|FORM 10-Q



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

| |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2004
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                          | (I.R.S. Employer Identification No.)
|of incorporation or organization)                     |                                     
|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 for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
  Yes
üNoo


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

As of April 29, 2004, the registrant
had outstanding 3,115,101 shares of its $5 par value common stock.

Page 1 of 22 pages
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# Part I:   FINANCIAL INFORMATION

The unaudited consolidated financial
statements of Princeton National Bancorp, Inc. and Subsidiary and managements
discussion and analysis of financial condition and results of operations are presented in
the schedules as follows:

|Schedule 1: |  | Consolidated Balance Sheets                                                           | 
|----------- |  | ------------------------------------------------------------------------------------- | 
|Schedule 2: |  | Consolidated Statements of Income and Comprehensive Income                            | 
|Schedule 3: |  | Consolidated Statements of Stockholders Equity                                       | 
|Schedule 4: |  | Consolidated Statements of Cash Flows                                                 | 
|Schedule 5: |  | Notes to Consolidated Financial Statements                                            | 
|Schedule 6: |  | Managements Discussion and Analysis of Financial Condition and Results of Operations | 
|Schedule 7: |  | Controls and Procedures                                                               | 

# Part II:   OTHER INFORMATION

# Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

| | (e) |  | The
following table provides information about purchases of the Corporations common
stock by the Corporation during the quarter ended March 31, 2004:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|Period            |  | (a) Total number ofshares purchased |  | (b) Average price paidper share |  | (c) Total numberof shares purchasedas part of apublicly announcedplans or programs |  | (d) Maximum number(or approximate dollar value) of shares that may yet be purchased under the plans or programs
|----------------- |  | ----------------------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|1/1/04  1/31/04  |  | 0                                   |  | $0.00                           |  | 0                                                                                  |  | 100,000                                                                                                        
|2/1/04   2/29/04 |  | 32,000                              |  | $28.50                          |  | 32,000                                                                             |  | 68,000                                                                                                         
|3/1/04   3/31/04 |  | 5,000                               |  | $28.65                          |  | 5,000                                                                              |  | 63,000                                                                                                         
|                  |  |                                     |  |                                 |  |                                                                                    |  |                                                                                                                
|Total             |  | 37,000                              |  | $28.52                          |  | 37,000                                                                             |  | 63,000                                                                                                         
|                  |  |                                     |  |                                 |  |                                                                                    |  |                                                                                                                

|(1) |  | We purchased an
aggregate of 37,000 shares of our common stock pursuant to the repurchase
program that we announced on January 26, 2004 (the Program).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Our Board of
Directors approved the repurchase by us of up to an aggregate of 100,000 shares
of our common stock pursuant to the Program. The expiration date of this Program
is January 26, 2005. 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 and Reports on Form 8-K

| | (a) |  | Exhibits:
| | --- |  | ---------

| |  | 31 |  | Certification of
Tony J. Sorcic required by Rule 13a-14(a).
| |  | -- |  | -----------------------------------------------------------

| |  | 31 |  | Certification of
Todd D. Fanning required by Rule 13a-14(a).
| |  | -- |  | ------------------------------------------------------------

| |  | 32 |  | Certificaton of
Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350.
| |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------

| |  | 32 |  | Certificaton of
Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350.
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | The Corporation
filed an 8-K on January 27, 2004 related to the announcement of fourth quarter
2003 earnings.
| | --- |  | -------------------------------------------------------------------------------------------------------------

# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|                    |                                                         |                                  |                     |  | 
|------------------- | ------------------------------------------------------- | -------------------------------- | ------------------- |  | 
|                    |                                                         | PRINCETON NATIONAL BANCORP, INC.
|Date:   May 7, 2004 |                                                         | By                               | /s/ Tony J. Sorcic  |  | 
|                    |                                                        
|                    | Tony J. SorcicPresident & Chief Executive Officer       |                                 
|Date:   May 7, 2004 |                                                         | By                               | /s/ Todd D. Fanning |  | 
|                    |                                                        
|                    | Todd D. FanningVice-President & Chief Financial Officer |                                 

