**U.S.Securities and Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|

 

**Forquarterly period ended March 31, 2005**

 
| o |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|---|--------|--------------------------------------------------------------------------------|

 

**Commissionfile number  0-13343**

 

**IlliniCorporation**

(Exact name ofsmall business issuer as specified in its charter)

 
| **Illinois**                                                     | ** ** | **37-1135429**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**3200 WestIles Avenue, Springfield, Illinois 62711**

(Address ofprincipal executive offices)

 

**(217) 787-5111**

(Issuer’stelephone number)

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 
|   |   | Yes ý No o |
|--------|--------|--------------------------------|

 

As of May 9, 2005,there were 541,029 shares of common stock, $0.01 par value outstanding.

 
| Transitional Small  Business Disclosure Format: |   | Yes o No ý |
|-------------------------------------------------|--------|--------------------------------|

 

 

----

 

**ILLINICORPORATION**

INDEX TO FORM 10-QSB

March 31,2005

 
| **PART I.    FINANCIAL INFORMATION** |                                                                                                       |
|----------------------------------------------------------|------------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                       |   |
| Item 1.                                                  | Financial Statements (Unaudited)                                                                           |   |
|                                                     |                                                                                                       |   |
|                                                     | Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                                |   |
|                                                     |                                                                                                       |   |
|                                                     | Consolidated  Statements of Income / (Loss)  Three Months Ended March 31, 2005 and 2004               |   |
|                                                     |                                                                                                       |   |
|                                                     | Consolidated  Statements of Shareholders’ Equity  Three Months Ended March 31, 2005 and 2004     |   |
|                                                     |                                                                                                       |   |
|                                                     | Consolidated  Statements of Comprehensive Income / (Loss)  Three Months Ended March 31, 2005 and 2004 |   |
|                                                     |                                                                                                       |   |
|                                                     | Consolidated  Statements of Cash Flows  Three Months Ended March 31, 2005 and 2004                    |   |
|                                                     |                                                                                                       |   |
|                                                     | Notes  to Unaudited Consolidated Financial Statements                                                      |   |
|                                                     |                                                                                                       |   |
| Item 2.                                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                |   |
|                                                     |                                                                                                       |   |
| Item 3.                                                  | Controls and Procedures                                                                                    |   |
|                                                     |                                                                                                       |   |
| **PART II.    OTHER  INFORMATION**   |                                                                                                       |
| ** **                                               |                                                                                                       |
| **SIGNATURES**                                           |                                                                                                       |

 

**InformationConcerning Forward-Looking Statements**

*Statements contained in this Form 10-QSBwhich are not historical facts are “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These statements involve importantknown and unknown risks, uncertainties and other factors and can be identifiedby phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,”“predict,” “potential,” “future,” “may,” “should” and similar expressions orwords.  Such forward-looking statementsare subject to risk and uncertainties which could cause actual results todiffer materially from those projected. Such risks and uncertainties include potential change in interest rates,competitive factors in the financial services industry, general economicconditions, the effect of new legislation and other risks detailed in documentsfiled by Illini Corporation with the Securities and Exchange Commission fromtime to time.*

 

2

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**PART I****.  FINANCIAL INFORMATION**

**Item 1****.****Financial Statements**

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**March 31,2005 and December 31, 2004**

**Unaudited**

 
| ** **                                                                                                                                             | ** ** | **March 31,  2005**   | ** **  | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(dollars in thousands)** | ** **  |
| **ASSETS**                                                                                                                                             | ** ** | ** **                 |        |                        |       |
| Cash  and due from banks                                                                                                                               | ** ** | **$**                      | **6,863**   |                        | $          | 8,136 |   |
| Interest-bearing  deposits in other banks                                                                                                              | ** ** | **67**                     |        | 66                          |       |
| Federal  funds sold                                                                                                                                    | ** ** | **3,335**                  |        | 3,359                       |       |
| Cash  and cash equivalents                                                                                                                             | ** ** | **10,265**                 |        | 11,561                      |       |
| Investment  securities available for sale, at fair value                                                                                               | ** ** | **78,529**                 |        | 56,161                      |       |
| Loans,  net of allowance for loan losses of $2,226 and $2,412                                                                                          | ** ** | **142,754**                |        | 156,160                     |       |
| Federal  Home Loan Bank stock                                                                                                                          | ** ** | **875**                    |        | 863                         |       |
| Premises  and equipment                                                                                                                                | ** ** | **5,860**                  |        | 5,903                       |       |
| Accrued  interest receivable                                                                                                                           | ** ** | **1,523**                  |        | 1,649                       |       |
| Other  real estate owned                                                                                                                               | ** ** | **1,215**                  |        | 994                         |       |
| Goodwill                                                                                                                                               | ** ** | **1,856**                  |        | 1,856                       |       |
| Other  assets                                                                                                                                          | ** ** | **2,180**                  |        | 2,369                       |       |
| Total  Assets                                                                                                                                          | ** ** | **$**                      | **245,057** |                        | $          | 237,516 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                          | ** ** | ** **                 | ** **  | ** **                  | ** ** |
| Noninterest-bearing  demand deposits                                                                                                                   | ** ** | **$**                      | **35,054**  | ** **                  | **$**      | **37,569** | ** ** |
| Interest-bearing  deposits:                                                                                                                            |       |                       |        |                        |       |
| NOW  and money market accounts                                                                                                                         | ** ** | **55,403**                 |        | 57,797                      |       |
| Savings  deposits                                                                                                                                      | ** ** | **23,331**                 |        | 21,902                      |       |
| Time  deposits, $100,000 and over                                                                                                                      | ** ** | **15,288**                 |        | 13,209                      |       |
| Other  time deposits                                                                                                                                   | ** ** | **76,552**                 |        | 68,242                      |       |
| Total  Deposits                                                                                                                                        | ** ** | **205,628**                |        | 198,719                     |       |
|                                                                                                                                                   |       |                       |        |                        |       |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                            | ** ** | **696**                    |        | 1,392                       |       |
| Borrowings                                                                                                                                             | ** ** | **11,000**                 |        | 13,298                      |       |
| Subordinated  debentures                                                                                                                               | ** ** | **9,000**                  |        | 9,000                       |       |
| Accrued  interest payable                                                                                                                              | ** ** | **545**                    |        | 813                         |       |
| Other  liabilities                                                                                                                                     | ** ** | **1,150**                  |        | 869                         |       |
| Total  Liabilities                                                                                                                                     | ** ** | **228,019**                |        | 224,091                     |       |
|                                                                                                                                                   |       |                       |        |                        |       |
| Shareholders’  equity                                                                                                                             |       |                       |        |                        |       |
| Preferred  stock, $0.01 par value, authorized and unissued 10,000,000 shares                                                                           | ** ** | **—**                 |        | —                      |       |
| Common  stock, $0.01 par value, authorized 45,000,000 shares;698,289 shares issued at  March 31, 2005 and 571,789 sharesat December 31, 2004 | ** ** | **7**                      |        | 6                           |       |
| Capital  surplus                                                                                                                                       | ** ** | **13,059**                 |        | 9,038                       |       |
| Retained  earnings                                                                                                                                     | ** ** | **10,840**                 |        | 10,615                      |       |
| Accumulated  other comprehensive income                                                                                                                | ** ** | **209**                    |        | 843                         |       |
| Less:  Treasury shares, at cost, 157,260 shares                                                                                                        | ** ** | **(7,077**                 | **)**       | (7,077                      | )          |
| Total  Shareholders’ Equity                                                                                                                       | ** ** | **17,038**                 |        | 13,425                      |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                       | ** ** | **$**                      | **245,057** |                        | $          | 237,516 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

