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  ü No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes  ü No o 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 of shares purchased		(b) Average price paid per share		(c) Total number of shares purchased as part of a publicly announced plans 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. Sorcic President & Chief Executive Officer
Date:   May 7, 2004		By	/s/ Todd D. Fanning
			Todd D. Fanning Vice-President & Chief Financial Officer

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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			$	12,545		$	13,428
Interest-bearing deposits with financial institutions				634			511
Federal funds sold				1,025			2,475
Total cash and cash equivalents				14,204			16,414
Loans held for sale, at lower of cost or market				2,126			2,323
Investment securities:
Available-for-sale, at fair value				151,478			154,065
Held-to-maturity, at amortized cost				16,544			15,827
Total investment securities				168,022			169,892
Loans:
Loans, net of unearned interest				389,550			383,053
Allowance for loan losses				(2,279	)		(2,250	)
Net loans				387,271			380,803
Premises and equipment, net of accumulated depreciation				14,970			14,664
Bank-owned life insurance				15,143			15,036
Interest receivable				3,905			4,634
Goodwill, net of accumulated amortization				1,355			1,355
Intangible assets, net of accumulated amortization				1,473			1,525
Other real estate owned				689			798
Other assets				2,305			2,293
TOTAL ASSETS			$	611,463		$	609,737
LIABILITIES
Deposits:
Demand			$	62,862		$	65,418
Interest-bearing demand				179,427			179,805
Savings				60,934			57,151
Time				235,228			235,453
Total deposits				538,451			537,827
Borrowings:
Customer repurchase agreements				9,688			9,664
Advances from the Federal Home Loan Bank				5,000			5,150
Interest-bearing demand notes issued to the U.S. Treasury				705			297
Note payable				1,050			1,050
Total borrowings				16,443			16,161
Other liabilities				4,713			4,874
TOTAL LIABILITIES				559,607			558,862
STOCKHOLDERS’ EQUITY
Common stock:   $5 par value, 7,000,000 shares
authorized; 4,139,841 issued				20,699			20,699
Surplus				7,586			7,020
Retained earnings				39,378			38,726
Accumulated other comprehensive income, net of tax				1,695			1,275
Less:   Cost of 1,024,740 and 1,015,838 treasury shares at
March 31, 2004 and December 31, 2003, respectively				(17,502	)		(16,845	)
TOTAL STOCKHOLDERS’ EQUITY				51,856			50,875
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY			$	611,463		$	609,737

See accompanying notes to consolidated financial statements

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Schedule 2

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

			For the Three Months Ended March 31
			2004			2003
Interest income:
Interest and fees on loans			$	5,711		$	5,984
Interest and dividends on investment securities				1,529			1,804
Interest on federal funds sold				2			20
Interest on interest-bearing time deposits in other banks				2			16
Total interest income				7,244			7,824
Interest expense:
Interest on deposits				2,139			2,770
Interest on borrowings				96			108
Total interest expense				2,235			2,878
Net interest income				5,009			4,946
Provision for loan losses				100			100
Net interest income after provision
for loan losses				4,909			4,846
Non-interest income:
Trust & farm management fees				346			322
Service charges on deposit accounts				743			722
Other service charges				259			263
Gain on sales of securities available-for-sale				182			0
Brokerage fee income				178			131
Mortgage banking income				148			399
Bank-owned life insurance income				141			150
Other operating income				42			72
Total non-interest income				2,039			2,059
Non-interest expense:
Salaries and employee benefits				2,692			2,467
Occupancy				338			307
Equipment expense				410			396
Federal insurance assessments				63			55
Intangible assets amortization				52			52
Data processing				172			179
Advertising				147			90
Other operating expense				910			878
Total non-interest expense				4,784			4,424
Income before income taxes				2,164			2,481
Income tax expense				523			709
Net income			$	1,641		$	1,772
Earnings per share:
Basic				0.53			0.55
Diluted				0.52			0.55
Basic weighted average shares outstanding				3,119,404			3,221,291
Diluted weighted average shares outstanding				3,170,115			3,250,428

See accompanying notes to consolidated financial statements

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Schedule 2

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

			For the Three Months Ended March 31
			2004			2003
Net income			$	1,641		$	1,772
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during the period				531			(227	)
Less:   Reclassification adjustment for realized gains on
sales of securities included in net income				(111	)		0
Other comprehensive income (loss)				420			(227	)
Comprehensive income			$	2,061		$	1,545

See accompanying notes to consolidated financial statements

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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 Ended March 31
			2004			2003
Balance, January 1			$	50,875		$	51,074
Net income				1,641			1,772
Cash dividends ($0.18 per share in 2004, and $.15 per share in 2003)				(562	)		(485	)
Other comprehensive income (loss), net of tax				420			(227	)
Purchases of treasury stock (37,000 shares in 2004, and 40,000 shares in 2003)				(1,055	)		(878	)
Exercise of stock options and re-issuance of treasury stock
(28,568 shares in 2004 and 7,085 shares in 2003)				506			81
Sales of treasury stock (1,099 shares in 2004, and 686 shares in 2003)				31			14
Balance, March 31			$	51,856		$	51,351

