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

**Washington,D.C.  20549**

 

**FORM 10-QSB**

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

 

**For quarterly period ended March 31, 2002**

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

 

**Commission filenumber         0-13343**

 

**Illini Corporation**

(Exact name of small 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 West Iles Avenue, Springfield, Illinois 62707**         |
| (Address of principal executive offices)                       |
|                                                           |   |                                 |
| **(217) 787-5111**                                             |
| (Issuer’s telephone number)                               |

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act during the past 12 months (or for suchshorter 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   ý      No   o

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: 411,701 shares of $0.01 par value common stock as of April 30, 2002.

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

 

----

** **

**ILLINI CORPORATION**

INDEX TO FORM 10-QSB

March 31, 2002

 
| **PART I.**       | **FINANCIAL INFORMATION** |
|-------------------|---------------------------|
|              |                      |   |
|              | Item 1.                   | Financial Statements  (Unaudited) |
|              |                      |   |
|              |                      | Condensed  Consolidated Balance Sheets March 31, 2002 and December 31, 2001 |
|              |                      |   |
|              |                      | Condensed  Consolidated Statements of Income Three Months Ended March 31, 2002 and 2001 |
|              |                      |   |
|              |                      | Condensed  Consolidated Statements of Cash Flows Three Months Ended March 31, 2002 and  2001 |
|              |                      |   |
|              |                      | Notes  to Interim Condensed Consolidated Financial Statements |
|              |                      |   |
|              | Item  2.                  | Management’s  Discussion and Analysis of Operations |
|              |                      |   |
| **PART II.**      | **OTHER INFORMATION**     |
|              |                      |
| **SIGNATURES**    |
|              |                      |   |
| **EXHIBIT INDEX** |
|                   |                           |  |  |  |

 

**InformationConcerning Forward-Looking Statements**

*Statements contained in this Form10-QSB which are not historical facts are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Thesestatements involve important known and unknown risks, uncertainties and otherfactors and can be identified by phrases using “estimate,” “anticipate,”“believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,”“may,” “should” and similar expressions or words.  Such forward-looking statements are subject to risk anduncertainties which could cause actual results to differ materially from thoseprojected.  Such risks and uncertaintiesinclude potential change in interest rates, competitive factors in thefinancial services industry, general economic conditions, the effect of newlegislation and other risks detailed in documents filed by Illini Corporationwith the Securities and Exchange Commission from time to time.*

 

2

----

 

**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**March 31, 2002and December 31, 2001**

** **
|                                                                                                     |   | **March 31,  2002**        |        | **December  31,  2001** |       |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------|-------------|-------------------------|------------|
|                                                                                                     |   | **(Unaudited)**            |        |                    |       |
|                                                                                                     |   | **(dollars in thousands)** |        |
| **ASSETS**                                                                                               |   |                       |        |                    |       |
| Cash and due  from banks                                                                                 |   | **$**                      | **5,797**   |                    | $          | 8,146 |   |
| Interest-bearing  deposits in other banks                                                                |   | **31**                     |        | 29                      |       |
| Federal funds  sold                                                                                      |   | **6,320**                  |        | 7,410                   |       |
| Cash and cash  equivalents                                                                               |   | **12,148**                 |        | 15,585                  |       |
| Investment  securities available for sale, at fair value                                                 |   | **46,561**                 |        | 49,156                  |       |
| Loans, net of  the allowance for loan losses                                                             |   | **210,510**                |        | 196,913                 |       |
| Premises and  equipment                                                                                  |   | **6,997**                  |        | 6,946                   |       |
| Accrued interest  receivable                                                                             |   | **2,716**                  |        | 2,549                   |       |
| Other real  estate owned                                                                                 |   | **921**                    |        | 370                     |       |
| Goodwill                                                                                                 |   | **1,856**                  |        | 1,856                   |       |
| Intangible  assets                                                                                       |   | **362**                    |        | 392                     |       |
| Other assets                                                                                             |   | **711**                    |        | 745                     |       |
| Total Assets                                                                                             |   | **$**                      | **282,782** |                    | $          | 274,512 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                           |   |                       | ** **  |                    | ** ** |
| Noninterest-bearing  demand deposits                                                                     |   | **35,130**                 |        | 34,140                  |       |
| Interest-bearing  deposits:                                                                              |   |                       |        |                    |       |
| NOW and money  market accounts                                                                           |   | **59,422**                 |        | 60,057                  |       |
| Savings deposits                                                                                         |   | **19,335**                 |        | 17,995                  |       |
| Time deposits,  $100,000 and over                                                                        |   | **29,628**                 |        | 31,842                  |       |
| Other time  deposits                                                                                     |   | **103,736**                |        | 94,793                  |       |
| Total deposits                                                                                           |   | **247,251**                |        | 238,827                 |       |
| Short-term debt                                                                                          |   | **1,166**                  |        | 1,613                   |       |
| Long-term debt                                                                                           |   | **8,400**                  |        | 8,471                   |       |
| Preferred  securities of subsidiary trust                                                                |   | **9,000**                  |        | 9,000                   |       |
| Accrued interest  payable                                                                                |   | **1,176**                  |        | 1,414                   |       |
| Other  liabilities                                                                                       |   | **1,987**                  |        | 1,597                   |       |
| Total  Liabilities                                                                                       |   | **268,980**                |        | 260,922                 |       |
|                                                                                                     |   |                       |        |                    |       |
| **COMMITMENTS AND CONTINGENT  LIABILITIES**                                                              |   |                       | ** **  |                    | ** ** |
|                                                                                                     |   |                       |        |                    |       |
| Shareholders’  equity:                                                                              |   |                       |        |                    |       |
| Preferred stock,  $0.01 par value, authorized and unissued 10,000,000 shares                             |   | **—**                 |        | —                  |       |
| Common  stock–$0.01 par value, authorized 45,000,000 shares;  571,789 shares issued and outstanding |   | **6**                      |        | 6                       |       |
| Capital surplus                                                                                          |   | **9,070**                  |        | 9,070                   |       |
| Retained  earnings                                                                                       |   | **10,995**                 |        | 10,775                  |       |
| Accumulated  other comprehensive income                                                                  |   | **935**                    |        | 943                     |       |
| Less:  Treasury shares, at cost, 160,088 shares                                                     |   | **(7,204**                 | **)**       | (7,204                  | )          |
| Total  shareholders’ equity                                                                         |   | **13,802**                 |        | 13,590                  |       |
| Total  Liabilities and Shareholders Equity                                                               |   | **$**                      | **282,782** |                    | $          | 274,512 |   |