3

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME/ (LOSS)**

**Three Months Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **2005**                                          | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                                                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest  income:                                                           |       |                                              | ** ** |       |       |
| Loans,  including fees                                                      | ** ** | **$**                                             | **2,374**  | ** ** | $          | 2,922 |   |
| Investment  securities:                                                     | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Taxable                                                                     | ** ** | **400**                                           | ** ** | 290        |       |
| Exempt  from federal income taxes                                           | ** ** | **186**                                           | ** ** | 181        |       |
| Federal  Funds sold and interest-bearing deposits                           | ** ** | **41**                                            | ** ** | 6          |       |
| Total  interest income                                                      | ** ** | **3,001**                                         | ** ** | 3,399      |       |
| Interest  expense:                                                          |       |                                              | ** ** |       |       |
| Deposits:                                                                   |       |                                              | ** ** |       |       |
| NOW  and money market accounts                                              | ** ** | **175**                                           | ** ** | 108        |       |
| Savings  deposits                                                           | ** ** | **45**                                            | ** ** | 33         |       |
| Time  deposits, $100,000 and over                                           | ** ** | **88**                                            | ** ** | 126        |       |
| Other  time deposits                                                        | ** ** | **455**                                           | ** ** | 661        |       |
| Federal  funds purchased and securities sold under agreements to repurchase | ** ** | **6**                                             | ** ** | 9          |       |
| Borrowings                                                                  | ** ** | **87**                                            | ** ** | 99         |       |
| Subordinated  debentures                                                    | ** ** | **244**                                           | ** ** | 244        |       |
| Total  interest expense                                                     | ** ** | **1,100**                                         | ** ** | 1,280      |       |
| Net  interest income                                                        | ** ** | **1,901**                                         | ** ** | 2,119      |       |
| Provision  for loan losses                                                  | ** ** | **—**                                        | ** ** | 1,390      |       |
| Net  interest income after provision for loan losses                        | ** ** | **1,901**                                         | ** ** | 729        |       |
| Noninterest  income:                                                        |       |                                              | ** ** |       |       |
| Service  charges on deposit accounts                                        | ** ** | **335**                                           | ** ** | 350        |       |
| Other  fee income                                                           | ** ** | **69**                                            | ** ** | 78         |       |
| Mortgage  loan servicing fees, net                                          | ** ** | **18**                                            | ** ** | 21         |       |
| Gains  on sales of mortgage loans                                           | ** ** | **17**                                            | ** ** | 14         |       |
| Gains  (losses) on sale of other real estate owned                          | ** ** | **(17**                                           | **)**      | 20         |       |
| Other                                                                       | ** ** | **31**                                            | ** ** | 20         |       |
| Total  noninterest income                                                   | ** ** | **453**                                           | ** ** | 503        |       |
| Noninterest  expense:                                                       |       |                                              | ** ** |       |       |
| Salaries  and employee benefits                                             | ** ** | **1,004**                                         | ** ** | 1,265      |       |
| Net  occupancy expense                                                      | ** ** | **179**                                           | ** ** | 185        |       |
| Equipment  expense                                                          | ** ** | **40**                                            | ** ** | 48         |       |
| Data  processing fees                                                       | ** ** | **165**                                           | ** ** | 201        |       |
| Supplies  expense                                                           | ** ** | **33**                                            | ** ** | 34         |       |
| Communication  and transportation expense                                   | ** ** | **132**                                           | ** ** | 118        |       |
| Marketing  and advertising expense                                          | ** ** | **53**                                            | ** ** | 53         |       |
| Correspondent  bank fees                                                    | ** ** | **60**                                            | ** ** | 54         |       |
| Loan  foreclosure and other real estate owned expense                       | ** ** | **52**                                            | ** ** | 524        |       |
| Professional  fees                                                          | ** ** | **147**                                           | ** ** | 166        |       |
| Regulatory  fees                                                            | ** ** | **42**                                            | ** ** | 22         |       |
| Other                                                                       | ** ** | **122**                                           | ** ** | 153        |       |
| Total  noninterest expense                                                  | ** ** | **2,029**                                         | ** ** | 2,823      |       |
| Income  (loss) before income tax expense (benefit)                          | ** ** | **325**                                           | ** ** | (1,591     | )          |
| Income  tax expense (benefit)                                               | ** ** | **46**                                            | ** ** | (693       | )          |
| Net  income (loss)                                                          | ** ** | **$**                                             | **279**    | ** ** | $          | (898 | ) |
| Basic  and diluted earnings (loss) per share                                | ** ** | **$**                                             | **0.59**   | ** ** | (2.18      | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

4

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

**Three Months Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)**             | ** ** |
| Common  Stock                                     |       |                                   |       |   |   |
| Beginning  of year balance                        | ** ** | **$**                                  | **6**      | ** ** | **$** | **6** | ** ** |
| Issuance  of shares from private placement        | ** ** | **1**                                  | ** ** | **—** | ** ** |
| End  of period balance                            | ** ** | **7**                                  | ** ** | **6** | ** ** |
| ** **                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Capital  Surplus                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Beginning  of year balance                        | ** ** | **9,038**                              | ** ** | **9,070** | ** ** |
| Sale  of treasury stock                           | ** ** | **—**                             | ** ** | **(32** | **)** |
| Issuance  of shares from private placement        | ** ** | **4,021**                              | ** ** | **—** | ** ** |
| End  of period balance                            | ** ** | **13,059**                             | ** ** | **9,038** | ** ** |
| ** **                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Retained  Earnings                                | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Beginning  of year balance                        | ** ** | **10,615**                             | ** ** | **12,068** | ** ** |
| Net  income (loss)                                | ** ** | **279**                                | ** ** | **(898** | **)** |
| Dividends  on common stock                        | ** ** | **(54**                                | **)**      | **—** | ** ** |
| End  of period balance                            | ** ** | **10,840**                             | ** ** | **11,170** | ** ** |
| ** **                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Treasury  Stock                                   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Beginning  of year balance                        | ** ** | **(7,077**                             | **)**      | **(7,204** | **)** |
| Sale  of treasury stock                           | ** ** | **—**                             | ** ** | **127** | ** ** |
| End  of period balance                            | ** ** | **(7,077**                             | **)**      | **(7,077** | **)** |
| ** **                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Accumulated  Other Comprehensive Income           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Beginning  of year balance                        | ** ** | **843**                                | ** ** | **1,101** | ** ** |
| Unrealized  gain (loss) on securities, net of tax | ** ** | **(634**                               | **)**      | **209** | ** ** |
| End  of period balance                            | ** ** | **209**                                | ** ** | **1,310** | ** ** |
| ** **                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Total  Shareholders’ Equity                  | ** ** | **$**                                  | **17,038** | ** ** | **$** | **14,447** | ** ** |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME / (LOSS)**

