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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007

Commission File Number 0-20050

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

Delaware	36-3210283
(State or other jurisdiction of 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)

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 o

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	o
Accelerated filer	x
Non-accelerated filer	o

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

Yes o No x

As of October 17, 2007, the registrant had outstanding 3,316,224 shares of its $5 par value common stock.

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

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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, 2007:

Period	(a) Total number of shares purchased	(b) Average price paid per share		(c) Total number of shares purchased as part of publicly announced plans or programs	(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
7/1/07 -7/31/07	0	$	0.00	0	50,000
8/1/07 -8/31/07	0	$	0.00	0	50,000
9/1/07 – 9/30/07	0	$	0.00	0	50,000
Total	0	$	0.00	0	50,000

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

Item 6. 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 .

/s/ Tony J. Sorcic

/s/ Todd D. Fanning

Tony J. Sorcic

President & Chief Executive Officer

November 6, 2007

Todd D. Fanning

Sr. VP & Chief Financial Officer

November 6, 2007

Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

	September 30, 2007 (unaudited)			December 31, 2006
ASSETS
Cash and due from banks	$	23,398		$	33,882
Interest-bearing deposits with financial institutions		8,423			103
Federal funds sold		17,700			5,200

Total cash and cash equivalents		49,521			39,185

Loans held for sale, at lower of cost or market		939			4,512

Investment securities:
Available-for-sale, at fair value		206,682			252,467
Held-to-maturity, at amortized cost (fair value of $16,117 and $15,567)		15,973			15,449

Total investment securities		222,655			267,916

Loans:
Loans, net of unearned interest		690,228			629,472
Allowance for loan losses		(3,221	)		(3,053	)

Net loans		687,007			626,419

Premises and equipment, net of accumulated depreciation		31,294			28,670
Land held for sale, at lower of cost or market		1,344			0
Bank-owned life insurance		22,324			21,470
Accrued interest receivable		10,575			11,139
Goodwill		24,521			23,029
Intangible assets, net of accumulated amortization		5,317			5,921
Other real estate owned		701			0
Other assets		3,895			3,698

TOTAL ASSETS	$	1,060,093		$	1,031,959

LIABILITIES
Deposits:
Demand	$	91,186		$	107,834
Interest-bearing demand		258,911			231,953
Savings		115,410			116,246
Time		436,111			425,866

Total deposits		901,618			881,899

Borrowings:
Customer repurchase agreements		33,978			31,344
Advances from the Federal Home Loan Bank		6,980			6,970
Interest-bearing demand notes issued to the U.S. Treasury		2,387			2,333
Trust Preferred securities		25,000			25,000
Note payable		13,050			8,500

Total borrowings		81,395			74,147

Other liabilities		10,532			10,558

TOTAL LIABILITIES		993,545			966,604

STOCKHOLDERS’ EQUITY
Common stock: $5 par value, 7,000,000 shares authorized; 4,478,295 issued at September 30, 2007 and December 31, 2006		22,391			22,391
Surplus		18,246			18,158
Retained earnings		50,126			48,109
Accumulated other comprehensive loss, net of tax		(750	)		(960	)
Less: Cost of 1,162,071 and 1,126,885 treasury shares at September 30, 2007 and December 31, 2006, respectively		(23,465	)		(22,343	)

TOTAL STOCKHOLDERS’ EQUITY		66,548			65,355

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,060,093		$	1,031,959

See accompanying notes to unaudited consolidated financial statements

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
	2007		2006		2007		2006
Interest income:
Interest and fees on loans	$	12,980	$	10,714	$	36,880	$	30,559
Interest on investment securities:
Taxable		1,592		1,634		5,211		4,455
Non-taxable		1,027		1,133		3,261		3,450
Interest on federal funds sold		24		206		246		357
Interest on interest-bearing time deposits in other banks		9		59		85		77

Total interest income		15,632		13,746		45,683		38,898

Interest expense:
Interest on deposits		7,677		6,397		22,777		16,736
Interest on borrowings		1,105		961		3,077		2,791

Total interest expense		8,782		7,358		25,854		19,527

Net interest income		6,850		6,388		19,829		19,371
Provision for loan losses		250		80		550		175

Net interest income after provision for loan losses		6,600		6,308		19,279		19,196