 

See accompanying notes to interim condensed consolidated financialstatements.

 

3

----

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**Three Months Ended March 31, 2002 and 2001**

**(Unaudited)**

 
|                                                                                                                     |   | **2002**                    |       | **2001** |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------|------------|
|                                                                                                                     |   | **(dollars  in thousands)** |       |
| Interest income:                                                                                                         |   |                        |       |     |       |
| Interest and  fees on loans                                                                                              |   | **$**                       | **3,959**  |     | $          | 3,701 |   |
| Interest on  investments securities:                                                                                     |   |                        | ** ** |     | ** ** |
| Taxable                                                                                                                  |   | **488**                     |       | 635      |       |
| Exempt from  federal income taxes                                                                                        |   | **195**                     |       | 181      |       |
| Interest on  short term investments                                                                                      |   | **21**                      |       | 71       |       |
| Total interest  income                                                                                                   |   | **4,663**                   |       | 4,588    |       |
| Interest  expense:                                                                                                       |   |                        |       |     |       |
| Interest on  deposits:                                                                                                   |   |                        |       |     |       |
| NOW and money  market accounts                                                                                           |   | **284**                     |       | 543      |       |
| Savings deposits                                                                                                         |   | **67**                      |       | 82       |       |
| Time deposits,  $100,000 and over                                                                                        |   | **332**                     |       | 401      |       |
| Other time  deposits                                                                                                     |   | **1,110**                   |       | 1,187    |       |
| Interest on  short-term debt                                                                                             |   | **5**                       |       | 58       |       |
| Interest on  long-term debt                                                                                              |   | **144**                     |       | 100      |       |
| Interest on  preferred securities of subsidiary trust                                                                    |   | **237**                     |       | 94       |       |
| Total interest  expense                                                                                                  |   | **2,179**                   |       | 2,465    |       |
| Net interest  income                                                                                                     |   | **2,484**                   |       | 2,123    |       |
| Provision for  loan losses                                                                                               |   | **210**                     |       | 100      |       |
| Net interest  income after provision for loan losses                                                                     |   | **2,274**                   |       | 2,023    |       |
|                                                                                                                     |   |                        |       |     |       |
| Noninterest  income:                                                                                                     |   |                        |       |     |       |
| Service charges  on deposit accounts                                                                                     |   | **278**                     |       | 333      |       |
| Other fee income                                                                                                         |   | **81**                      |       | 68       |       |
| Mortgage loan  servicing fees                                                                                            |   | **34**                      |       | 59       |       |
| Gains on sales  of mortgage loans                                                                                        |   | **18**                      |       | 43       |       |
| Gains (losses)  on sale of other real estate owned                                                                       |   | **(4**                      | **)**      | 6        |       |
| Other                                                                                                                    |   | **31**                      |       | 30       |       |
| Total  noninterest income                                                                                                |   | **438**                     |       | 539      |       |
| Noninterest  expense:                                                                                                    |   |                        |       |     |       |
| Salaries and  employee benefits                                                                                          |   | **1,245**                   |       | 1,010    |       |
| Net occupancy  expense                                                                                                   |   | **189**                     |       | 199      |       |
| Equipment  expense                                                                                                       |   | **81**                      |       | 104      |       |
| Data processing  fees                                                                                                    |   | **150**                     |       | 183      |       |
| Supplies expense                                                                                                         |   | **54**                      |       | 43       |       |
| Communication  and transportation expense                                                                                |   | **109**                     |       | 104      |       |
| Marketing and  advertising expense                                                                                       |   | **60**                      |       | 57       |       |
| Correspondent  and processing fees                                                                                       |   | **86**                      |       | 71       |       |
| Loan and other  real estate owned expense                                                                                |   | **19**                      |       | 14       |       |
| Professional  fees                                                                                                       |   | **161**                     |       | 186      |       |
| Regulatory fees                                                                                                          |   | **23**                      |       | 33       |       |
| Other                                                                                                                    |   | **124**                     |       | 139      |       |
| Total  noninterest expense                                                                                               |   | **2,301**                   |       | 2,143    |       |
|                                                                                                                     |   |                        |       |     |       |
| Income before  income tax expense                                                                                        |   | **411**                     |       | 419      |       |
| Income tax  expense                                                                                                      |   | **88**                      |       | 110      |       |
| Net income                                                                                                               |   | **$**                       | **323**    |     | $          | 309 |   |
| Basic earnings per  share  (based on weighted average common shares outstanding of 411,701 in 2002 and  571,789 in 2001) |   | **$**                       | **0.78**   |     | $          | 0.54 |   |

