Edgar Filing: PRINCETON NATIONAL BANCORP INC

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

FORM 10-K

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

For the fiscal year ended December 31, 2003

Commission File Number 0-20050

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

Delaware 36-32110283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

606 South Main Street
Princeton, Illinois 61356-2080
(Address of principal executive (Zip Code)
offices)

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

Securities registered pursuant to Section 12(b) of the Act: None

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

Name of each
exchange on
Title of each class which registered
------------------- ----------------

Common Stock The Nasdaq
Stock Market
Preferred Share
Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

--------- -------
X YES NO
--------- -------

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
--------------
this Form 10-K. X
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At February 25, 2004, 3,118,601 shares of Common Stock, $5.00 Par Value,
were outstanding, and the aggregate market value of the common stock (based upon
the closing representative bid price of the common stock on June 30, 2003, the
last business day of the Registrant's most recently completed second quarter, as
reported by NASDAQ) held by nonaffiliates was approximately $78,588,745.

Determination of stock ownership by nonaffiliates was made solely for the
purpose of responding to this requirement and the registrant is not bound by
this determination for any other purpose.

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

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X YES NO
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Portions of the following documents are incorporated by reference:

2004 Notice and Proxy Statement for the Annual Meeting of Stockholders
April 27, 2004 (the "Proxy Statement") - Part III and portions of the
Corporation's 2003 Annual Report (the "Annual Report") - Parts II and III

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Page 1 of 59 pages

PART I

ITEM 1. BUSINESS

Princeton National Bancorp, Inc. ("PNBC", the "Corporation", or the
"Company") is a single-bank holding company which operates in one business
segment and conducts a full service commercial banking and trust business
through its subsidiary bank, Citizens First National Bank ("Citizens Bank", "the
Bank", or the "subsidiary bank"). PNBC was incorporated as a Delaware
corporation in 1981 in contemplation of the acquisition of all of the
outstanding common stock of Citizens Bank and other future acquisitions. At
December 31, 2003, the Corporation had consolidated total assets of $609,737,000
and stockholders' equity of $50,875,000.

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

Corporate policy, strategy and goals are established by the Board
of Directors of PNBC. Pursuant to PNBC's holding company philosophy, operational
and administrative policies for the Bank are also established at the holding
company level. Within this framework, the Bank focuses on providing personalized
services and quality products to its customers to meet the needs of the
communities in which its offices are located. In 2003, the majority of the
directors of PNBC also served as the directors of Citizens Bank, which further
assists PNBC to directly implement its policies at Citizens Bank.

ACQUISITION AND EXPANSION STRATEGY

PNBC seeks to diversify both its market area and asset base and
increase profitability through acquisitions and expansion. PNBC's goal, as
reflected by its acquisition policy, is to expand through the acquisition of
established financial service organizations (primarily commercial banks to the
extent suitable candidates may be identified) and by expanding into potential
high growth areas. In integrating acquisitions, PNBC focuses on, among other
actions, implementing the policies established at Citizens Bank, improving asset
quality, the net interest margin, and encouraging community involvement.

PNBC will also consider establishing branch facilities as a means of
expanding its presence into new market areas. PNBC opened new branch facilities
in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, in Hampshire in
1995, in Henry in 1999, and in Huntley in 2001. In 2004, the construction of a
new facility in Aurora/Oswego, Illinois will begin. Once this facility has been
completed, construction of another new facility will begin in Elburn, Illinois
in 2005. Both of these suburban locations are located in rapidly growing
communities that will provide significant loan and deposit growth opportunities,
as well as increased revenue potential.

CITIZENS FIRST NATIONAL BANK

Citizens Bank was organized in 1865 as a national bank under the
National Bank Act. Currently in its one hundred and thirty-ninth year, Citizens
Bank has fourteen offices in eleven different communities in north central
Illinois: Princeton, DePue, Genoa, Hampshire, Henry, Huntley, Minooka, Oglesby,
Peru, Sandwich and Spring Valley.