2

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Schedule 1

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

|                                                           | March 31,2004 |  | December 31,2003
|---------------------------------------------------------- | ------------- |  | ----------------
|ASSETS                                                     |               |  |                 
|Cash and due from banks                                    |               |  | $               
|Interest-bearing deposits with financial institutions      |               |  |                 
|Federal funds sold                                         |               |  |                 
|                                                           |               |  |                 
|Total cash and cash equivalents                            |               |  |                 
|Loans held for sale, at lower of cost or market            |               |  |                 
|Investment securities:                                     |               | 
|Available-for-sale, at fair value                          |               |  |                 
|Held-to-maturity, at amortized cost                        |               |  |                 
|                                                           |               |  |                 
|Total investment securities                                |               |  |                 
|Loans:                                                     |               | 
|Loans, net of unearned interest                            |               |  |                 
|Allowance for loan losses                                  |               |  |                 
|                                                           |               |  |                 
|Net loans                                                  |               |  |                 
|Premises and equipment, net of accumulated depreciation    |               |  |                 
|Bank-owned life insurance                                  |               |  |                 
|Interest receivable                                        |               |  |                 
|Goodwill, net of accumulated amortization                  |               |  |                 
|Intangible assets, net of accumulated amortization         |               |  |                 
|Other real estate owned                                    |               |  |                 
|Other assets                                               |               |  |                 
|                                                           |               |  |                 
|TOTAL ASSETS                                               |               |  | $               
|                                                           |               |  |                 
|LIABILITIES                                                |               | 
|Deposits:                                                  |               | 
|Demand                                                     |               |  | $               
|Interest-bearing demand                                    |               |  |                 
|Savings                                                    |               |  |                 
|Time                                                       |               |  |                 
|                                                           |               |  |                 
|Total deposits                                             |               |  |                 
|Borrowings:                                                |               | 
|Customer repurchase agreements                             |               |  |                 
|Advances from the Federal Home Loan Bank                   |               |  |                 
|Interest-bearing demand notes issued to the U.S. Treasury  |               |  |                 
|Note payable                                               |               |  |                 
|                                                           |               |  |                 
|Total borrowings                                           |               |  |                 
|Other liabilities                                          |               |  |                 
|                                                           |               |  |                 
|TOTAL LIABILITIES                                          |               |  |                 
|                                                           |               |  |                 
|STOCKHOLDERS EQUITY                                       |               | 
|Common stock:   $5 par value, 7,000,000 shares             |               | 
|authorized; 4,139,841 issued                               |               |  |                 
|Surplus                                                    |               |  |                 
|Retained earnings                                          |               |  |                 
|Accumulated other comprehensive income, net of tax         |               |  |                 
|Less:   Cost of 1,024,740 and 1,015,838 treasury shares at |               | 
|March 31, 2004 and December 31, 2003, respectively         |               |  |                 
|                                                           |               |  |                 
|TOTAL STOCKHOLDERS EQUITY                                 |               |  |                 
|                                                           |               |  |                 
|TOTAL LIABILITIES AND                                      |               | 
|STOCKHOLDERS EQUITY                                       |               |  | $               
|                                                           |               |  |                 