 

See accompanying notes to interim condensed consolidated financialstatements.

 

4

----

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Three MonthsEnded March 31, 2002 and 2001**

**(Unaudited)**

** **
|                                                                               |   | **2002**                    |       | **2001** |       |
|------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------|------------|
|                                                                               |   | **(dollars  in thousands)** |       |
| Cash flows from operating activities:                                              |   |                        |       |     |       |
| Net income                                                                         |   | **$**                       | **323**    |     | $          | 309 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                        |       |     |       |
| Depreciation and  amortization                                                     |   | **214**                     |       | 211      |       |
| Amortization of  goodwill and other intangibles                                    |   | **30**                      |       | 41       |       |
| Provision for  loan losses                                                         |   | **210**                     |       | 100      |       |
| Investment  security amortization (accretion), net                                 |   | **(7**                      | **)**      | (25      | )          |
| Federal Home  Loan Bank stock dividend                                             |   | **(10**                     | **)**      | (15      | )          |
| Gains on sales  of mortgage loans                                                  |   | **(18**                     | **)**      | (43      | )          |
| (Gains) loss on  sale of other real estate owned                                   |   | **4**                       | ** ** | (6       | )          |
| Increase in  accrued interest receivable                                           |   | **(167**                    | **)**      | (100     | )          |
| Increase  (decrease) in accrued interest payable                                   |   | **(238**                    | **)**      | 207      |       |
| Origination of  secondary market mortgage loans                                    |   | **(1,287**                  | **)**      | (4,171   | )          |
| Proceeds from  the sales of secondary market mortgage loans                        |   | **1,357**                   |       | 3,949    |       |
| Other, net                                                                         |   | **425**                     |       | (567     | )          |
| Net cash  provided by (used in) operating activities                               |   | **836**                     |       | (110     | )          |
|                                                                               |   |                        |       |     | ** ** |
| Cash flows from  investing activities:                                             |   |                        |       |     |       |
| Proceeds from maturities  and paydowns of investment securities available for sale |   | **5,245**                   |       | 6,058    |       |
| Purchases of  investment securities available for sale                             |   | **(2,642**                  | **)**      | (2,453   | )          |
| Net increase in  loans                                                             |   | **(14,429**                 | **)**      | (7,105   | )          |
| Purchases of  premises and equipment                                               |   | **(265**                    | **)**      | (266     | )          |
| Proceeds from  sales of other real estate owned                                    |   | **15**                      |       | 6        |       |
| Net cash used in  investing activities                                             |   | **(12,076**                 | **)**      | (3,760   | )          |
|                                                                               |   |                        | ** ** |     |       |
| Cash flows from  financing activities:                                             |   |                        | ** ** |     |       |
| Net increase  (decrease) in non-interest bearing deposit accounts                  |   | **990**                     | ** ** | (6,723   | )          |
| Net increase in  NOW, money market accounts and savings deposits                   |   | **705**                     | ** ** | 4,345    |       |
| Net increase  (decrease) in time deposits $100,000 and over                        |   | **(2,214**                  | **)**      | 4,670    |       |
| Net increase in  other time deposits                                               |   | **8,943**                   | ** ** | 7,005    |       |