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

COMMERCIAL, REAL ESTATE, AND AGRICULTURAL LENDING

The subsidiary bank's commercial loan department provides secured and
to a much lesser extent unsecured loans, including real estate loans, to
companies and individuals for business purposes and to governmental units within
the Bank's market area. As of December 31, 2003, Citizens Bank had commercial
loans of $80.7 million (21.1% of the Bank's total loan portfolio) and commercial
real estate loans of $107.7 million (28.1% of the Bank's total loan portfolio).
Citizens Bank does not have a concentration of commercial loans in any single
industry or business, except for loans to the agricultural industry as more
fully disclosed below.

Agricultural and agricultural real estate loans are primarily related
to ventures within 30 miles of branch locations. As of December 31, 2003,
Citizens Bank had agricultural loans of $43.0 million and agricultural real
estate loans of $38.7 million, which represent approximately 11.2% and 10.1%,
respectively, of the Bank's total loan portfolio.

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

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

PERSONAL FINANCIAL SERVICES

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

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

Citizens Bank is active in consumer and mortgage lending with
approximately $66.1 million in home mortgage loans, including loans available
for sale (17.2 % of the Bank's total loan portfolio) and $33.7 million in
consumer installment loans (8.8 % of the Bank's total loan portfolio) as of
December 31, 2003. To better serve its retail customers, Citizens Bank is active
in the secondary residential mortgage

market. As a matter of policy, Citizens Bank does not hold, in portfolio, long
term, fixed rate, single-family home mortgage loans, however, the servicing of
such loans is maintained. As of December 31, 2003, Citizens Bank had $138.8
million of loans that have been sold, but servicing has been maintained.
Management believes customers receive a higher level of quality service with
this arrangement.

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

Citizens Bank continues to maintain an intensive sales training
program, which includes team coaching, setting goals, measuring results, and
reward recognition. In 2003, Citizens Bank again achieved record levels of
product referrals and product sales.

TRUST DEPARTMENT AND FARM MANAGEMENT SERVICES

Gross revenue from Trust and Farm Management services in 2003 totaled
approximately $1,280,000, an increase of 7.4% from $1,192,000 in 2002. Trust
income increased from $994,000 in 2002 to $1,058,000 in 2003. The increase in
Trust fees is the result of profitable new business relationships and the
increase in equity prices throughout the year. Farm management fees increased to
$222,000 in 2003 from $198,000 in 2002. The increase in farm management fees was
due primarily to a successful recognition of opportunities in the sale of rural
real estate.

Total trust assets as of December 31, 2003 were $228,041,000, which is
an increase of approximately $31,851,000 from the total on December 31, 2002.
This increase was due to an emphasis on new business development and the
noticeable increase in stock equity prices.

COMPETITION

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

SUPERVISION AND REGULATION

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

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

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

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

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

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

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

The Bank may declare dividends out of undivided profits, except that
until the surplus fund of the Bank is equal to its common capital, no dividend
can be declared until one-tenth of the Bank's net income for the applicable
period has been carried to the surplus fund. The Bank, however, cannot declare
or pay a dividend, if after making the dividend, the Bank would be
undercapitalized. In addition, prior approval of the OCC is required if
dividends declared by the Bank in any calendar year will exceed its net income
for that year combined with its retained net income for the preceding two years.
Under national banking regulations and capital guidelines, as of December 31,
2003, the Bank was authorized to distribute approximately $4,395,000 as
dividends without prior approval from the OCC, based on net income for 2003 and
retained net income for 2001 and 2002. As of January 1, 2004, retained net
income for the prior two years was approximately $2,999,000 and during 2004 the
Bank may pay dividends without prior approval from the

OCC equal to that amount plus any 2004 net income. Future payments of dividends
by the Bank will be dependent on individual regulatory capital requirements and
levels of profitability. The ability of the Bank to pay dividends may be further
restricted as a result of regulatory policies and guidelines relating to
dividend payments and capital adequacy.

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

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

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

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

At December 31, 2003, PNBC had a total capital to risk-weighted assets
ratio of 11.22%, a Tier 1 capital to risk-based assets ratio of 10.72%, and a
leverage ratio of 7.83%. At December 31, 2003, the Bank had a total capital to
risk-weighted assets ratio of 11.34%, a Tier 1 capital to risk-weighted assets
ratio of 10.83%, and a leverage ratio of 7.91%.