See accompanying notes to consolidated financial statements

3

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Schedule 2

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

|                                                          | For the Three MonthsEnded March 31
|--------------------------------------------------------- | ----------------------------------
|
|Interest income:                                          |                                   
|Interest and fees on loans                                |                                   
|Interest and dividends on investment securities           |                                   
|Interest on federal funds sold                            |                                   
|Interest on interest-bearing time deposits in other banks |                                   
|                                                          |                                   
|Total interest income                                     |                                   
|Interest expense:                                         |                                   
|Interest on deposits                                      |                                   
|Interest on borrowings                                    |                                   
|                                                          |                                   
|Total interest expense                                    |                                   
|                                                          |                                   
|Net interest income                                       |                                   
|Provision for loan losses                                 |                                   
|                                                          |                                   
|Net interest income after provision                      
|for loan losses                                           |                                   
|Non-interest income:                                      |                                   
|Trust & farm management fees                              |                                   
|Service charges on deposit accounts                       |                                   
|Other service charges                                     |                                   
|Gain on sales of securities available-for-sale            |                                   
|Brokerage fee income                                      |                                   
|Mortgage banking income                                   |                                   
|Bank-owned life insurance income                          |                                   
|Other operating income                                    |                                   
|                                                          |                                   
|Total non-interest income                                 |                                   
|Non-interest expense:                                     |                                   
|Salaries and employee benefits                            |                                   
|Occupancy                                                 |                                   
|Equipment expense                                         |                                   
|Federal insurance assessments                             |                                   
|Intangible assets amortization                            |                                   
|Data processing                                           |                                   
|Advertising                                               |                                   
|Other operating expense                                   |                                   
|                                                          |                                   
|Total non-interest expense                                |                                   
|                                                          |                                   
|Income before income taxes                                |                                   
|Income tax expense                                        |                                   
|                                                          |                                   
|Net income                                                |                                   
|                                                          |                                   
|Earnings per share:                                       |                                   
|Basic                                                     |                                   
|Diluted                                                   |                                   
|Basic weighted average shares outstanding                 |                                   
|Diluted weighted average shares outstanding               |                                   

See accompanying notes to consolidated financial statements

4

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Schedule 2

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

|                                                            | For the Three MonthsEnded March 31
|----------------------------------------------------------- | ----------------------------------
|
|Net income                                                  |                                   
|Other comprehensive income (loss), net of tax               |                                   
|Unrealized holding gains (losses) arising during the period |                                   
|Less:   Reclassification adjustment for realized gains on  
|sales of securities included in net income                  |                                   
|                                                            |                                   
|Other comprehensive income (loss)                           |                                   
|                                                            |                                   
|Comprehensive income                                        |                                   
|                                                            |                                   

See accompanying notes to consolidated financial statements

5

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Schedule 3

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

|                                                                                | For the Three Months EndedMarch 31
|------------------------------------------------------------------------------- | ----------------------------------
|
|Balance, January 1                                                              |                                   
|Net income                                                                      |                                   
|Cash dividends  ($0.18 per share in 2004, and $.15 per share in 2003)           |                                   
|Other comprehensive income (loss), net of tax                                   |                                   
|Purchases of treasury stock  (37,000 shares in 2004, and 40,000 shares in 2003) |                                   
|Exercise of stock options and re-issuance of treasury stock                     |                                   
|(28,568 shares in 2004 and 7,085 shares in 2003)                                |                                   
|Sales of treasury stock  (1,099 shares in 2004, and 686 shares in 2003)         |                                   
|                                                                                |                                   
|Balance, March 31                                                               |                                   
|                                                                                |                                   