Non-interest income:
Trust & farm management fees		353		300		1,124		1,158
Service charges on deposit accounts		1,174		1,065		3,259		3,166
Other service charges		535		501		1,492		1,336
Gain on sales of securities available-for-sale		149		98		358		158
Gain on sale of loans		0		0		0		90
Brokerage fee income		224		201		641		563
Mortgage banking income		257		149		666		536
Bank-owned life insurance income		203		205		608		581
Other operating income		40		45		154		125

Total non-interest income		2,935		2,564		8,302		7,713

Non-interest expense:
Salaries and employee benefits		4,257		3,936		12,574		11,944
Occupancy		569		523		1,770		1,458
Equipment expense		756		717		2,371		2,138
Federal insurance assessments		84		78		254		236
Intangible assets amortization		177		163		528		488
Data processing		268		194		797		781
Advertising		188		220		539		634
Other operating expense		1,088		1,135		3,219		3,525

Total non-interest expense		7,387		6,966		22,052		21,204

Income before income taxes		2,148		1,906		5,529		5,705
Income tax expense		408		299		806		867

Net income	$	1,740	$	1,607	$	4,723	$	4,838


Earnings per share:
Basic		0.53		0.48		1.42		1.43
Diluted		0.52		0.47		1.41		1.43

Basic weighted average shares outstanding		3,314,913		3,372,188		3,331,852		3,372,780
Diluted weighted average shares outstanding		3,322,292		3,393,341		3,342,689		3,394,517

See accompanying notes to unaudited consolidated financial statements

Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)

	For the Three Months Ended September 30						For the Nine Months Ended September 30
	2007			2006			2007			2006

Net income	$	1,740		$	1,607		$	4,723		$	4,838

Other comprehensive income, net of tax

Unrealized holding gains arising during the period, net of tax		1,196			2,039			417			453
Less: Reclassification adjustment for realized gains on sales of securities included in net income, net of tax		(91	)		(62	)		(219	)		(100	)
Plus: Amortization of transition obligation of post retirement healthcare continuation		4			0			12			0

Other comprehensive income		1,109			1,977			210			353

Comprehensive income	$	2,849		$	3,584		$	4,933		$	5,191

See accompanying notes to unaudited consolidated financial statements

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, 2007	Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Loss, net of tax effect			Treasury Stock			Total

Balance, January 1, 2007	$	22,391	$	18,158	$	48,109		$	(960	)	$	(22,343	)	$	65,355

Net income						4,723									4,723
Sale of 4,314 shares of treasury stock				46								74			120
Purchase of 40,000 shares of treasury stock												(1,204	)		(1,204	)
Exercise of stock options and re-issuance of treasury stock (500 shares)				7		(4	)					8			11
Cash dividends
($.81 per share)						(2,702	)								(2,702	)
Stock option compensation expense				35											35
Other comprehensive income, net of $133 tax effect									210						210

Balance, September 30, 2007	$	22,391	$	18,246	$	50,126		$	(750	)	$	(23,465	)	$	66,548


For the Nine Months Ended September 30, 2006

Balance, January 1, 2006	$	22,392	$	16,968	$	45,786		$	(482	)	$	(21,520	)	$	63,144

Net income						4,838									4,838
Purchase of 35,000 shares of treasury stock												(1,198	)		(1,198	)
Sale of 937 shares of treasury stock				15								16			31
Exercise of stock options and re-issuance of treasury stock (56,865 shares)				1,042		(565	)					1,062			1,539
Cash dividends
($.74 per share)						(2,497	)								(2,497	)
Other comprehensive income, net of $223 tax effect									353						353

Balance, September 30, 2006	$	22,392	$	18,025	$	47,562		$	(129	)	$	(21,640	)	$	66,210

See accompanying notes to unaudited consolidated financial statements

Schedule 4

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

	For the Nine Months Ended September 30
	2007			2006
Operating activities:
Net income	$	4,723		$	4,838
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,872			1,697
Provision for loan losses		550			175
Amortization of other intangible assets and purchase accounting adjustments		528			487
Amortization of premiums and discounts on investment securities		(212	)		435
Gain on sales of securities, net		(358	)		(158	)
Gain on sale of loans		0			(90	)
Stock-based compensation expense		35			0
FHLB stock dividends		0			(24	)
Loans originated for sale		(41,155	)		(38,425	)
Proceeds from sales of loans originated for sale		44,728			37,148
Increase in accrued interest payable		434			852
Decrease (increase) in accrued interest receivable		564			(1,600	)
Increase in other assets		(1,579	)		(1,651	)
Decrease in other liabilities		(731	)		(2,725	)