| Net increase  (decrease) in short-term debt                                        |   | **(447**                    | **)**      | (8,106   | )          |
| Proceeds from  issuance of preferred securities of subsidiary trust                |   | **—**                  | ** ** | 9,000    |       |
| Proceeds of  long-term debt                                                        |   | **2,400**                   | ** ** | —   |       |
| Repayment of  long-term debt                                                       |   | **(2,471**                  | **)**      | —   |       |
| Cash dividends  paid                                                               |   | **(103**                    | **)**      | (143     | )          |
| Net cash  provided by financing activities                                         |   | **7,803**                   | ** ** | 10,048   |       |
|                                                                               |   |                        |       |     |       |
| Net increase in  cash and cash equivalents                                         |   | **(3,437**                  | **)**      | 6,178    |       |
|                                                                               |   |                        | ** ** |     |       |
| Cash and cash  equivalents at beginning of period                                  |   | **15,585**                  |       | 7,023    |       |
|                                                                               |   |                        |       |     |       |
| Cash and cash  equivalents at end of period                                        |   | **$**                       | **12,148** |     | $          | 13,201 |   |
| Supplemental Information:                                                          |   |                        |       |     |       |
| Income taxes  paid                                                                 |   | **$**                       | **120**    |     | $          | 613 |   |
| Interest paid                                                                      |   | **$**                       | **2,417**  |     | $          | 2,258 |   |
| Other non-cash  investing activities:                                              |   |                        |       |     |       |
| Transfer of  loans to other real estate owned                                      |   | **$**                       | **570**    |     | $          | 100 |   |

 

Seeaccompanying notes to interim condensed consolidated financial statements.

 

5

----

** **

**ILLINICORPORATION AND SUBSIDIARIES**

**Notes toInterim Condensed Consolidated Financial Statements (Unaudited)**

**March 31, 2002**

 

(1)                                  Basis of Presentation

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with the instructions to Form 10-QSB and, therefore, donot include all of the information and notes required by accounting principlesgenerally accepted in the United States of America for complete consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  For further information, refer to theconsolidated financial statements and footnotes included in the IlliniCorporation (“Corporation”) Annual Report on Form 10-KSB for the year endedDecember 31, 2001.  The capital stockand capital surplus have been reclassified from the Annual Report on Form 10-KSBfor the year ended December 31, 2001 due to the amendments approved by theshareholders described in recent developments.

 

Basicearnings per share is computed by dividing income available to commonshareholders by the weighted-average number of common shares outstanding forthe period.  Illini Corporation has nopotential common shares which are dilutive.

 

Resultsfor the three months ended March 31, 2002 may not be indicative of the annualperformance of Illini Corporation or the subsidiary banks, Illini Bank andFarmers State 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 the interimconsolidated financial statements (unaudited) in conformity with accountingprinciples generally accepted in the United States of America.  Actual results could differ from thoseestimates.

 

(2)                                  RecentDevelopments

 

Illini Corporation has executed a definitive agreementand plan of merger to acquire all of the outstanding stock of IllinoisCommunity Bancorp, Inc (“ICBI”) through the merger of ICBI with a wholly ownedsubsidiary of Illini Corporation.  Underthe terms of the merger agreement, ICBI’s shareholders will receive .2126shares of common stock of the Illini Corporation in exchange for each share ofICBI common stock.  In the event thatcertain loan contingencies are resolved prior to closing, the exchange ratiomay be increased to up to .2472 shares of Illini Corporation in exchange foreach share of ICBI stock.  As ofDecember 31, 2001, ICBI had total assets of $57,040,000, total liabilities of$53,629,000 and total equity of $3,401,000. For the year ended December 31, 2001, ICBI had a net loss of $1,763,000.