**Three Months Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                                                                          | ** ** | **(dollars in thousands)**             | ** ** |
| Net  Income (loss)                                                                                                  | ** ** | **$**                                  | **279**    |   | $ | (898 | ) |
| Other  comprehensive income (loss), unrealized gains on securities, net of  reclassification adjustment, net of tax | ** ** | **(634**                               | **)**      | 209 |   |
| Comprehensive  income (loss)                                                                                        | ** ** | **$**                                  | **(355**   | **)** | $ | (689 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**ThreeMonths Ended March 31, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **2005**                   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                               | ** ** | **(dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                                   |       |                       |       |       |       |
| Net  income (loss)                                                                       | ** ** | **$**                      | **279**    | ** ** | **$**      | **(898** | **)** |
| Adjustments  to reconcile net income (loss) to net cash provided by operatingactivities: |       |                       | ** ** |       |       |
| Depreciation                                                                             | ** ** | **142**                    | ** ** | 200        |       |
| Provision  for loan losses                                                               | ** ** | **—**                 | ** ** | 1,390      |       |
| Investment  security amortization, net                                                   | ** ** | **26**                     | ** ** | 18         |       |
| Federal  Home Loan Bank stock dividend                                                   | ** ** | **(12**                    | **)**      | (2         | )          |
| Gains  on sales of mortgage loans, net                                                   | ** ** | **(17**                    | **)**      | (14        | )          |
| Valuation  allowance established or direct write-downfor other real estate owned         | ** ** | **—**                 | ** ** | 455        |       |
| (Gains)  losses on sales of other real estate owned                                      | ** ** | **17**                     | ** ** | (20        | )          |
| Decrease  in accrued interest receivable                                                 | ** ** | **126**                    | ** ** | 282        |       |
| Decrease  in accrued interest payable                                                    | ** ** | **(268**                   | **)**      | (235       | )          |
| Origination  of secondary market mortgage loans                                          | ** ** | **(1,870**                 | **)**      | (2,031     | )          |
| Proceeds  from the sales of secondary market mortgage loans                              | ** ** | **1,887**                  | ** ** | 2,125      |       |
| Other,  net                                                                              | ** ** | **832**                    | ** ** | (946       | )          |
| Net  cash provided by operating activities                                               | ** ** | **1,142**                  | ** ** | 324        |       |
| Cash  flows from investing activities:                                                   |       |                       | ** ** |       |       |
| Proceeds  from maturities and paydowns of investment securities available for sale       | ** ** | **2,346**                  | ** ** | 9,860      |       |
| Purchases  of investment securities available for sale                                   | ** ** | **(25,736**                | **)**      | (1,710     | )          |
| Net  (increase) decrease in loans                                                        | ** ** | **13,128**                 | ** ** | (1,754     | )          |
| Purchases  of premises and equipment                                                     | ** ** | **(99**                    | **)**      | (47        | )          |
| Proceeds  from sales of other real estate owned                                          | ** ** | **40**                     | ** ** | 81         |       |
| Net  cash provided by (used in) investing activities                                     | ** ** | **(10,321**                | **)**      | 6,430      |       |
| Cash  flows from financing activities:                                                   |       |                       | ** ** |       |       |
| Net  decrease in noninterest-bearing deposit accounts                                    | ** ** | **(2,515**                 | **)**      | (1,276     | )          |
| Net  decrease in NOW, money market accounts and savings deposits                         | ** ** | **(965**                   | **)**      | (3,489     | )          |
| Net  increase (decrease) in time deposits, $100,000 and over                             | ** ** | **2,079**                  | ** ** | (2,466     | )          |
| Net  increase (decrease) in other time deposits                                          | ** ** | **8,310**                  | ** ** | (8,043     | )          |
| Net  increase (decrease) in federal funds purchased                                      | ** ** | **(700**                   | **)**      | 1,510      |       |
| Net  increase in securities sold under agreements to repurchase                          | ** ** | **4**                      | ** ** | 3          |       |
| Proceeds  from sale of treasury shares                                                   | ** ** | **—**                 | ** ** | 95         |       |
| Proceeds  from issuance of shares from private placement, net of expenses                | ** ** | **4,022**                  | ** ** | —     |       |
| Proceeds  of borrowings                                                                  | ** ** | **—**                 | ** ** | 6,000      |       |
| Repayment  of borrowings                                                                 | ** ** | **(2,298**                 | **)**      | (4,013     | )          |
| Cash  dividends paid                                                                     | ** ** | **(54**                    | **)**      | —     |       |
| Net cash  provided by (used in) financing activities                                     | ** ** | **7,883**                  | ** ** | (11,679    | )          |
|                                                                                     |       |                       | ** ** |       |       |
| Net  decrease in cash and cash equivalents                                               | ** ** | **(1,296**                 | **)**      | (4,925     | )          |
|                                                                                     |       |                       | ** ** |       |       |
| Cash  and cash equivalents at beginning of period                                        | ** ** | **11,561**                 | ** ** | 15,916     |       |
|                                                                                     |       |                       | ** ** |       |       |
| Cash  and cash equivalents at end of period                                              | ** ** | **$**                      | **10,265** | ** ** | $          | 10,991 |   |
|                                                                                     |       |                       | ** ** |       |       |
| Supplemental  Disclosures                                                                |       |                       | ** ** |       |       |
| Transfer  of loans to other real estate owned                                            | ** ** | **$**                      | **278**    | ** ** | 80         |   |
|                                                                                          |            |                            |            |            |            |  |  |  |  |

 

See accompanying notes tounaudited consolidated financial statements.

 

6

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**ILLINICORPORATION AND SUBSIDIARIES**

**Notes toUnaudited Consolidated Financial Statements**

**March 31,2005**

 

(1)                                  Basisof Presentation

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-QSB and, therefore, do not include all ofthe information and notes required by U.S. generally accepted accountingprinciples for complete consolidated financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.  Forfurther information, refer to the consolidated financial statements andfootnotes included in the Illini Corporation (“Corporation”) Annual Report on Form 10-KSBfor the year ended December 31, 2004. Certain amounts in the 2004 consolidated financial statements have beenreclassified to conform to the 2005 presentation.  Such reclassifications have no effect on previouslyreported consolidated net income or shareholders’ equity.  The consolidated balance sheet of theCorporation as of December 31, 2004 has been derived from the auditedconsolidated balance sheet of the Corporation as of that date.

 

Results for thethree months ended March 31, 2005 may not be indicative of the annualperformance of the Corporation or the subsidiary banks, Illini Bank and FarmersState Bank of Camp Point (“the subsidiary banks”).  Management of the Corporation has madeestimates and assumptions relating to the reporting of assets and liabilitiesand the disclosure of contingent assets and liabilities to prepare theconsolidated financial statements (unaudited) in conformity with U.S. generallyaccepted accounting principles.  Actualresults could differ from those estimates.