The FDIC has a risk-based assessment system for the deposit insurance
provided to depositors at depository institutions whereby assessments to each
institution are calculated upon the probability that the insurance fund will
incur a loss with respect to the institution, the likely amount of such loss,
and the revenue needs of the insurance fund. The system utilizes nine separate
assessment classifications based on an entity's capital level and supervisory
evaluation. The Bank's deposits are predominantly insured through the Bank
Insurance Fund (the "BIF") and certain deposits held by the Bank are insured
through the Savings Association Insurance Fund (the "SAIF"). The BIF and SAIF
are both administered by the FDIC.

The BIF and SAIF semi-annual assessment rates currently both range from
0 to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease
the assessments rates on a semi-annual basis. An increase in the rates assessed
on the Bank could have an adverse effect on the earnings of PNBC and the Bank
depending on the amount of the increase.

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

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

Banks are permitted to merge with one another across state lines and
thereby create a main bank with branches in separate states. After establishing
branches in a state through an interstate merger transaction, a bank can
establish and acquire additional branches at any location in the state where any
bank involved in the merger could have established or acquired branches under
applicable federal or state law.

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

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

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

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

EMPLOYEES

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

As of December 31, 2003, Citizens Bank employed 192 full-time and 57
part-time employees. The Bank offers a variety of employee benefits. Citizens
Bank employees are not represented by a union or a collective bargaining
agreement, and employee relations are considered to be excellent.

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

In order to implement PNBC's community banking philosophy and to
promote itself as a community oriented organization, the Bank has a formal
officer call program. Nearly every officer of the Bank calls on existing or
potential customers and is expected to become actively involved in leadership
positions in community organizations. As of December 31, 2003, employees of the
Bank participated in approximately 144 community organizations, providing over
10,000 hours of community service.

AVAILABLE INFORMATION

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

ITEM 2. PROPERTIES

PNBC's headquarters and Citizens Bank's principal offices are located
at 606 South Main Street, Princeton, Illinois. Also located at this address is
an annex completed in 1990 that contains, among others, the trust and farm
management departments. The two buildings at this location are owned by Citizens
Bank and contain approximately 36,000 square feet of space, all of which is
occupied by PNBC and Citizens Bank. Citizens Bank also has two drive-up
facilities in Princeton and branch offices in DePue, Genoa, Hampshire, Henry,
Huntley, Minooka, Oglesby, Peru, Sandwich and Spring Valley. Citizens Bank is
the owner of each of these facilities. None of the facilities owned by the Bank
are subject to a mortgage. For additional information regarding these
properties, see Footnote 6 of Item 8 of this report.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders during the
fourth quarter of 2003.

SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS

The following table sets forth information regarding the executive
officers:

Name Age Position
---- --- --------
Tony J. Sorcic 50 President & Chief Executive Officer
James B. Miller 48 Executive Vice President
Robert B. Schneider 63 Senior Vice President & Trust Officer
Todd D. Fanning 41 Vice President & Chief Financial Officer

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

James B. Miller joined Citizens Bank in 1979 as an agricultural loan
officer and has been the Executive Vice-President of PNBC since 1996. Mr. Miller
currently is the Executive Vice-President and Commercial Banking Manager of
Citizens Bank, and became a director of PNBC in 2000.

Robert B. Schneider joined Citizens Bank in 1995 as Senior
Vice-President and Trust Officer, and remains in that capacity.

Todd D. Fanning joined Citizens Bank in 1990 as Assistant
Vice-President and Controller. He became Vice-President & Chief Financial
Officer in 1997 and remains in that capacity.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Since May 15, 1992, PNBC's Common Stock has been listed on the NASDAQ
National Market, under the symbol PNBC.

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

Cash
Prices Dividends
High Low Declared
---- --- --------

2003
----------------------
Fourth Quarter $29.12 $ 24.58 $ .42
Third Quarter 26.23 23.72 .16
Second Quarter 25.45 21.35 .16
First Quarter 22.35 21.40 .15

2002
----------------------
Fourth Quarter $ 22.00 $ 19.18 $ .45
Third Quarter 20.71 18.47 .14
Second Quarter 20.79 17.45 .13
First Quarter 17.98 16.15 .13

On December 31, 2003, PNBC had 549 registered holders of record of its
Common Stock.