 

The shareholders of the Corporation, at a specialmeeting on March 21, 2002, approved certain amendments to the Articles ofIncorporation of Illini Corporation. The approved amendments include: the elimination of preemptive rights of shareholders; elimination ofcumulative voting for the election of directors; increase of the number ofauthorized shares of common stock to 45,000,000 shares and the reduction of thepar value of common shares from $10 per share to $.01 per share; authorizationof 10,000,000 shares of preferred stock, par value $.01 per share; reduction ofthe vote required, pursuant to Sections 11.20 (b) and 11.60(e) of The BusinessCorporation Act of 1983, to approve a merger or sale transaction from approvalby two-thirds of the issued and outstanding shares of common stock to approvalby a majority of the issued and outstanding shares of common stock; theadoption of a qualified incentive stock option plan (60,000 shares) forexecutive employees of the Corporation and a 

 

6

----

 

non-qualified incentive stock option plan (7,500shares) for directors of the Corporation. As of March 31, 2002, no stockoptions have been granted to employees or directors of the Corporation.

 

The increase of the number of authorized shares ofcommon stock to 45,000,000 shares and the authorization of 10,000,000 shares ofpreferred stock give the Corporationflexibility in structuring its shareholder base and in raising capital.  As the shareholder base becomes larger itmay be necessary to utilize stock splits, stock dividends or a like mechanismin order to adjust the fair market value of the stock on a per share basis sothat it may be more easily traded or more easily adaptable to a more formaltrading market.  The addition ofauthorized preferred stock gives the Board of Directors flexibility in raisingcapital.  Some shareholders may requirea definitive annual return on their investment and are willing to forego votingrights in exchange for preference in both dividend rates and liquidationpayments.

 

(3)                                  Allowancefor Loan Losses and Impaired Loans

 

The allowance for loan losses is increased byprovisions charged to operations and is available to absorb loan losses.  Illini Corporation utilizes a systematic,documented methodology in determining the appropriate level of the allowancefor loan losses of its subsidiary banks. Management’s approach, which provides for general and specificallowances, is based on current economic conditions, past loan losses,collection experience, risk characteristics of the portfolio, assessingcollateral values by obtaining independent appraisals for significantproperties, and such other factors which, in management’s judgment, deservecurrent recognition in estimating potential loan losses.  The determination of the allowance for loanlosses is one of the significant estimates made by management in thepreparation of the consolidated financial statements.

 
|                            |   | **March 31,**              |   |
|---------------------------------|--------|----------------------------|--------|
|                            |   | **2002**                   |   | **2001** |   |
|                            |   | **(dollars in thousands)** |   |
| Balance at  beginning of period |   | $                          | 2,103  |   | $ | 2,188 |   |
| Provision  charged to expense   |   | 210                        |   | 100 |   |
| Charge-offs                     |   | 21                         |   | 65 |   |
| Less:  recoveries          |   | 6                          |   | 11 |   |
| Net charge-offs                 |   | 15                         |   | 54 |   |
| Balance at end  of period       |   | $                          | 2,298  |   | $ | 2,234 |   |

 

Loans, except large groups of smaller-balancehomogeneous loans, for which the full collection of principal and interestaccording to the contractual terms of the loan agreement is not probable, areevaluated for impairment.  Informationregarding impaired loans at March 31, 2002 and December 31, 2001 is as follows:

 
|                                                                |   | **March 31,  2002**        |   | **December  31,  2001** |   |
|---------------------------------------------------------------------|--------|----------------------------|--------|-------------------------|--------|
|                                                                |   | **(dollars in thousands)** |   |
| Nonaccrual loans                                                    |   | $                          | 4,169  |                    | $      | 4,920 |   |
| Impaired loans  continuing to accrue interest                       |   | 167                        |   | 212                     |   |
| Total impaired  loans                                               |   | $                          | 4,336  |                    | $      | 5,132 |   |
|                                                                |   |                       |   |                    |   |
| Allowance for  losses on specific impaired loans                    |   | $                          | 353    |                    | $      | 354 |   |
| Impaired loans  with no specific related allowance  For loan losses |   | 3,983                      |   | 4,669                   |   |
| Average balance  of impaired loans during the period                |   | 4,492                      |   | 3,882                   |   |

 

7

----

 

(4)                                  New Accounting Pronouncements

 

In July 2001, SFASNo.  142,  “Goodwill and Other Intangible Assets” was issued.  SFAS No. 142 requires that an intangible asset that is acquired shall beinitially recognized and measured based on its fair value.  This statement also provides that goodwillshould not be amortized, but shall be tested for impairment annually, or morefrequently if circumstances indicate potential impairment, through a comparisonof fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December15, 2001.  Illini Corporation hasgoodwill of $1,600,000 as of March 31, 2002 related to the Camp Pointacquisition.  The Company continued toamortize the existing goodwill through the remainder of fiscal 2001.  As of January 1, 2002, the amortization ofgoodwill has ceased.  Goodwill wastested for impairment as of January 1, 2002 and determined not to be impaired.  Goodwill amortization expense for thequarter ended March 31, 2001 was $41,000. Identifiable Intangible assets of $362,000 have continued to beamortized and consists of non-compete agreements and stock issuance costs as ofMarch 31, 2002.