See accompanying notes to consolidated financial statements

6

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Schedule 4

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

|                                                                     | For the Three Months EndedMarch 31
|-------------------------------------------------------------------- | ----------------------------------
|
|Operating activities:                                                |                                   
|Net income                                                           |                                   
|Adjustments to reconcile net income to net                           |                                   
|cash provided by operating activities:                               |                                   
|Depreciation                                                         |                                   
|Provision for loan losses                                            |                                   
|Amortization of other intangible assets                              |                                   
|Amortization of premiums on investment                              
|securities, net of accretion                                         |                                   
|Gain on securities transactions, net                                 |                                   
|Gain on sale of premises and equipment                               |                                   
|FHLB stock dividends                                                 |                                   
|Loans originated for sale                                            |                                   
|Proceeds from sales of loans originated for sale                     |                                   
|Increase (decrease) in interest payable                              |                                   
|Decrease in interest receivable                                      |                                   
|Increase in other assets                                             |                                   
|(Decrease) increase in other liabilities                             |                                   
|                                                                     |                                   
|Net cash provided by operating activities                            |                                   
|                                                                     |                                   
|Investing activities:                                                |                                   
|Proceeds from sales of investment securities available-for-sale      |                                   
|Proceeds from maturities of investment securities available-for-sale |                                   
|Purchase of investment securities available-for-sale                 |                                   
|Proceeds from maturities of investment securities held-to-maturity   |                                   
|Purchase of investment securities held-to-maturity                   |                                   
|Proceeds from sales of premises and equipment                        |                                   
|Net increase in loans                                                |                                   
|Purchases of premises and equipment                                  |                                   
|                                                                     |                                   
|Net cash (used in) provided by investing activities                  |                                   
|                                                                     |                                   
|Financing activities:                                                |                                   
|Net increase in deposits                                             |                                   
|Net increase (decrease) in borrowings                                |                                   
|Dividends paid                                                       |                                   
|Purchases of treasury stock                                          |                                   
|Exercise of stock options                                            |                                   
|Sales of treasury stock                                              |                                   
|                                                                     |                                   
|Net cash (used in ) provided by financing activities                 |                                   
|                                                                     |                                   
|(Decrease) increase in cash and cash equivalents                     |                                   
|Cash and cash equivalents at beginning of period                     |                                   
|                                                                     |                                   
|Cash and cash equivalents at March 31                                |                                   
|                                                                     |                                   
|                                                                     |                                   
|Supplemental disclosures of cash flow information:                   |                                   
|Cash paid during the period for:                                     |                                   
|Interest                                                             |                                   
|Income taxes                                                         |                                   
|Supplemental disclosures of non-cash flow activities:                |                                   
|Loans transferred to other real estate owned                         |                                   

See accompanying notes to consolidated financial statements

7

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Schedule 5

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

The accompanying unaudited
consolidated financial statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information required by accounting principles
generally accepted in the United States of America for complete financial statements and
related footnote disclosures. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered for a fair presentation of the results for
the interim period have been included. For further information, refer to the consolidated
financial statements and notes included in the Registrants 2003 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 2003 consolidated
financial statements have been reclassified to conform to the 2004 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 EndedMarch 31,
|-------------------------------- | ---------------------------
|
|Numerator:                       |                            
|Net income                       |                            
|Denominator:                     |                            
|Basic earnings per share        |                            
|weighted average shares          |                            
|Effect of dilutive securities-   |                            
|stock options                    |                            
|                                 |                            
|Diluted earnings per share      |                            
|adjusted weighted average shares |                            
|Net income per share:            |                            
|Basic                            |                            
|Diluted                          |                            

8

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# (2)   GOODWILL AND INTANGIBLE ASSETS

The
balance of goodwill, net of accumulated amortization, totaled $1,355,000 at March 31, 2004
and December 31, 2003. The balance of intangible assets, net of accumulated amortization,
totaled $1,473,000 and $1,525,000 at March 31, 2004 and December 31, 2003, respectively.

The
following table summarizes the Corporations intangible assets, which are subject to
amortization, as of March 31, 2004 and December 31, 2003.

|                        | 2004 |  | 2003
|----------------------- | ---- |  | ----
|
|Core deposit intangible |      |  | $   
|Other intangible assets |      |  |     
|                        |      |  |     
|Total                   |      |  | $   
|                        |      |  |     

Amortization
expense totaled $52,000 for the three months ended March 31, 2004 and March 31, 2003,
respectively. The amortization expense will be approximately $155,000 for the remainder of
2004 and will be approximately $205,000 for each of the next five years.