 

(2)                                  Earnings/ (Loss) per Common Share

 

Earningsper share represents income available to commonshareholders divided by the weighted average number of shares outstandingduring the period.  The Corporation hasno common equivalent shares that could cause dilution.  The following information was used in thecomputation of basic and diluted earnings per share.

 
| ** **                                  | ** ** | **Three Months Ended  March 31,**            | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net  Income / (Loss)                        | ** ** | **$**                                             | **279**    |   | $ | (898 | ) |
| ** **                                  | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Weighted  average common shares outstanding | ** ** | **474,968**                                       |       | 412,540 |   |
|                                             |            |                                                   |            |  |  |  |  |

 

(3)                                  Useof Estimates in the Preparation of Financial Statements

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period.  Actual results could differ from thoseestimates.  Significant estimates thatare particularly sensitive to change are the allowance for loan losses and thevalue of other real estate owned.

 

7

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(4)                                  AllowanceFor Loan Losses

 

In originating loans, theCorporation recognizes that credit losses will be experienced and the risk ofloss will vary with, among other things, current economic conditions; the typeof loan being made; the creditworthiness of the borrower over the term of theloan; and in the case of a collateralized loan, the quality of the collateralfor such loan.  The allowance for loanlosses represents the Corporation’s estimate of the allowance necessary toprovide for probable incurred losses in the loan portfolio.  In making this determination, the Corporationanalyzes the ultimate collectibility of the loans in its portfolio,incorporating feedback provided by internal loan staff, the independent loanreview function and information provided by examinations performed byregulatory agencies.  The Corporationmakes an ongoing evaluation as to the adequacy of the allowance for loanlosses.  Transactions in the allowancefor loan losses for the three months ended March 31, 2005 and 2004 are summarizedbelow:

 
| ** **                       | ** ** | **Three months ended  March 31,** | ** **  |
|----------------------------------|------------|----------------------------------------|-------------|
| ** **                       | ** ** | **2005**                               | ** **  | **2004** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**             | ** **  |
| **Allowance for Loan Losses:**   | ** ** | ** **                             | ** **  |   |   |
| Balance  at beginning of period  | ** ** | **$**                                  | **2,412**   | ** ** | $ | 2,359 |   |
|                             |       |                                   | ** **  |   |   |
| Charge-offs                      | ** ** | **(197**                               | **)**       | (1,080 | ) |
| Recoveries                       | ** ** | **11**                                 | ** **  | 9 |   |
| Net  charge-offs                 | ** ** | **(186**                               | **)**       | (1,071 | ) |
|                             |       |                                   | ** **  |   |   |
| Provision  charged to operations |       | —                                 | ** **  | 1,390 |   |
| Balance  at end of period        | ** ** | **$**                                  | **2,226**   | ** ** | $ | 2,678 |   |
| Average  loans outstanding       | ** ** | **$**                                  | **153,950** | ** ** | $ | 189,859 |   |
|                                  |            |                                        |             |  |  |  |  |  |  |

 

(5)                                  RegulatoryExamination 

 

The Corporation operates in a regulatedindustry and is subject to various regulatory constraints, including some whichlimit the amount of dividends that may be paid by a subsidiary bank or whichrequire prior regulatory approval.  At March 31, 2005 Illini Bank hadretained earnings of approximately $3,400,000 available to be paid to theCorporation and still be considered well capitalized and Farmers State Bank ofCamp Point had retained earnings of approximately $700,000 to be paid to theCorporation and still be considered well capitalized.  The memorandum ofunderstanding discussed below requires prior regulatory approval before thepayment of any dividends by Illini Bank.

 

In May of 2004 Illini Bank enteredinto a memorandum of understanding with the F.D.I.C. and the IllinoisDepartment of Financial and Professional Regulation, Division of Banks and RealEstate, which includes prior regulatory approval for payment of dividends byIllini Bank.  In July of 2004 Illini Corporation approved aresolution requested by the Federal Reserve Bank of Chicago that includesrestrictions similar to the above memorandum of understanding.  Costassociated with compliance to these agreements will be minimal, primarilyrelated to additional reporting requirements while the agreements are ineffect.  Management believes that these agreements should have no materialadverse effects on the operations or financial performance of the Corporation.

 

8

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PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

 

THREE MONTHS ENDEDMARCH 31, 2005

 

SELECTED FINANCIALRESULTS

 

The following table shows selected financial resultsand measures for the three months ended March 31, 2005 compared with thesame period in 2004.

 
| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** | **Change** | ** ** | **Change-%** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**            | ** ** |
| Net  income (loss)              |       | $                                     | 279        |   | $ | (898 | ) | $ | 1,177 |   | 131.1 | % |
| Average  assets                 |       | 237,178                               |       | 256,416 |   | (19,238 | ) | (7.5 | )% |
| Average  equity                 |       | 15,866                                |       | 15,304 |   | 562 |   | 3.7 | % |
| Return  on assets               |       | 0.48                                  | %          | (1.40 | )% | 1.88 | % | 134.3 | % |
| Return  on equity               |       | 7.13                                  | %          | (23.54 | )% | 30.67 | % | 130.3 | % |
| Efficiency  ratio               |       | 83.10                                 | %          | 104.22 | % | (21.12 | )% | (20.3 | )% |
| Dividend  payout ratio          |       | 17.02                                 | %          | 0.00 | % | 17.02 | % | N/A |   |
| Equity  to assets ratio         |       | 6.69                                  | %          | 5.97 | % | 0.72 | % | 12.1 | % |
| Tier  1 leverage ratio          |       | 8.67                                  | %          | 6.06 | % | 2.61 | % | 43.1 | % |
| Total  risk-based capital ratio |       | 15.47                                 | %          | 11.38 | % | 0.81 | % | 7.2 | % |
|                                 |            |                                       |            |  |  |  |  |  |  |  |  |  |

 

Definitions of ratios:

Return on assets -annualized net income (loss) divided by average assets.

Return on equity -annualized net income (loss) divided by average shareholders’ equity.

Efficiency ratio -noninterest expense divided by noninterest income plus taxable equivalent netinterest income.

Dividend payout ratio -dividends per share divided by net income per share.

Equity to assets ratio -average equity divided by average assets.

Tier 1 leverage ratio -Tier 1 capital divided by average assets.

Total risk-based capitalratio - Total risk based capital divided by total risk weighted assets.

 

The Corporation recordednet income of $279,000 for the three months ended March 31, 2005, up$1,177,000 from the same period in 2004. The return on average equity for the three months ended March 31,2005 was 7.13%, compared to a negative 23.54% for the same period ended March 31,2004.  Similarly, basic and dilutedearnings per share for the three months ended March 31, 2005 was $0.59 pershare versus $(2.18) for the same quarter in 2004, representing an increase of127.1%.  While the first quarter of 2005reflected more normalized earnings for the Corporation, earnings for the firstquarter of 2004 were negatively impacted by a provision for loan losses in theamount of $1,390,000, as well as the reduction in the carrying values on twoproperties that were held in other real estate owned.