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

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

Bank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

ITEM 6. SELECTED FINANCIAL DATA

Information regarding the Corporation's selected financial data is
included on page 37 of the Corporation's Annual Report, which information is
incorporated by reference herein.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Information regarding the Corporation's management's discussion and
analysis of financial condition and results of operations is included on pages
26-35 in the Corporation's Annual Report, which information is incorporated by
reference herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 305 of Regulation S-K is contained in
the Corporation's Annual Report on pages 33 and 34, under the headings "Asset
Liability Management" and "Contractual Obligations and Commercial Commitments",
which information is incorporated herein by reference.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information regarding the Corporation's consolidated financial
statements and supplementary data is included on pages 9-25 and page 36 in the
Corporation's Annual Report, which information is incorporated by reference
herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures. We evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as
of December 31, 2003. Our disclosure controls and procedures are the
controls and other procedures that we designed to ensure that we
record, process, summarize and report in a timely manner the
information we must disclose in reports that we file with or submit to
the SEC. Tony J. Sorcic, President and Chief Executive Officer, and
Todd D. Fanning, Vice-President and Chief Financial Officer, reviewed
and participated in this evaluation. Based on this evaluation, Messrs.
Sorcic and Fanning concluded that, as of the date of their evaluation,
our disclosure controls were effective.

(b) Internal controls. There have not been any significant changes in our
internal accounting controls or in other factors during the quarter
ended December 31, 2003 that could significantly affect those controls.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Information regarding executive officers and directors of the
Corporation is included in the Corporation's Definitive Proxy Statement for the
Annual Meeting of Stockholders to be held April 27, 2004 (the "Proxy Statement")
under the caption "Proposal 1-Election of Directors", which information is
incorporated by reference herein.

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

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

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

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is included in the Proxy
Statement under the captions "Board of Directors' Meetings and Committees",
"Compensation of Directors", and "Executive Compensation -- Summary; -- Summary
Compensation Table; and Employment Agreements," which information is
incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

EQUITY COMPENSATION PLAN INFORMATION

Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities in column (a))
(a) (b) (c)
-------------------- ----------------------- -------------------- -------------------------

Equity compensation
plans approved by
security holders 173,600 $19.83 239,951

Equity compensation
plans not approved by
security holders N/A N/A 10,477 (1)
---------- --------- --------
Total 173,600 $19.83 250,428

(1) Represents shares issuable under the Company's Amended and Restated Employee
Stock Repurchase Plan (the "ESPP"). The ESPP is a broad-based plan which was
originally adopted by the Company in October, 1994 and has twice been amended
and restated to increase the number of shares issuable under the ESPP to the
current maximum of 60,000 shares. Under the ESPP, eligible employees and
directors may purchase PNBC common stock without incurring any brokerage
commissions or service charges using lump sum contributions and/or payroll
deductions, in the case of employees.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding relationships and transactions is included in the
Proxy Statement under the caption "Certain Transactions," which information is
incorporated by reference herein.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) The following is a list of the Financial Statements included in Part
II, Item 8 of this report:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2003 and 2002.

Consolidated Statements of Income for the years ended December
31, 2003, 2002 and 2001.

Consolidated Statements of Comprehensive Income for the years
ended December 31, 2003, 2002, and 2001.

Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2003, 2002, and 2001.

Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.

Notes to Consolidated Financial Statements.

Management's Discussion and Analysis of Financial Condition
and Results of Operations.

(a)(2) Financial Statement Schedules

No consolidated financial statement schedules are required to
be included in this Report on Form 10-K.

(a)(3) Exhibits

The exhibits filed herewith are listed on the Exhibit Index
filed as part of this report on Form 10-K. Each management contract or
compensatory plan or arrangement of the Corporation listed on the
Exhibit Index is separately identified by an asterisk.

(b) Reports on Form 8-K

The Corporation filed an 8-K on October 28, 2003 related to
the announcement of third quarter 2003 earnings.

SIGNATURES

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

PRINCETON NATIONAL BANCORP, INC.