See accompanying notes to consolidated financial statements

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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 Ended March 31
			2004			2003
Operating activities:
Net income			$	1,641		$	1,772
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation				372			353
Provision for loan losses				100			100
Amortization of other intangible assets				52			52
Amortization of premiums on investment
securities, net of accretion				419			421
Gain on securities transactions, net				(182	)		0
Gain on sale of premises and equipment				0			(2	)
FHLB stock dividends				(30	)		(22	)
Loans originated for sale				(9,273	)		(18,077	)
Proceeds from sales of loans originated for sale				9,470			22,072
Increase (decrease) in interest payable				90			(285	)
Decrease in interest receivable				729			1,251
Increase in other assets				(10	)		(91	)
(Decrease) increase in other liabilities				(517	)		285
Net cash provided by operating activities				2,861			7,829
Investing activities:
Proceeds from sales of investment securities available-for-sale				8,462			0
Proceeds from maturities of investment securities available-for-sale				7,726			10,701
Purchase of investment securities available-for-sale				(13,948	)		(8,188	)
Proceeds from maturities of investment securities held-to-maturity				249			770
Purchase of investment securities held-to-maturity				(140	)		0
Proceeds from sales of premises and equipment				0			2
Net increase in loans				(6,568	)		(1,801	)
Purchases of premises and equipment				(678	)		(168	)
Net cash (used in) provided by investing activities				(4,897	)		1,316
Financing activities:
Net increase in deposits				624			13,899
Net increase (decrease) in borrowings				282			(3,807	)
Dividends paid				(562	)		(485	)
Purchases of treasury stock				(1,055	)		(878	)
Exercise of stock options				506			81
Sales of treasury stock				31			14
Net cash (used in ) provided by financing activities				(174	)		8,824
(Decrease) increase in cash and cash equivalents				(2,210	)		17,969
Cash and cash equivalents at beginning of period				16,414			18,870
Cash and cash equivalents at March 31			$	14,204		$	36,839
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest			$	2,145		$	3,163
Income taxes			$	300		$	105
Supplemental disclosures of non-cash flow activities:
Loans transferred to other real estate owned			$	0		$	27

See accompanying notes to consolidated financial statements

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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 Ended March 31,
			2004			2003
Numerator:
Net income			$	1,641		$	1,772
Denominator:
Basic earnings per share–
weighted average shares				3,119,404			3,221,291
Effect of dilutive securities-
stock options				50,711			29,137
Diluted earnings per share–
adjusted weighted average shares				3,170,115			3,250,428
Net income per share:
Basic			$	0.53		$	0.55
Diluted			$	0.52		$	0.55

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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
			Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Core deposit intangible			$	2,968		$	(1,550	)	$	2,968		$	(1,501	)
Other intangible assets				160			(105	)		160			(102	)
Total			$	3,128		$	(1,655	)	$	3,128		$	(1,603	)

        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			$	1,334
Servicing rights capitalized				92
Amortization of servicing rights				(68	)
Impairment of servicing rights				0
Balance, March 31			$	1,358

        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.

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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			$	89
For the year ended December 31, 2005				114
For the year ended December 31, 2006				107
For the year ended December 31, 2007				100
For the year ended December 31, 2008				94
For the year ended December 31, 2009				88
Thereafter				766

(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)			2004			2003
Net Income as reported			$	1,641		$	1,772
Deduct:   Stock-based compensation, net of
tax, that would have been reported
if the fair value based method had
been applied to all awards				(100	)		(60	)
Pro forma net income			$	1,541		$	1,712
Basic Earnings Per Share     As Reported			$	0.53		$	0.55
Pro Forma				0.49			0.53
Diluted Earnings Per Share As Reported			$	0.52		$	0.55
Pro Forma				0.49			0.53

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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

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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%.

			Three Months Ended, March 31, 2004									Three Months Ended, March 31, 2003
			Average Balance			Interest			Yield/ Cost			Average Balance			Interest			Yield/ Cost
Average Interest-Earning Assets
Interest-bearing deposits			$	930		$	2			0.83	%	$	5,797		$	16			1.12	%
Taxable investment securities				105,366			836			3.19	%		115,299			1,177			4.14	%
Tax-exempt investment securities				61,601			1,050			6.85	%		51,753			950			7.44	%
Federal funds sold				993			2			0.95	%		7,219			20			1.12	%
Net loans				385,001			5,720			5.98	%		358,500			5,988			6.77	%
Total interest-earning assets				553,891			7,610			5.53	%		538,567			8,151			6.14	%
Average non-interest earning assets				53,736									50,262
Total average assets			$	607,627								$	588,829
Average Interest-Bearing Liabilities
Interest-bearing demand deposits			$	178,686			479			1.08	%	$	158,474			560			1.43	%
Savings deposits				58,530			55			0.38	%		53,437			103			0.78	%
Time deposits				235,325			1,604			2.74	%		247,206			2,106			3.46	%
Interest-bearing demand notes
issued to the U.S. Treasury				539			1			0.81	%		747			2			1.16	%
Federal funds purchased and
securities repurchase agreements				11,557			18			0.64	%		9,047			17			0.78	%
Advances from Federal Home Loan Bank				5,110			70			5.49	%		5,757			78			5.53	%
Borrowings				1,050			7			2.85	%		1,300			10			3.25	%
Total interest-bearing liabilities				490,797			2,234			1.83	%		475,968			2,876			2.45	%
Net yield on average interest-earning assets						$	5,376			3.90	%				$	5,275			3.97	%
Average non-interest-bearing liabilities				65,870									62,027
Average stockholders’ equity				50,960									50,834
Total average liabilities and
stockholders’ equity			$	607,627								$	588,829

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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

Exhibit Number

Exhibit

31.1

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

31.2

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

32.1

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

32.2

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

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