 

9

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**FINANCIAL CONDITION**

 

Average earning assets of the Corporation for thefirst three months of 2005 decreased by $16.8 million (7.2%) to $217.3 million,from $234.1 million for the same period in 2004.

 

Average loans decreased$35.9 million (18.9%) to $154.0 million for the three months ended March 31,2005, compared to $189.9 million for the same period in 2004.  Residential real estate loans experienced adecline in average balances of $15.0 million from year ago averages, as IlliniBank sold $15.2 million in residential real estate loans that were classifiedas held for sale during the second quarter of 2004.  Declines in average balances were seen in theother major categories of the loan portfolio, ranging from the $12.6 milliondecrease in commercial loans, to $4.1 million in commercial real estate loans,$2.0 million in agricultural loans, $1.8 million in consumer and credit cardloans, and $0.4 million in agricultural real estate loans.  These decreases are reflective of management’sefforts during the course of 2004 and continuing into 2005 to eliminate certainloan relationships and reduce concentrations of credit in the main categoriesof loans.

 

Average balances of thesecurities portfolio increased by $15.4 million for the three months ended March 31,2005, as compared to the same period in 2004. The bank purchased short term U.S. Treasury Notes and U.S. Agenciesprimarily from the proceeds from loan payoffs, and a successful certificate ofdeposit promotion offered during the first quarter of 2005.

 

The impact of management’sdecision in the latter part of 2003 to reduce its exposure to out of the areacertificates of deposit as a funding source for loan and investment activitycontinued to be seen in the Corporation’s deposit portfolio.  Average balances for time deposits less than$100,000 decreased $15.8 million, and time deposits $100,000 and over decreased$2.5 million, respectively, during the first quarter of 2005, compared to thesame period in 2004.  These declines werepartially offset by the overall reductions in the loan portfolios.  The net effect of these actions was areduction in the Corporation’s funding costs of 9 basis points, to 2.42% forthe first quarter of 2005, as compared to 2.51% for the same period in2004.  As a result, the Corporation wasable to maintain its net interest margin for the three months ended March 31,2005 at 3.72%, a compression of only 6 basis points from the 3.78% reported forthe first quarter of 2004.

 

The subsidiary banks maintain an overnight federal fundsline of credit with an unaffiliated financial institution and a collateralizedborrowing capacity with the Federal Home Loan Bank of Chicago.

 

**RESULTS OF OPERATIONS**

 

This discussion should be read in conjunction withthe consolidated financial statements, notes, and tables included elsewhere inthis report and in the 2004 Illini Corporation Annual Report on Form 10-KSB(2004 Form 10-KSB).

 

Net Interest Income

 

The following tables show average balances andrelated interest income or interest expense, with the resulting average yieldor rate by category of average earning assets or interest bearingliabilities.  Interest income and theresulting net interest income are shown on a tax equivalent basis.

 

10

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**Consolidated Average Balances,Interest Income/Expense and Yield/Rates**

 
| ** **                                       | ** ** | **Three months ended March 31,** | ** **  |
|--------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                       | ** ** | **2005**                              | ** **  | **2004** | ** ** |
| ** **                                       | ** ** | ** **                            | ** **  | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Average**                           | ** **  | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                       | ** ** | **Balance**                           | ** **  | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| ** **                                       | ** ** | **(dollars in thousands)**            | ** **  |
| **ASSETS**                                       | ** ** | ** **                            | ** **  |
| Interest-earning  assets:                        |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                          | ** ** | **$**                                 | **6,884**   | ** ** | **$** | **41** | ** ** | **2.44** | % | $ | 3,000 |   | $ | 6 |   | 0.81 | % |
| Investment  securities (3)                       |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Taxable                                          | ** ** | **45,076**                            | ** **  | **400** | ** ** | **3.55** |   | 29,834 |   | 290 |   | 3.88 |   |
| Tax-exempt  (1)                                  | ** ** | **13,787**                            | ** **  | **270** | ** ** | **7.83** |   | 13,690 |   | 262 |   | 7.66 |   |
| Total  securities                                | ** ** | **58,863**                            | ** **  | **670** | ** ** | **4.55** |   | 43,524 |   | 552 |   | 5.07 |   |
| Loans                                            |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Commercial  (1)                                  | ** ** | **24,457**                            | ** **  | **398** | ** ** | **6.60** |   | 37,119 |   | 544 |   | 5.88 |   |
| Agriculture                                      | ** ** | **11,326**                            | ** **  | **165** | ** ** | **5.92** |   | 13,329 |   | 169 |   | 5.07 |   |
| Real  estate                                     |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Commercial                                       | ** ** | **85,876**                            | ** **  | **1,364** | ** ** | **6.44** |   | 89,928 |   | 1,414 |   | 6.31 |   |
| Agriculture                                      | ** ** | **5,178**                             | ** **  | **41** | ** ** | **3.17** |   | 5,642 |   | 105 |   | 7.46 |   |
| Residential                                      | ** ** | **22,804**                            | ** **  | **325** | ** ** | **5.78** |   | 37,774 |   | 554 |   | 5.89 |   |
| Consumer,  net                                   | ** ** | **3,661**                             | ** **  | **70** | ** ** | **7.71** |   | 5,380 |   | 113 |   | 8.39 |   |
| Credit  card                                     | ** ** | **648**                               | ** **  | **20** | ** ** | **12.68** |   | 687 |   | 29 |   | 17.13 |   |
| Total  loans                                     | ** ** | **153,950**                           | ** **  | **2,383** | ** ** | **6.28** |   | 189,859 |   | 2,928 |   | 6.18 |   |
| Allowance  for loan losses                       | ** ** | **(2,399**                            | **)**       |   | ** ** | ** ** | ** ** | (2,242 | ) | ** ** | ** ** | ** ** | ** ** |
| Net  loans (1) (2)                          | ** ** | **151,551**                           | ** **  | **2,383** | ** ** | **6.38** |   | 187,617 |   | 2,928 |   | 6.26 |   |
| Total  interest-earning assets                   | ** ** | **217,298**                           | ** **  | **3,094** | ** ** | **5.77** |   | 234,141 |   | 3,486 |   | 5.97 |   |
| Other  assets                                    | ** ** | **19,880**                            |        |   |   |   |   | 22,275 |   |   |   |   |   |
| Total  assets                                    | ** ** | **$**                                 | **237,178** |   |   |   |   |   | $ | 256,416 |   |   |   |   |   |
| **LIABILITIES**                                  |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                        |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                         | ** ** | **$**                                 | **55,184**  | ** ** | **$** | **175** | ** ** | **1.29** | **%** | $ | 56,311 |   | $ | 108 |   | 0.77 | % |
| Savings                                          | ** ** | **22,540**                            | ** **  | **45** | ** ** | **0.82** |   | 21,791 |   | 33 |   | 0.60 |   |
| Time  deposits less than $100,000                | ** ** | **71,124**                            | ** **  | **455** | ** ** | **2.59** |   | 86,916 |   | 661 |   | 3.05 |   |
| Time  deposits $100,000 and over                 | ** ** | **13,408**                            | ** **  | **88** | ** ** | **2.66** |   | 15,937 |   | 126 |   | 3.18 |   |
| Total  interest-bearing deposits                 | ** ** | **162,256**                           | ** **  | **763** | ** ** | **1.91** |   | 180,955 |   | 928 |   | 2.06 |   |
| Short-term  borrowings                           | ** ** | **922**                               | ** **  | **6** | ** ** | **2.58** |   | 2,256 |   | 9 |   | 1.59 |   |
| Long-term  borrowings                            | ** ** | **11,763**                            | ** **  | **87** | ** ** | **2.99** |   | 12,016 |   | 99 |   | 3.30 |   |
| Subordinated  debentures (4)                     | ** ** | **9,000**                             | ** **  | **244** | ** ** | **10.98** |   | 9,000 |   | 244 |   | 10.86 |   |
| Total  interest-bearing liabilities              | ** ** | **183,941**                           | ** **  | **1,100** | ** ** | **2.42** |   | 204,227 |   | 1,280 |   | 2.51 |   |
| Other  liabilities                               | ** ** | **37,371**                            |        |   |   |   |   | 36,885 |   |   |   |   |   |
| Shareholders’  equity                       | ** ** | **15,866**                            |        |   |   |   |   | 15,304 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                                 | **237,178** |   |   |   |   |   | $ | 256,416 |   |   |   |   |   |
| **Net interest margin**                          | ** ** | ** **                            | ** **  | **$** | **1,994** |   | **3.72** | **%** |   |   | $ | 2,206 |   | 3.78 | % |