 

In July 2001, SFAS No.143, “Accounting for Asset Retirement Obligations” was issued.  SFAS No. 143 establishes standards foraccounting and reporting of obligations associated with the retirement oftangible long-lived assets and associated asset retirement costs.  SFAS No. 143 is effective beginning June 15,2002.  The adoption of this statementwill not have an impact on Illini Corporation.

 

In October 2001, SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” wasissued.  Under SFAS No. 144, long-livedassets to be sold within one year must be separately identified and carried atthe lower of carrying value or fair value less costs to sell.  Long-lived assets expected to be held longerthan one year are subject to depreciation and must be written down to fairvalue upon impairment.  Long-livedassets no longer expected to be sold within one year, such as some foreclosedreal estate, must be written down to the lower of current fair value or fairvalue at the date of foreclosure adjusted to reflect depreciation sinceacquisition.  SFAS No. 144 must beimplemented by January 1, 2002.  Theadoption of this statement did not have an impact on Illini Corporation.

 

(5)                                  Other Comprehensive Income

 

Forthe three month period ended March 31, 2002 and 2001, unrealized gains (losses)on debt and marketable equity securities available for sale, net of tax, is theCorporation’s only other comprehensive income component.  Other comprehensive income for the threemonth period ended March 31, 2002 and 2001 is summarized as follows:

 
|                                                                      |   | **Three  Months Ended March 31, 2002** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                      |   | **Before-Tax  Amount**                 |   | **Tax(Expense)  Benefit** |   | **Net-of-Tax  Amount** |   |
|                                                                      |
| Net realized and  unrealized losses on securities available for sale      |   | $                                      | (9     | ) | $ | 1 |   | $ | (8 | ) |
| Less adjustment  for net securities gains (losses) realized in net income |   | 0                                      |   | 0 |   | 0 |   |
| Other  comprehensive loss                                                 |   | $                                      | (9     | ) | $ | 1 |   | $ | (8 | ) |

 

8

----

 
|                                                                      |   | **Three  Months Ended March 31, 2001** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                      |   | **Before-Tax  Amount**                 |   | **Tax  (Expense)  Benefit** |   | **Net-of-Tax  Amount** |   |
|                                                                      |
| Net realized and  unrealized gains on securities available for sale       |   | $                                      | 876    |   | $ | (319 | ) | $ | 557 |   |
| Less adjustment  for net securities gains (losses) realized in net income |   | 0                                      |   | 0 |   | 0 |   |
| Other  comprehensive income                                               |   | $                                      | 876    |   | $ | (319 | ) | $ | 557 |   |

 

 

**Item 2. Management’s Discussion and Analysis of Operations**

 

Thisdiscussion should be read in conjunction with the consolidated financialstatements, notes, and tables included elsewhere in this report and in the 2001Illini Corporation Annual Report on Form 10-KSB (2001 Form 10-KSB).

 

**SUMMARY**

 
|                      |   | **Quarter  ended  March 31,**                     |      | **Percent** |   |
|---------------------------|--------|---------------------------------------------------|-----------|-------------|--------|
| **Earnings**              |   | **2002**                                          |      | **2001**    |   | **Change** |   |
|                      |   | **(dollars in thousands, except per share data)** |      |
| Total revenue             |   | **$**                                             | **5,101** |        | $      | 5,127 |   | (0.49 | )% |
| Net income                |   | **323**                                           |      | 309         |   | 4.45 | % |
| Basic earnings  per share |   | **$**                                             | **0.78**  |        | $      | 0.54 |   | 45.06 | % |