Net cash provided by operating activities		9,399			959

Investing activities:
Proceeds from sales of investment securities available-for-sale		12,872			4,994
Proceeds from maturities of investment securities available-for-sale		48,925			29,867
Purchase of investment securities available-for-sale		(15,187	)		(49,950	)
Proceeds from maturities of investment securities held-to-maturity		995			885
Purchase of investment securities held-to-maturity		(1,450	)		(1,380	)
Proceeds from sale of loans		0			16,590
Net increase in loans		(44,095	)		(24,526	)
Purchases of premises and equipment		(1,340	)		(3,406	)
Payment related to acquisition, net of cash and cash equivalents		(10,110	)		0

Net cash used in investing activities		(9,390	)		(26,926	)

Financing activities:
Net increase in deposits		6,854			39,905
Net increase in borrowings		7,248			3,738
Dividends paid		(2,702	)		(2,497	)
Purchases of treasury stock		(1,204	)		(1,198	)
Exercise of stock options and issuance of treasury stock		11			1,539
Sales of treasury stock		120			31

Net cash provided by financing activities		10,327			41,518

Increase in cash and cash equivalents		10,336			15,551
Cash and cash equivalents at beginning of period		39,185			23,745

Cash and cash equivalents at September 30	$	49,521		$	39,296


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	25,420		$	18,675
Income taxes	$	1,335		$	767

Supplemental disclosures of non-cash flow activities:
Loans transferred to other real estate owned	$	1,076		$	31
Land transferred to held for sale	$	1,344		$	0

See accompanying notes to unaudited consolidated financial statements

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, 2007 and 2006, and all such adjustments are of a normal recurring nature. The 2006 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 2006 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 2006 consolidated financial statements have been reclassified to conform to the 2007 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 Month Ended September 30,
	2007		2006		2007		2006
Numerator:
Net income	$	1,740	$	1,607	$	4,723	$	4,838

Denominator:
Basic earnings per share- weighted average shares		3,314,913		3,372,188		3,331,852		3,372,780

Effect of dilutive securities- stock options		7,379		21,153		10,837		21,737
Diluted earnings per share- adjusted weighted average shares		3,322,292		3,393,341		3,342,689		3,394,517

Net income per share:

Basic	$	0.53	$	0.48	$	1.42	$	1.43
Diluted	$	0.52	$	0.47	$	1.41	$	1.43

The earnings per share calculation for the three and nine month periods ended September 30, 2007 does not include 281,416 and 160,283 shares, respectively, which were anti-dilutive.

(2) ACQUISITION

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

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

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

Transaction costs related to the completion of the transaction were considered immaterial. The total fair value of the assets and liabilities acquired exceeded the book value, resulting in goodwill of $1,492,000 which is not subject to amortization.

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

	PRO FORMA For the nine months ended September 30, 2007		PRO FORMA For the nine months ended September 30, 2006
Net interest income	$	19,869	$	19,575
Provision for loan losses		550		175
Non-interest income		8,337		7,878
Non-interest expense		22,067		21,713
Income before income taxes		5,589		5,565
Income tax expense		830		813
Net income	$	4,759	$	4,752

Earnings per share
Basic	$	1.43	$	1.41
Diluted	$	1.42	$	1.40

Basic weighted average shares outstanding		3,331,852		3,372,780
Diluted weighted average shares outstanding		3,342,689		3,394,517

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

(3) GOODWILL AND INTANGIBLE ASSETS

The balance of goodwill, net of accumulated amortization, totaled $24,521,000 at September 30, 2007 and $23,029,000 at December 31, 2006, with the increase of $1,492,000 resulting from the acquisition of the Plainfield branch of HomeStar Bank in February, 2007. The balance of intangible assets, net of accumulated amortization, totaled $5,317,000 and $5,921,000 at September 30, 2007 and December 31, 2006, respectively.

The following table summarizes the Corporation’s intangible assets, which are subject to amortization, as of September 30, 2007 and December 31, 2006.

(in thousands)	2007					2006
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Core deposit intangible	$	9,004	$	(3,782	)	$	9,004	$	(3,112	)
Other intangible assets		234		(139	)		160		(131	)
Total	$	9,238	$	(3,921	)	$	9,164	$	(3,243	)

Amortization expense of all intangible assets totaled $528,000 for the nine months ended September 30, 2007 and $488,000 for the nine months ended September 30, 2006, respectively. The amortization expense of these intangible assets will be approximately $177,000 for the remaining quarter of 2007.