 

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(1)                      Incomeamounts are presented on a taxable equivalent basis (TE), which is defined asincome on earning assets that is subject to either a reduced rate or zero rateof income tax, adjusted to give effect to the appropriate incremental federalincome tax rate and adjusted for non-deductible carrying costs, where applicable.  Where appropriate, yield calculations includethese adjustments.  The federal statutoryrate was 34% for all periods presented.

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $120,000 in 2005 and$109,000 in 2004.

(3)                      Averagesecurities balances are based on amortized historical cost, excluding SFAS 115adjustments to fair value, which are included in other assets.

(4)                      The averagebalance for the Corporation is based on monthly average balances versus a dailyaverage balance.

 

11

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Net interest margin is a measure of the net returnon interest-earning assets and is computed by dividing annualized net interestincome by the average of total interest-earning assets for the period.

 

Net interest income on a tax equivalent basis forthe first quarter of 2005 was $2.0 million, down $212,000 (9.6%) from the $2.2million reported for the same quarter in 2004. This decrease resulted from changes in the volume of assets andliabilities, as well as changes in interest rates.

 

Provision for Loan Losses

 

The amount of theprovision for loan losses is based on management’s evaluations of the loanportfolio, with particular attention directed toward nonperforming, impairedand other potential problem loans. During these evaluations, consideration is also given to such factors asmanagement’s evaluation of specific loans, the level and composition ofimpaired loans, other nonperforming loans, other identified potential problemloans, historical loss experience, results of examinations by regulatoryagencies, results of any independent asset quality review process, the marketvalue of collateral, the estimate of discounted cash flows, the strength andavailability of guarantees, concentrations of credits, and various otherfactors, including concentration of credit risk in various industries andcurrent economic conditions.

 

While nonperforming loanshave increased to $4,356,000 at March 31, 2005 from $2,730,000 at December 31,2004, they are down over 18% from March 31, 2004. The increase innonperforming loans was the result of three loans on the watch list at December 31,2004 which were moved to nonaccrual status during thefirst quarter. These three loans had been previously reviewed by management andany loss exposure determined as of December 31, 2004.

 

Consequently, based onmanagement’s analysis, no provision for loan losses was deemed necessary duringthe first quarter of 2005, as compared to a provision of $1,390,000 made in thefirst quarter of 2004.  The 2004provision was made as a result of the analysis, which took into account thefact that there was charge-offs of $909,000 in impaired loans and an increasein impaired loans and classified assets.

 

Managementremains watchful of credit quality issues and believes that current issues withthe portfolio are reflective of a challenging economic environment.  Should the economic climate fail to improve,borrowers may experience difficulty, and consequently, the level ofnonperforming loans, charge-offs and delinquencies could rise and require aprovision for loan losses.  Managementcontinues to monitor the loan portfolio.

 

Noninterest Income

 

Non-interest income forthe three months ended March 31, 2005 was $453,000, down $50,000 (9.9%)from the $503,000 reported at March 31, 2004.  A loss of $17,000 on the sale of one piece ofother real estate during the first quarter of 2005 compares negatively to the$20,000 gain on sale recorded in the first quarter of 2004.  Service charges on deposit accounts were down$15,000, to $335,000, from the $350,000 reported in the first quarter of 2004,primarily the result of a reduction in account maintenance fees.

 

Noninterest Expense

 

Non-interest expense forthe first quarter of 2005 was $2,029,000, down $794,000  (28.1%) when compared to the firstquarter of 2004.  This decrease wasfocused in two primary areas, loan foreclosure and other real estate ownedexpense (down $472,000) and salaries and employee benefits (down $261,000).

 

During the first quarterof 2004, Illini Bank reduced the carrying value of two properties listed inother real

 

12

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estateowned by an aggregate amount of $455,000. These properties have since been sold. Expenses incurred in 2005 represent normal costs associated with loancollections and normal loan related expenses.

 

The reduction in salariesand benefits expense reflects the positive effects of the corporaterestructuring that occurred during the course of 2004.

 

**CREDIT QUALITY**

 

Allowance for Loan Losses

 

When the subsidiary banks(Banks) originate loans, they recognize that credit losses will be experienced,and that all these loans carry varying degrees of risk, such as:  economic conditions; the creditworthiness ofthe borrower; the type of loan being made; and, with loans secured bycollateral, the quality of the collateral for the loan.  The allowance for loan losses represents theBanks’ estimate of the level of allowance necessary to provide for probableincurred losses in the loan portfolio. The Banks analyze the collectibility of the loans in their respectiveportfolios, using information provided by internal loan staff, the loan reviewfunction, and information provided by examinations performed by regulatoryagencies.  The Banks perform an ongoingevaluation as to the adequacy of the allowance for loan losses.

 

The allowance for loanlosses is based on estimates, and ultimate losses will vary from currentestimates.  These estimates are reviewedon a monthly basis, and as adjustments, either positive or negative, are deemednecessary, a corresponding increase or decrease is made in the provision forloan losses.

 

At March 31, 2005,the allowance for loan losses was $2.2 million, or 1.54% of total loans.  This compares to the $2.4 million (1.52%) and$2.7 million (1.42%) reported at December 31, 2004 and March 31,2004, respectively.  The change from December 31,2004, represents the partial charge-off of one nonaccrual loan in the amount of$197,000.  Collateral securing thebalance of this loan appears adequate at the present time to protect IlliniBank’s interests.