 
|                             |   | **Quarter ended  March 31,** | ** ** | **Basis Point** | ** ** |
|----------------------------------|--------|------------------------------|------------|-----------------|------------|
| **Key Ratios**                   |   | **2002**                     |       | **2001**        |       | **Change** | ** ** |
| Return on  average assets (1)    |   | **0.47**                     | **%**      | 0.51            | %          | (0.04 | )% |
| Return on  average equity (1)    |   | **9.37**                     | **%**      | 6.65            | %          | 2.72 | % |
| Average equity  to assets        |   | **5.01**                     | **%**      | 7.69            | %          | (2.68 | )% |
| Tier 1 leverage  ratio           |   | **5.40**                     | **%**      | 9.30            | %          | (3.98 | )% |
| Tier 1  risk-based capital ratio |   | **6.67**                     | **%**      | 11.73           | %          | (5.16 | )% |
| Total risk-based  capital ratio  |   | **9.80**                     | **%**      | 14.64           | %          | (4.84 | )% |
| Dividend payout  ratio           |   | **31.90**                    | **%**      | 46.28           | %          | (14.38 | )% |
| Net interest  margin             |   | **4.07**                     | **%**      | 3.96            | %          | 0.11 | % |
| Efficiency ratio                 |   | **75.95**                    | **%**      | 77.87           | %          | (1.92 | )% |

 

----

(1)Reported on an annualized basis.

 

9

----

 

**RESULTS OF OPERATION**

 

Earning Assets

 

Average earning assets ofthe Corporation for the first three months of 2002 increased 14.09% or $31.9million to $258.4 million from $226.5 million for the first three months of2001.  Earning assets increasedprimarily due to planned loan growth.

 

As discussed in the assetquality section of this Form 10-QSB, management has actively pursued theimprovement of the asset quality of all earning assets, including loans andinvestment securities.

 

Averagenet loans increased to $205.5 million for the three months ended March 31, 2002compared to $170.1 million for the same period in 2001.  The increase of $35.4 million for the threemonths ended March 31, 2002 as compared to the same period for 2001 wasprimarily due to an increase of $34.7 million in commercial loans, includingcommercial real estate loans.  Theaverage yield on the loan portfolio, net of the allowance for loan losses,decreased 98 basis points to 7.86% for the three months ended March 31,2002.  The decrease in average yield isdue to lower interest rates and adjustable rate loans repricing.

 

Averageinvestment securities decreased $4.6 million for the three months ended March31, 2002 as compared to the same period in 2001.  The average yield of the investment securities portfolio was6.47% for the three months ended March 31, 2002, a decrease of 39 basis pointsas compared to the same period in 2001. The decrease in investments from December 31, 2001 to March 31, 2002 isa result of the increase in loan growth, and is consistent with management’sintent to maintain a balance in the investment portfolio to support basicsurplus, which is used as a measurement of liquidity

 

Funding

 

The average balance for the Corporation is based on a monthly averagebalance verses a daily average balance. The most important and stable source of funding is core deposits,considered by management to include non-interest bearing demand deposits, NOWand money market accounts, savings deposits and time deposits under$100,000.  Average core deposits for thethree months ended March 31, 2002 increased 18.46% or $33.1 million to $212.4million from $179.3 million for the three months ended March 31, 2001.  The average rate paid on total interestbearing liabilities for the three months ended March 31, 2002 decreased 127basis points when compared to the three months ended March 31, 2001.

 

The increase in average core deposits for the three months ended March31, 2002 as compared to the same period in 2001 has provided a low cost fundingsource for the growth in the loan portfolio. In addition to federal funds purchased, the bank subsidiaries maintainan overnight federal funds line of credit with an unaffiliated financialinstitution and a line of credit with the Federal Home Loan Bank of Chicago.

 

Net Interest Income/Net Interest Margin

 

The operating results of the Corporation are highly dependent on netinterest income, which is the difference between interest income oninterest-earning assets and interest expense on interest-bearing liabilities,consisting primarily of deposits.  Netinterest income is determined by the difference between yields earned on assetsand rates paid on liabilities and the relative amounts of interest-earningassets and interest-bearing liabilities.

 

Interest income, on a fully taxable equivalent basis, was $4.8 millionfor the three months ended March 31,

 

10

----

 

2002 compared to $4.7 million for the same period in 2001.  Interest expense was $2.2 million for thethree months ended March 31, 2001 compared to $2.5 million for the same periodin 2001.  An increase in interest incomeand a decrease in interest expense resulted in a $381,000 increase in netinterest income for the three months ended March 31, 2002.

 

Net interest margin for the three months ended March 31, 2002 of 4.07%was up from 3.96% reported for the same period in 2001.  The increase in the net interest margin isprimarily due to decreases in rates of core time deposits.  Management will continue to closely monitorits funding costs to maintain an acceptable spread given the current interestrate environment.  Management willcontinue to structure the balance sheet to provide insulation for extremeinterest rate changes.  Management hasreduced its focus on increasing the loan portfolio.