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, 2007, 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, 2007	$	2,079
Servicing rights capitalized		542
Amortization of servicing rights		(219	)
Impairment of servicing rights		0
Balance, September 30, 2007	$	2,402

The Corporation services loans for others with unpaid principal balances at September 30, 2007 and December 31, 2006 of approximately $260,428,000, and $236,893,000, respectively.

The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of September 30, 2007. The Corporation’s actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on the amount of additional 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, 2007	$	68
For the year ended December 31, 2008		268
For the year ended December 31, 2009		251
For the year ended December 31, 2010		235
For the year ended December 31, 2011		221
For the year ended December 31, 2012		207
Thereafter		1,152

(4) FDIC ONE-TIME ASSESSMENT CREDIT

Effective November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to eligible institutions. The purpose of the credit is to recognize contributions made by certain institutions to capitalize the Bank Insurance Fund and Savings Association Insurance Fund, which have now been merged into the Deposit Insurance Fund. The Bank is an eligible institution and received notice from the FDIC that its share of the credit is $647,000. This amount is not reflected in the accompanying financial statements as it represents contingent future credits against future insurance assessment payments. As such, the timing and ultimate recoverability of the one-time credit may change. In 2007, FDIC premium credits received totaled $250,000 against the premium expense, leaving a remaining credit of $397,000 to offset future premium expense.

(5) FEDERAL HOME LOAN BANK STOCK

The Corporation owns approximately $2.4 million of Federal Home Loan Bank stock included in investment securities. During the third quarter of 2007, the Federal Home Loan Bank of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The draft order prohibits capital stock repurchase and redemptions until a time to be determined by the Federal Housing Finance Board. The Federal Home Loan Bank will continue to provide liquidity and funding through advances and the purchases of mortgages through the MPF Program. With regard to dividends, the Federal Home Loan Bank will continue to assess their dividend capacity each quarter and make appropriate request for approval. Management performed an analysis and deemed the investment in Federal Home Loan Bank stock was not impaired as of September 30, 2007.

(6) IMPACT OF NEW ACCOUNTING STANDARDS

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

In September 2006, the FASB issued SFAS No. 157 (FAS 157), “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157 establishes a common definition of fair value, provides a framework for measuring fair value under U.S. GAAP and expands 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 Corporation is currently evaluating the impact, if any, the adoption of FAS 157 will have on its financial reporting and disclosures.

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 were adopted during 2006, while the requirement to measure a plan’s assets and obligations as of the balance sheet date is effective for fiscal years ending after December 15, 2008. The Corporation does not expect the adoption of the measurement provisions to have a material impact on its financial reporting and disclosures.

In September 2006, the FASB ratified Emerging Issues Task Force No. 06-4, “Postretirement Benefits Associated with Split-Dollar Life Insurance” (EITF 06-4). EITF 06-4 requires deferred-compensation or postretirement benefit aspects of an endorsement-type split-dollar life insurance arrangement to be recognized as a liability by the employer and the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits should be recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Corporation is currently evaluating the impact, if any, the adoption of EITF 06-4 will have on its financial reporting and disclosures.

In February 2007, the FASB issued SFAS No. 159 (FAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”. FAS 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately in the balance sheet. The main intent of the Statement is to mitigate the difficulty in determining reported earnings caused by a “mixed-attribute model” (or reporting some assets at fair value and others using a different valuation attribute such as amortized cost). The project is separated into two phases. This first phase addresses the creation of a fair value option for financial assets and liabilities. A second phase will address creating a fair value option for selected non-financial items. FAS 159 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Corporation is currently evaluating the impact, if any, the adoption of FAS 159 will have on its financial reporting and disclosures.