 

Illini Corporation’sprimary business of making commercial, real estate, and consumer loans entailspotential losses, the magnitude of which depends on a variety of economicfactors affecting borrowers, which are beyond the control of theCorporation.  Accordingly, a significantfactor in the Corporation’s past and future operating results is the level ofthe provision for loan losses.

 
| **Credit Quality**                  | ** ** | **March 31,  2005**   | ** ** | **December 31,  2004** | ** ** | **March 31,  2004** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)** | ** ** |
| **Nonperforming assets:**           |       |                       | ** ** |                        |       |                     |       |
| Accruing  loans past due 90 days    | ** ** | **$**                      | **7**      | ** **                  | $          | 19                       |       | $ | 18 |   |
| Nonaccrual                          | ** ** | **4,349**                  | ** ** | 2,711                       |       | 5,283                    |       |
| Renegotiated                        | ** ** | **—**                 | ** ** | —                      |       | 612                      |       |
| Other  real estate owned            | ** ** | **1,215**                  | ** ** | 994                         |       | 3,482                    |       |
| Total  nonperforming assets         | ** ** | **$**                      | **5,571**  | ** **                  | $          | 3,724                    |       | $ | 9,395 |   |
| ** **                          | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** **               | ** ** |
| **Key ratios:**                     | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Nonperforming  loans to loans       | ** ** | **3.00**                   | **%**      | 1.72                        | %          | 3.13                     | %          |
| 90  days delinquent to ending loans | ** ** | **0.00**                   | ** ** | 0.01                        |       | 0.01                     |       |
| Allowance  to total loans           | ** ** | **1.54**                   | ** ** | 1.52                        |       | 1.42                     |       |
| Allowance  to nonperforming loans   | ** ** | **51.10**                  | ** ** | 88.34                       |       | 45.29                    |       |
|                                     |            |                            |            |                             |            |                          |            |  |  |  |  |

 

13

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Nonperforming Assets

 

Nonperforming and renegotiated loans at March 31,2005 totaled $4.3 million, up $1.6 million (or 59.3%) from December 31,2004, and down $1.5 million (25.4%) from March 31, 2004.  Nonaccrual loans comprise the majority of thenonperforming loans.  The classificationof a loan as nonaccrual does not necessarily indicate that the principal isuncollectible, in whole or in part.  TheBanks make a determination as to the collectibility on a case-by-casebasis.  The Banks consider the adequacyof the collateral and the other resources of the borrower in determining thesteps to be taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon thespecific facts of each situation. Alternatives that are typically considered to collect nonaccrual loansare foreclosure, collection under guarantees, loan restructuring, or judicialcollection actions.

 

Other real estate owned increased by $221,000, to$1.2 million, from the $1.0 million reported as of December 31, 2004.  This increase represents the addition duringthe first quarter of 2005 of multiple properties totaling $278,000 associatedwith one creditor, the sale of one property with a carrying value of $32,000,and payments totaling $25,000 received on properties.

 

Illini Corporation’s loan underwriting guidelinesand credit review procedures and policies are designed to protect theCorporation from credit losses.  IlliniCorporation’s process for monitoring loan quality includes detailed monthlytrend analysis of delinquencies and nonperforming assets.  Management extensively monitors significantcredit relationships through appraisals, assessment of the financial conditionof borrowers, restrictions on out-of-area lending, and avoidance of loanconcentrations.

 

As discussed in the Corporation’s 2004 Form 10-KSBand previous Form 10-QSB reports, management has implemented severalinitiatives to improve credit quality. These steps included a new loan policy and improved reporting systems(credit quality and production).  Managementis committed to continuing these initiatives.

 

OtherPotential Problem Loans

 

The Corporation has other potential problem loans thatare currently performing, but where some concerns exist as to the ability ofthe borrower to comply with present loan repayment terms. Excludingnonperforming loans, these loans totaled $2,202,000 that management hasclassified as impaired at March 31, 2005, down $3,908,000 from $6,110,000reported at December 31, 2004. Management currently considers these loans to be impaired due todeclining financial performance. These classifications are a direct result ofimproved reporting systems (credit quality and production).  The classification of these loans, however,does not imply that management expects losses on each of these loans, butbelieves that a higher level of scrutiny and close monitoring is prudent underthe circumstances. Such classifications relate to specific concerns for eachindividual borrower and do not relate to any concentration risk common to allloans in this group.

 

**CAPITAL RESOURCES**

 

The current economic and regulatory environmentplaces increased emphasis on capital strength. A strong capital position, which is vital to the continued profitabilityof Illini Corporation, also promotes depositor and investor confidence andprovides a solid foundation for the future growth of the organization.  Illini Corporation has historically satisfiedits capital requirements principally through the retention of earnings.

 

The table below shows thevarious measures of regulatory capital and related quarterly ratios.

 

14

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| ** **                                            | ** ** | **Regulatory requirements  to be:** | ** ** | **Actual Regulatory Capital Ratios** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **Adequately  Capitalized**         | ** ** | **Well-  Capitalized**               | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| Total  risk-based capital as% of risk-weighted assets |       | 8.0                                 | %          | 10.0                                 | %          | 15.5 | % | 12.4 | % |
| Tier  1 capital as% of risk-weighted assets           |       | 4.0                                 | %          | 6.0                                  | %          | 12.2 | % | 8.4 | % |
| Tier  1 capital as% quarterly average assets          |       | 4.0                                 | %          | 5.0                                  | %          | 8.7 | % | 6.2 | % |

 

Risk-based capital guidelines require theclassification of assets and some off-balance items in terms of credit-riskexposure and the measuring of capital as a percentage of the risk adjustedasset totals.  Management believes, anddata in the above table show that, as of March 31, 2005 and December 31,2004, the Corporation met all capital adequacy requirements to which it issubject.  As of those dates, theCorporation’s subsidiary banks were “well capitalized” under regulatory promptcorrective action provisions.

 

The capital of the Corporation was supplemented in February, 2005 bythe proceeds from the sale of 126,500 shares of common stock of the Corporationto a limited number of accredited investors. Gross proceeds of $4,174,500 from the sale were used as follows:  $2.3 million to retire the Marine Bank loan;$1.0 million sent to Illini Bank as a capital infusion; and the balanceretained for general corporate purposes.

 

Earnings retention is affected by the Board ofDirectors’ declaration of cash dividends. The dividend payout ratio is an indicator of the level of earningsretained.  The Board of Directors of theCorporation considers the capital strength of the Corporation and the Banks indetermining the appropriate level of cash dividends to be paid toshareholders.  The dividend payout ratiofor the three months ended March 31, 2005 was 17.02% as compared to 0.00%for the three months ended March 31, 2004.

 

As discussed in the Corporation’s 2004 Form 10-KSB,the Corporation has $9 million of trust preferred securities outstanding.  Twenty Five (25) percent of the Tier 1capital ratio can be comprised of the trust preferred issue.  As of March 31, 2005, the portioneligible for inclusion in the Tier 1 computation amounted to approximately $5.6million.