By: /s/ Tony J. Sorcic
-----------------------------------
Tony J. Sorcic, President and Chief
Executive Officer
Date: March 15, 2004

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

Signature Title Date
--------- ----- ----

/s/ Tony J. Sorcic President and Chief Executive Officer and Director March 15, 2004
------------------------------------ (Principal Executive Officer)
Tony J. Sorcic

/s/ Todd D. Fanning Vice-President & Chief Financial Officer March 15, 2004
------------------------------------ (Principal Accounting and Financial Officer)
Todd D. Fanning

/s/ Craig O. Wesner Chairman of the Board March 15, 2004
------------------------------------
Craig O. Wesner

/s/ Daryl Becker Director March 15, 2004
-----------------------------------
Daryl Becker

/s/ Gary C. Bruce Director March 15, 2004
------------------------------------
Gary C. Bruce

/s/ Sharon L. Covert Director March 15, 2004
------------------------------------
Sharon L. Covert

/s/ John R. Ernat Director March 15, 2004
-----------------------------------
John R. Ernat

/s/ Donald E. Grubb Director March 15, 2004
-----------------------------------
Donald E. Grubb

/s/ Mark Janko Director March 15, 2004
------------------------------------
Mark Janko

/s/ Thomas M. Longman Director March 15, 2004
------------------------------------
Thomas M. Longman

/s/ James B. Miller Director March 15, 2004
-----------------------------------
James B. Miller

/s/ Stephen W. Samet Director March 15, 2004
-----------------------------------
Stephen W. Samet

/s/ Ervin I. Pietsch Director March 15, 2004
-----------------------------------
Ervin I. Pietsch

INDEX TO EXHIBITS

EXHIBIT
NUMBER EXHIBIT
------- -------

3.1 Amended and Restated Certificate of Incorporation of Princeton National
Bancorp, Inc. ("PNBC") (incorporated by reference to Exhibit 3.1 to the
PNBC Registration Statement on Form S-1 (Registration No. 33-46362)
(the "S-1 Registration Statement")).

3.2 By-Laws of PNBC (as amended January 27, 2003) (incorporated by
reference to Exhibit 3.2 of the 2002 PNBC Annual Report on Form 10-K).

4.1 Certificate of Designation of Series A Junior Participating Preferred
Stock (incorporated by reference from Registration Statement on Form
8-A filed by PNBC on August 1, 2003 (File No. 000-20050)).

10.1* Employment Agreement, dated as of January 8, 2003 between PNBC and
James B. Miller. (incorporated by reference to Exhibit 10.2 of the 2002
PNBC Annual Report on Form 10-K).

10.2* Employment Agreement, dated as of October 23, 2000, between PNBC and
Tony J. Sorcic (incorporated by reference to Exhibit 10.2 of the 2000
PNBC Annual Report on Form 10-K).

10.3* Citizens First National Bank Profit Sharing Plan, as amended and
restated January 1, 1989 (incorporated by reference to Exhibit 10.4 to
the S-1 Registration Statement).

10.4* Citizens First National Bank Defined Contribution Plan and Trust, as
amended and restated January 1, 1989 (incorporated by reference to
Exhibit 10.5 to the S-1 Registration Statement).

10.5 Princeton National Bancorp, Inc. Stock Option Plan (incorporated by
reference from Schedule 14A filed by PNBC on March 6, 1998).

10.6* Princeton National Bancorp, Inc. Deferred Compensation Plan
(incorporated by reference to Exhibit 10.6 of the 2001 PNBC Annual
Report on Form 10-K).

10.7* Princeton National Bancorp, Inc. Management Incentive Compensation Plan
(incorporated by reference to Exhibit 10.7 of the 2001 PNBC Annual
Report on Form 10-K).

10.8 Princeton National Bancorp, Inc. 2003 Stock Option Plan (incorporated
by reference from Schedule 14A filed by PNBC on March 19, 2003).

13 Portions of 2003 Annual Report to Shareholders.

14 Code of Ethics.

21 Subsidiaries of PNBC.

23 Consent of KPMG LLP.

31.1 Certification of Tony J. Sorcic required by Rule 13a-14(a).

31.2 Certification of Todd D. Fanning required by Rule 13a-14(a).

32.1 Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

32.2 Certification of Todd D. Fanning required by Rule 13a-14(b) and Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

* Management contract or compensatory plan.