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, 2007 and 2006

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, 2007 and 2006. 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

The Corporation reported third quarter 2007 diluted earnings per share improved 13.0% compared to second quarter 2007. Net income for the third quarter of 2007 was $1,740,000, or basic earnings per share of $0.53 (diluted earnings per share of $0.52), as compared to net income of $1,607,000 in the third quarter of 2006, or basic earnings per share of $0.48 (diluted earnings per share of $0.47). This represents an increase of $133,000 (or 8.3%) and $0.05 per basic (10.4%) and diluted (10.4%) earnings per share. The Corporation has made significant earnings improvements in the third quarter of 2007, compared to net income of $1,429,000 (or basic earnings per share of $0.43 and diluted earnings per share of $0.42) in the first quarter of 2007, and net income of $1,553,000 (or basic earnings per share of $0.47 and diluted earnings per share of $0.46) in the second quarter of 2007. Net income for the first nine months of 2007 was $4,723,000, or basic earnings per share of $1.42 (diluted earnings per share of $1.41), compared to net income of $4,838,000, or basic and diluted earnings per share of $1.43 for the first nine months of 2006. This represents a decrease of $115,000 (or 2.4%) or $0.01 per basic share and $0.02 per diluted share. The lower net income figure is primarily attributed to a decrease in the net yield on interest-earning assets from 3.39% for the first nine months of 2006 to 3.17% for the first nine months of 2007. The annualized return on average assets and return on average equity were 0.67% and 10.65%, respectively, for the third quarter of 2007, compared with 0.66% and 9.90% for the third quarter of 2006. For the nine-month periods, the annualized return on average assets and return on average equity were 0.61% and 9.67%, respectively for 2007, compared with 0.69% and 10.12%, respectively for 2006.

Net interest income before provision for loan losses was $6,850,000 for the third quarter of 2007, compared to $6,388,000 for the third quarter of 2006 (an increase of $462,000 or 7.2%). This increase is a result of an increase in average interest-earning assets of $74.9 million over the past twelve months. For the three months ended September 30, 2007, average interest-earning assets were $910.2 million compared to $856.9 million for the three months ended September 30, 2006. The resulting net yield on interest-earning assets (on a fully taxable equivalent basis) was 3.23% in both the third quarter of 2007 and 2006. Net interest income before any provision for loan losses was $19,829,000 for the first nine months of 2007, compared to $19,371,000 reported for the first nine months of 2006 (an increase of $458,000 or 2.4%). The resulting net yield on interest-earning assets (on a fully taxable equivalent basis) decreased to 3.17% for the first three quarters of 2007 from 3.39% in the first three quarters of 2006. However, the increase in average interest-earning assets of $74.9 million over the comparable nine-month periods was more than enough to offset the decrease in net yield.

The Corporation’s provision for loan loss expense recorded each quarter is determined by management’s evaluation of the risk characteristics of the loan portfolio. For the third quarter of 2007, PNBC had net charge-offs of $139,000, compared to recoveries of $11,000 for the third quarter of 2006. For the nine-month comparable periods, PNBC had net charge-offs of $382,000 in 2007 and net charge-offs of $208,000 in 2006. PNBC recorded a loan loss provision of $250,000 in the third quarter of 2007 and $550,000 in the first nine months of 2007 compared to a provision of $80,000 in the third quarter of 2006 and $175,000 in the first nine months of 2006. The ratio of non-performing loans to total loans at September 30, 2007 remains low at 0.93% compared to 0.70% at September 30, 2006.

The Corporation has built a strong fee income base from diversified sources as evidenced by non-interest income totaling $2,935,000 for the third quarter of 2007, compared to $2,564,000 in the third quarter of 2006, an increase of $371,000 (or 14.5%). The leading components were an increase in service charges on deposits accounts, due to more accounts at the subsidiary bank, of $109,000 (or 10.2%) and an increase in mortgage banking income of $108,000 (or 72.5%) due to an increase in servicing income. Annualized non-interest income as a percentage of average total assets increased to 1.13% for the third quarter of 2007 from 1.05% for the same period in 2006. Year-to-date in 2007, non-interest income totaled $8,302,000 compared to $7,713,000 for the same period of 2006, an increase of $589,000 (or 7.6%). The primary reason for the positive change is the increase in gains from the sales of securities and other service charges (increasing $200,000 and $156,000, respectively). Offsetting these increases, in 2006, the Corporation recorded a pre-tax gain of $90,000 in conjunction with the sale of $16,500,000 of first mortgage loans. Additionally, during the second quarter of 2006, the subsidiary bank completed the sale of the farm management department generating a pre-tax gain of $77,000. Annualized non-interest income as a percentage of total average assets decreased from 1.09% for the first nine months of 2006, to 1.08% for the same period in 2007.