 

**LIQUIDITY**

 

Illini Corporation’spolicy is to manage interest rate risk to a level, which places limits on thesensitivity of its earnings to changes in market interest rates.  An explanation of the asset/liabilitymanagement process is found in the Corporation’s 2004 Form 10-KSB, beginning on page 14.

 

The asset portion of the balance sheet providesliquidity primarily through loan principal repayments, maturities of investmentsecurities, and sales of investment securities available for sale.  The liability side of the balance sheetprovides liquidity through various customers’ interest-bearing and noninterest-bearingdeposit accounts.  Short-term borrowingsare an additional source of liquidity and represent Illini Corporation’sincremental borrowing capacity.

 

Illini Corporation uses a comprehensive analysis ofits asset/liability function, including a review of its funds management policyand its principal measure of liquidity. The Corporation utilizes a liquidity measurement, called “Basic Surplus,”which redefines liquid assets as the total available assets held by theCorporation which can be converted to cash in thirty days or less, reduced byshort term liabilities, plus available borrowings.  As of March 31, 2005, the most recentcalculation, Illini Corporation’s basic surplus was

 

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$52.6 million, or 22.2% of total average assets.

 

Management believes the formula provides an accuratemeasurement of liquidity and provides management with a comprehensible andconsistent tool to develop pricing and profitability strategies.  Based on the new measurement and as comparedto peer banks, management believes the liquidity position of the banks isstrong.

 

**PART I- Item 3. Controls and Procedures**

 

An evaluation was performed under the supervisionand with the participation of the Corporation’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Corporation’s disclosure controls and procedures(as defined in Rule 13a-15(e) promulgated under the Securities andExchange Act of 1934, as amended) as of March 31, 2005. Based on thatevaluation, the Corporation’s management, including the Chief Executive Officerand Chief Financial Officer, concluded that the Corporation’s disclosurecontrols and procedures were effective. There have been no significant changesin the Corporation’s internal controls or in other factors during the firstquarter of 2005 that could significantly affect internal controls.  Management has concluded the disclosurecontrols and procedures are adequate in all material respects for SEC reportingpurposes.

 

**PART II****.****OTHER INFORMATION**

 

Item 1 LegalProceedings 

 

The first case was filedin 1998 by a shareholder of the Corporation against Illinois Stock TransferCompany, as Rights Agent for the Corporation under the Corporation’sShareholder Rights Agreement (“Rights Agreement”), for specific performance ofthe Rights Agreement, on behalf of the plaintiff individually and on behalf ofa class of shareholders.  The complaintalleged that the Rights Agreement was triggered in April of 1998, and thatthe Rights Agent had a duty under the Rights Agreement to distribute RightsCertificates to the Corporation’s shareholders. The Corporation was named as a defendant in 1999 and the class wascertified.  Plaintiff was seeking to recoverattorney’s fees from the Corporation in addition to other relief.  In January of 2000, the trial courtentered summary judgment in favor of the Corporation and the Rights Agent.  Plaintiff appealed this ruling to theIllinois Appellate Court.  The AppellateCourt reversed the order granting summary judgment for defendants and remandedthe case for trial on the issue of whether the Corporation’s Board of Directorsacted in good faith in determining that a shareholder’s acceptance of a gift ofthe Corporation’s Stock did not trigger the Rights Agreement, and in theCorporation’s later amendment of the Rights Agreement.  The Appellate Court further ruled thatplaintiff’s attorney’s fees were recoverable under the Rights Agreement.  After a series of unsuccessful motions filedby the Plaintiff’s counsel, the Corporation filed a motion to remove thePlaintiff’s attorney.  The court removedthe attorney for the Plaintiff class and appointed new counsel to represent theclass.  The removed counsel filed a motionfor reconsideration, which was denied. The new counsel filed a motion for direction to remove the classrepresentative, which was granted on January 15, 2003.  On March 7, 2003 the trial courtappointed a successor class representative. The Corporation has negotiated asettlement of the suit with the new class representative and classcounsel.  The terms of that settlementhave been agreed upon and approved by the court following a fairness hearing.  That agreement provides for a completeresolution of the shareholder claims and a portion of the claims for attorneyfees for the class representative.  As ofMarch 31, 2005 and December 31, 2004 the Corporation has an accrualof $200,000 for this settlement and believes it will have no further adverseimpact on the Corporation. This accrual is included in other liabilities in theConsolidated Balance Sheet.  The removedattorney, representing the removed class representative, has appealed variousrulings of the trial court and that appeal is now pending in the Appellate

 

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Court of Illinois, FourthDistrict.  Theremoved attorney is also petitioning the trial court for fees.  The court will also be asked to deny the feerequest filed by the attorney for the original class representative. Thatproceeding should be concluded in the trial court after the decision isrendered in the appeal.

 

In April 2003, theCorporation, its directors, and one of its officers were named as defendants ina complaint filed in the Circuit Court of Sangamon County, Illinois.  Plaintiffs seek to rescind the Stock PurchaseAgreement entered into by the Corporation in 2001 to purchase approximately 30%of its common shares from a minority shareholder group.  Management believes that the Stock PurchaseAgreement was a routine business transaction beneficial to the Corporation’sshareholders and was entered into after appropriate due diligence andconsultation with the Corporation’s outside financial advisors.  The Corporation has filed motions to dismisson the basis of a prior pending action. The Corporation has completed its independent directors’ review.  The Corporation has also filed motions todismiss on the basis of a prior pending action and to realign the parties,naming the Corporation as the party plaintiff, and for leave of court todismiss the action.  Those motions arepending.  Management is contesting theclaim vigorously.  The range of potentialloss to the Corporation, if the case is decided contrary to its interests, hasnot been measured in a dollar amount because the claim of the plaintiff is notfor a monetary judgment.

 

Item 2                UnregisteredSales of Equity Securities and Use of Proceeds - none

 

Item 3                Defaults Upon Senior Securities – none

 

Item 4                Submission ofMatters to a Vote of Security Holders – none

 

Item 5                OtherInformation - none

 

Item 6                          Exhibits

 

(a)           Exhibits:
| 31.1 |   | Certification of  CEO pursuant to rule 13a-14(a)/15d-14(a).                                                                        |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  CFO pursuant to rule 13a-14(a)/15d-14(a).                                                                        |
| 32.1 |   | CEO Certification  pursuant to 18 U.S.C. section 1350, as adopted  pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 |   | CFO  Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to  section 906 of the Sarbanes-Oxley Act of 2002  |

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
| Illini Corporation        |        |
|---------------------------|-------------|
| (Registrant)              |        |
|                      |        |
|                      |        |
| By: /s/Gaylon E. Martin   |        | May 11, 2005 |   |
| Gaylon E. Martin          | Date signed |
| President                 |        |
|                      |        |
|                      |        |
| By: /s/Dennis B.  Guthrie |        | May 11, 2005 |   |
| Dennis B. Guthrie         | Date signed |
| Chief Financial Officer   |        |

 

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