The
Corporations other intangible assets consist of originated mortgage servicing rights
which are included in other assets on the consolidated balance sheets. Mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net servicing
income similar to the interest method using an accelerated amortization method and are
subject to periodic impairment testing. As of March 31, 2004 no impairment had been
recorded. Changes in the carrying value of capitalized mortgage servicing rights are
summarized as follows:

|(in thousands)                  
|--------------------------------
|Balance, January 1              
|Servicing rights capitalized    
|Amortization of servicing rights
|Impairment of servicing rights  
|                                
|Balance, March 31               
|                                

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

The
Corporation services loans for others with unpaid principal balances at March 31, 2004 and
December 31, 2003 of approximately $142,101,000, and $138,775,000, respectively.

9

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The
following table shows the future estimated amortization expense for mortgage servicing
rights based on existing balances as of March 31, 2004. The Corporations actual
amortization expense in any given period may be significantly different from the estimated
amounts displayed depending on the amount of additional servicing rights, changes in
mortgage interest rates, estimated prepayment speeds, and market conditions.

# Estimated Amortization Expense:

|                                            | Amount (in thousands)
|------------------------------------------- | ---------------------
|For the nine months ended December 31, 2004 |                      
|For the year ended December 31, 2005        |                      
|For the year ended December 31, 2006        |                      
|For the year ended December 31, 2007        |                      
|For the year ended December 31, 2008        |                      
|For the year ended December 31, 2009        |                      
|Thereafter                                  |                      

# (3)   STOCK OPTION PLAN

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

|                                           | For the Three Months Ended March 31,
|------------------------------------------ | ------------------------------------
|(in thousands, except per share data)     
|Net Income as reported                     |                                     
|Deduct:   Stock-based compensation, net of |                                     
|tax, that would have been reported         |                                     
|if the fair value based method had         |                                     
|been applied to all awards                 |                                     
|                                           |                                     
|Pro forma net income                       |                                     
|                                           |                                     
|Basic Earnings Per Share     As Reported   |                                     
|Pro Forma                                  |                                     
|Diluted Earnings Per Share As Reported     |                                     
|Pro Forma                                  |                                     

10

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Schedule 6

# PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2004 and 2003

The
following discussion provides information about Princeton National Bancorp, Inc.s
(PNBC or the Corporation) financial condition and results of
operations for the quarters ended March 31, 2004 and 2003. This discussion should be read
in conjunction with the attached consolidated financial statements and notes thereto.
Certain statements in this report constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, but not limited to those statements that include the
words believes, expects, anticipates,
estimates, or similar expressions. PNBC cautions that such forward-looking
statements involve risks and uncertainties that may cause actual results to differ
materially from those expressed or implied. Such risks and uncertainties include potential
change in interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation, and other risks detailed in documents
filed by the Corporation with the Securities and Exchange Commission from time to time.

# RESULTS OF OPERATIONS

Net
income for the first quarter of 2004 was $1,641,000, or basic earnings per share of $0.53
(diluted earnings per share of $0.52), as compared to net income of $1,772,000 in the
first quarter of 2003, or basic and diluted earnings per share of $0.55. This represents a
decrease of $131,000 (7.4%) or $.02 per basic share and $.03 per diluted share. During the
first quarter of 2003, due to the record-low interest rates, the mortgage refinancing
activity was much higher than the first three months of this year resulting in a decrease
of $251,000 in mortgage banking income. Additionally, total non-interest expenses for the
first quarter of 2004 have increased $360,000 over the same time period in 2003, due to
increases in salaries and advertising. The annualized return on average assets and return
on average equity were 1.09% and 12.95%, respectively, for the first quarter of 2004,
compared with 1.22% and 14.14% for the first quarter of 2003.

Net
interest income before provision for loan losses was $5,009,000 for the first quarter of
2004, compared to $4,946,000 for the first quarter of 2003 (an increase of $63,000 or
1.3%). This increase is a result of an increase in average interest-earning assets,
despite a lower net interest margin. For the three months ended March 31, 2004, average
interest-earning assets were $553.9 million compared to $538.6 million for the three
months ended March 31, 2003. The resulting net yield on interest-earning assets (on a
fully taxable equivalent basis) decreased from 3.97% in the first quarter of 2003 to 3.90%
in the first quarter of 2004, due generally to interest-earning assets repricing faster
than interest-bearing liabilities.