Total non-interest expense for the third quarter of 2007 was $7,387,000, an increase of $421,000 (or 6.0%) from $6,966,000 in the third quarter of 2006. Increases were seen in salaries and employee benefits ($321,000), occupancy ($46,000) and equipment ($39,000), offsetting decreases in other operating expenses ($47,000) and advertising ($32,000). Annualized non-interest expense as a percentage of total average assets decreased to 2.85% for the third quarter of 2007, compared to 2.86% for the same period in 2006. The last time the Corporation was at the 2.85% level for an entire year was 1993. Year-to-date non-interest expense for the first nine months of 2007 was $22,052,000, an increase of $848,000 (or 4.0%) from the $21,204,000 for the nine months of 2006, primarily due to an increase in salaries and employee benefits of $630,000 (or 5.3%). Annualized non-interest expense as a percentage of total average assets also decreased to 2.87% for the first nine months of 2007, compared to 3.00% for the same period in 2006.

INCOME TAXES

Income tax expense totaled $408,000 for the third quarter of 2007, as compared to $299,000 for the third quarter of 2006. The effective tax rate was 19.0% for the three month period ended September 30, 2007 and 15.7% for the three month period ended September 30, 2006. Income tax expense totaled $806,000 for the first nine months of 2007, as compared to $867,000 for the first nine months of 2006. The effective tax rate was 14.6% for the nine month period ended September 30, 2007 and 15.2% for the nine month period ended September 30, 2006. The lower effective tax rate in 2007 is due to the amount of tax-exempt investment securities in the Corporation’s investment portfolio as well as a lower pre-tax income.

ANALYSIS OF FINANCIAL CONDITION

Total assets at September 30, 2007 increased to $1,060,093,000 from $1,031,959,000 at December 31, 2006 (an increase of $28.1 million or 2.7%). Investment balances totaled $222,655,000 at September 30, 2007, compared to $267,916,000 at December 31, 2006 (a decrease of $45.3 million or 20.3%). The decrease in the investment portfolio during the year has been the result of management’s decision to fund new loans with maturing investments rather than be overly competitive with the high price of deposits, thereby increasing the Corporation’s loan-to-asset ratio. Loan balances, net of unearned interest, increased to $690,228,000 at September 30, 2007, compared to $629,472,000 at December 31, 2006 (an increase of $60.8 million or 9.7%). Accordingly, the period-end loan-to-asset ratio increased from 61.0% at December 31, 2006 to 65.1% at September 30, 2007. This change in the Corporation’s asset mix had a positive impact on the net interest margin, which improved from 3.11% in the first quarter of 2007, to 3.15% in the second quarter, to 3.23% in the third quarter. Non-performing loans increased to $6,408,000 at September 30, 2007 (or 0.93% of net loans), as compared to $3,926,000 or 0.62% of net loans at December 31, 2006. Although non-performing loans have increased, all are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.

Total deposits increased to $901,618,000 at September 30, 2007 from $881,899,000 at December 31, 2006 (an increase of $19.7 million or 2.2%). This increase is net of a decrease of $33.7 million due to the subsidiary bank’s decision not to participate in the State of Illinois link deposit program, choosing to fund loans with internal deposits instead of relying on the State of Illinois deposits. Accordingly, other deposit categories have increased $53.4 million since December 31, 2006. Comparing categories of deposits at September 30, 2007 to December 31, 2006, time deposits increased by $10.2 million (or 2.4%) and interest-bearing demand deposits increased $27.0 million (or 11.6%). Conversely, demand deposits decreased $16.6 million (or 15.4%) and savings deposits decreased $0.8 million (or 0.7%). 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 $74,147,000 at December 31, 2006 to $81,395,000 at September 30, 2007 (an increase of $7.2 million or 9.8%).

ASSET QUALITY

For the nine months ended September 30, 2007, the subsidiary bank charged off $569,000 of loans and had recoveries of $187,000, compared to charge-offs of $428,000 and recoveries of $220,000 during the nine months ended September 30, 2006. 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, 2007, the balance of the allowance for loan losses was $3,221,000 which is 50.3% of non-performing loans and 0.47% of total loans, compared with $3,053,000 which was 77.8% of non-performing loans and 0.49% of total loans at December 31, 2006.

At September 30, 2007, non-accrual loans were $6,408,000 compared to $3,893,000 at December 31, 2006. Impaired loans totaled $4,040,000 at September 30, 2007 compared to $2,123,000 at December 31, 2006. The total amount of loans ninety days or more past due and still accruing interest at September 30, 2007 was $0 compared to $33,000 at December 31, 2006. There was a specific loan loss reserve of $165,000 established for impaired loans as of September 30, 2007 compared to a specific loan loss reserve of $150,000 at December 31, 2006. 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, 2007.