PNBC
recorded a loan loss provision of $100,000 in the both the first quarter of 2004 and the
first quarter of 2003. The provision expense recorded each quarter is determined by
managements evaluation

11

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of the risk characteristics of the
loan portfolio. For the first quarter of 2004, PNBC had net charge-offs of $71,000,
compared to net charge-offs of $214,000 for the first quarter of 2003.

Non-interest
income totaled $2,039,000 for the first quarter of 2004, as compared to $2,059,000 in the
first quarter of 2003, a decrease of $20,000 (or 1.0%). As previously mentioned, this is a
result of the decrease in mortgage banking income of $251,000 (or 62.9%) due to a lower
amount of fee income being generated from the origination/refinancing and subsequent sales
and servicing of mortgage loans in the secondary market. Partially offsetting the decrease
in mortgage banking income was $182,000 in gains on sales of available-for-sale securities
in the first quarter of 2004, compared to $0 in the first quarter of 2003. Annualized
non-interest income as a percentage of total average assets was 1.35% for the first three
months of 2004, compared to 1.40% for the same period in 2003.

Total
non-interest expense for the first quarter of 2004 was $4,784,000, an increase of $360,000
(or 8.1%) from $4,424,000 in the first quarter of 2003. The majority of the increase was
in salaries/employee benefits, which increased $225,000 (or 9.1%), and in advertising,
which increased $57,000 (or 63.3%) due to expenses relating to the introduction of a new
checking account. Collectively, all other categories of non-interest expense increased
$78,000 (or 4.2%). Annualized non-interest expense as a percentage of total average assets
was 3.17% for the first three months of 2004, compared to 3.01% for the same period in
2003.

# INCOME TAXES

Income
tax expense totaled $523,000 for the first quarter of 2004, as compared to $709,000 for
the first quarter of 2003. The effective tax rate was 24.2% for the three months ended
March 31, 2004 compared to 28.6% for the three months ended March 31, 2003, partially due
to an increase in amount of interest income earned from municipal (tax-exempt) securities.

# ANALYSIS OF FINANCIAL CONDITION

Total
assets at March 31, 2004 increased to $611,463,000 from $609,737,000 at December 31, 2003
(an increase of $1.7 million or 0.3%). Total deposits at March 31, 2003 increased to
$538,451,000 from $537,817,000 at December 31, 2003 (an increase of $624,000 or 0.1%).
Comparing categories of deposits at March 31, 2004 to the December 31, 2003 totals,
savings deposits increased $3.8 million (or 6.6%). Conversely, demand deposits decreased
$2.6 million (or 3.9%); interest-bearing demand deposits decreased $378,000 (0.2%); and
time deposits decreased by $225,000 (or 0.1%). 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
$16,161,000 at December 31, 2003 to $16,443,000 at March 31, 2004 (an increase of $282,000
or 1.7%). Investment balances totaled $168,022,000 at March 31, 2004, compared to
$169,892,000 at December 31, 2003 (a decrease of $1.9 million or 1.1%).

Loan
balances, net of unearned interest, increased to $389,550,000 at March 31, 2003, compared
to $383,053,000 at December 31, 2003 (an increase of $6.5 million or 1.7%). Non-performing
loans increased slightly totaling $1,087,000 or 0.28% of net loans at March 31, 2004, as
compared to $969,000 or 0.25% of net loans at December 31, 2003.

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For
the three months ended March 31, 2004, the subsidiary bank charged off $152,000 of loans
and had recoveries of $81,000, compared to charge-offs of $261,000 and recoveries of
$47,000 during the three months ended March 31, 2003. 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 March 31,
2004, the allowance was $2,279,000 which is 209.7% of non-performing loans and 0.59% of
total loans, compared with $2,250,000 which was 232.2% of non-performing loans and 0.59%
of total loans at December 31, 2003.