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, 2007, total risk-based capital of PNBC was 8.61%, compared to 9.18% at December 31, 2006. The Tier 1 capital ratio to average assets decreased from 6.33% at December 31, 2006, to 6.23% at September 30, 2007. Total stockholders' equity to total assets at September 30, 2007 decreased to 6.28% from 6.33% at December 31, 2006.

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 financing and operating activities, offset by those used in investing activities, resulted in a net increase in cash and cash equivalents of $10,336,000 from December 31, 2006 to September 30, 2007. This increase in cash and cash equivalents was primarily due to a net decrease in the investment portfolio, as well as increases in deposits and borrowings, offset by a net increase in loans and the acquisition payment. For more detailed information, see PNBC's Consolidated Statements of Cash Flows.

FEDERAL HOME LOAN BANK STOCK

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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

The subsidiary bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. At September 30, 2007, commitments to extend credit and standby letters of credit were approximately $149,011,000 and $6,103,000 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 counterparty. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties.

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

MERGERS AND ACQUISITIONS

On February 23, 2007, the Company completed the acquisition, for $10.2 million in cash, of the fixed assets and loans while assuming the deposit liabilities of the Plainfield, Illinois branch of HomeStar Bank in order to expand its market presence in this area. The Company financed the purchase price with existing cash and federal funds sold on the balance sheet at the time of purchase. Since the completion of the branch purchase, the Plainfield location operates as a branch of the Company’s subsidiary bank.

The transaction has been accounted for as a purchase, and the results of operations of Plainfield since the acquisition date have been included in the consolidated financial statements.

LAND HELD FOR SALE

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

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, 2006, as reported in PNBC's 2006 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.

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, 2007						Nine Months Ended, September 30, 2006
	Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost
Average Interest-Earning Assets

Interest-bearing deposits	$	2,208	$	85	5.15	%	$	2,017	$	77	5.07	%
Taxable investment securities		145,095		5,211	4.80	%		143,092		4,455	4.16	%
Tax-exempt investment securities		100,568		4,942	6.57	%		105,843		5,228	6.60	%
Federal funds sold		6,414		246	5.13	%		8,817		357	5.42	%
Net loans		657,233		36,949	7.52	%		576,871		30,636	7.10	%

Total interest-earning assets		911,518		47,433	6.96	%		836,640		40,753	6.51	%

Average non-interest earning assets		116,726						106,903

Total average assets	$	1,028,244					$	943,543


Average Interest-Bearing Liabilities

Interest-bearing demand deposits	$	233,016		4,951	2.84	%	$	211,195		3,294	2.09	%
Savings deposits		64,890		202	0.42	%		115,748		250	0.29	%
Time deposits		478,101		17,624	4.93	%		376,492		13,192	4.68	%
Interest-bearing demand notes issued to the U.S. Treasury		1,072		39	4.86	%		798		26	4.41	%
Federal funds purchased		759		31	5.46	%		1,827		63	4.59	%
Customer repurchase agreements		31,663		1,102	4.65	%		29,985		1,018	4.54	%
Advances from Federal Home Loan Bank		6,975		271	5.19	%		7,823		284	4.85	%
Trust preferred securities		25,000		1,065	5.70	%		25,000		1,055	5.64	%
Note payable		10,575		569	7.19	%		6,611		345	6.98	%

Total interest-bearing liabilities		852,051		25,854	4.06	%		775,479		19,527	3.37	%

Net yield on average interest-earning assets			$	21,579	3.17	%			$	21,226	3.39	%

Average non-interest-bearing liabilities		110,926						104,171

Average stockholders' equity		65,267						63,893

Total average liabilities and stockholders' equity	$	1,028,244					$	943,543

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 Ended September 30,
	2007		2006
Net interest income as stated	$	19,829	$	19,371
Tax equivalent adjustment-investments		1,680		1,778
Tax equivalent adjustment-loans		70		77

Tax equivalent net interest income	$	21,579	$	21,226

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, 2007. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice-President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of the date of their evaluation, our disclosure controls were effective.

(b)	Internal controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended September 30, 2007 that could significantly affect those controls.

INDEX TO EXHIBITS

Exhibit Number		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.