At
March 31, 2004, impaired loans totaled $179,000 compared to $235,000 at December 31, 2003.
Loans 90 days or more past due and still accruing interest at March 31, 2004 were $16,000
compared to $44,000 at December 31, 2003. The balances of non-performing and impaired
loans continue to be below industry averages. There is a specific loan loss reserve of
$11,000 established for impaired loans as of March 31, 2004 compared to a specific loan
loss reserve of $15,000 at December 31, 2003. 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 March 31, 2004.

# 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 March 31, 2004 total risk-based capital of
PNBC was 11.36%, compared to 11.22% at December 31, 2003. The Tier 1 capital ratio
increased from 7.70% at December 31, 2003, to 7.81% at March 31, 2004. Total
stockholders equity to total assets at March 31, 2004 increased to 8.48% from 8.34%
at December 31, 2003.

# LIQUIDITY

Liquidity
is measured by a financial institutions ability to raise funds through deposits,
borrowed funds, capital, or the sale of assets. Additional sources of liquidity include
cash flow from the repayment of loans and the maturity of investment securities. Major
uses of cash include the origination of loans and purchase of investment securities. Cash
flows provided by operating activities, offset by those used in investing and financing
activities, resulted in a net decrease in cash and cash equivalents of $2,210,000 from
December 31, 2003 to March 31, 2004. This decrease was primarily due to a net increase in
loans. For more detailed information, see PNBCs Consolidated Statements of Cash
Flows.

# FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The
subsidiary bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees,

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elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets. The contract
amounts of those instruments reflect the extent of involvement the subsidiary bank has in
particular classes of financial instruments.

The
subsidiary banks exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those instruments.
The subsidiary bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At March 31, 2004 commitments to
extend credit and standby letters of credit were approximately $94,641,000 and $6,243,000,
respectively.

Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The subsidiary bank evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on
managements credit evaluation of the counter party. Collateral held varies, but may
include real estate, accounts receivable, inventory, property, plant and equipment, and
income-producing properties.

Standby
letters of credit are conditional commitments issued by the subsidiary bank to guarantee
the performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending loan
facilities to customers. The subsidiary bank secures the standby letters of credit with
the same collateral used to secure the loan.

# EXPANSION PLANS

In
2003, the Corporation signed a sales contract for the purchase of property in Aurora,
Illinois. The purchase of this property should be finalized in the second quarter of 2004
with construction of the new bank facility to begin in the fall of 2004. In 2005, once the
Aurora facility is completed, a new bank facility will be built on the Elburn, Illinois
property which was purchased in July of 2003.

# 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, 2003, as reported in
PNBCs 2003 Annual Report on Form 10-K.

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# IMPACT OF NEW ACCOUNTING STANDARDS

In
December 2003, the FASB issued FASB Interpretation 46, Consolidation of Variable
Interest Entities (FIN 46R), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation 46, Consolidation of Variable Interest Entities, which was
issued on January 17, 2003. Adoption of this Statement did not have a material effect on
the Corporations consolidated financial statements.

In
March 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 105, Application of Accounting Principles to Loan
Commitments, (SAB 105). SAB 105 applies to all registrants that issue loan
commitments that relate to the origination of mortgage loans that will be held for sale
and applies specifically to loan commitments that are issued after March 31, 2004. The
adoption of SAB 105 is not expected to have a material effect on the Corporations
Consolidated Financial Statements.

# EFFECTS OF INFLATION

The
consolidated financial statements and related consolidated financial data presented herein
have been prepared in accordance with accounting principles generally accepted in the
United States of America and practices within the banking industry which require the
measurement of financial condition and operating results in terms of historical dollars,
without considering the changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institutions performance than the effects of
general levels of inflation.

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# PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

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

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

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# Schedule 7.   Controls and Procedures

|(a) |  | Disclosure
controls and procedures.   We evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of March 31,
2004. 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 March
31, 2004 that could significantly affect those controls.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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INDEX TO EXHIBITS

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

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

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

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

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

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