 

Net interest income is affected by the growth, pricing, mix, andmaturity of interest earning-assets and interest- bearing liabilities, as wellas other factors, including loan quality. Also, the Corporation’s interest-rate spread is affected by regulatory,economic, and competitive factors that influence interest rates, loan demand,and deposit flow.  Individual componentsof net interest income and net interest margin are presented in theconsolidated average balances, interest income/expense and yield/rates tablelocated elsewhere in this report under the headings; Consolidated AverageBalances, Interest Income/Expense and Yield/Rates, and Net InterestIncome-Rate/Volume Variance Analysis.

 

11

----

 

**ConsolidatedAverage Balances, Interest Income/Expense and Yield/Rates**

 
|                                                 |   | **Three  months ended March 31,** |        |
|------------------------------------------------------|--------|-----------------------------------|-------------|
|                                                 |   | **2002**                          |        | **2001** |   |
|                                                 |   | **Average  Balance**              |        | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   | **Average  Balance** |   | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                                 |   | **(dollars  in thousands)**       |
| **ASSETS**                                           |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                            |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                              |   | **$**                             | **5,276**   | ** ** | **1.9** | **%** | **$** | **21** | ** ** | **1.59** | **%** | $ | 4,158 |   | 1.7 | % | $ | 71 |   | 6.88 | % |
| Investment  securities(3)                            |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |   | **34,220**                        | ** **  | **12.3** | ** ** | **488** | ** ** | **5.71** |   | 39,470 |   | 16.1 |   | 635 |   | 6.44 |   |
| Tax-exempt(1)                                        |   | **13,451**                        | ** **  | **4.8** | ** ** | **283** | ** ** | **8.41** |   | 12,794 |   | 5.2 |   | 262 |   | 8.18 |   |
| Total securities                                     |   | **47,671**                        | ** **  | **17.1** | ** ** | **771** | ** ** | **6.47** |   | 52,264 |   | 21.3 |   | 897 |   | 6.86 |   |
| Loans                                                |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial(1)                                        |   | **46,012**                        | ** **  | **16.5** | ** ** | **855** | ** ** | **7.54** |   | 28,776 |   | 11.8 |   | 651 |   | 9.18 |   |
| Agriculture                                          |   | **15,707**                        | ** **  | **5.6** | ** ** | **231** | ** ** | **5.97** |   | 13,772 |   | 5.6 |   | 283 |   | 8.32 |   |
| Real estate                                          |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           |   | **92,394**                        | ** **  | **33.1** | ** ** | **1,789** | ** ** | **7.85** |   | 74,921 |   | 30.6 |   | 1,608 |   | 8.70 |   |
| Agriculture                                          |   | **6,853**                         | ** **  | **2.5** | ** ** | **136** | ** ** | **8.02** |   | 7,209 |   | 3.0 |   | 159 |   | 8.95 |   |
| Residential                                          |   | **33,291**                        | ** **  | **12.0** | ** ** | **666** | ** ** | **8.11** |   | 34,773 |   | 14.2 |   | 711 |   | 8.29 |   |
| Consumer, net                                        |   | **12,594**                        | ** **  | **4.5** | ** ** | **270** | ** ** | **8.69** |   | 12,073 |   | 4.9 |   | 264 |   | 8.89 |   |
| Credit card                                          |   | **848**                           | ** **  | **0.3** | ** ** | **33** | ** ** | **15.99** |   | 783 |   | 0.3 |   | 33 |   | 17.18 |   |
| Total loans                                          |   | **207,699**                       | ** **  | **74.5** | ** ** | **3,980** | ** ** | **7.77** |   | 172,307 |   | 70.4 |   | 3,709 |   | 8.73 |   |
| Allowance for  loan losses                           |   | **(2,203**                        | **)**       | **(0.8** | **)** |   |   |   |   | (2,214 | ) | (0.9 | ) |   |   |   |   |
| Net loans(1)(2)                                      |   | **205,496**                       | ** **  | **73.7** | ** ** | **3,980** | ** ** | **7.86** |   | 170,093 |   | 69.5 |   | 3,709 |   | 8.84 |   |
| Total interest  earning assets                       |   | **258,443**                       | ** **  | **92.7** | ** ** | **4,772** | ** ** | **7.49** |   | 226,515 |   | 92.5 |   | 4,677 |   | 8.37 |   |
| Cash and due  from banks                             |   | **5,533**                         | ** **  | **2.0** |   |   |   |   |   | 5,653 |   | 2.3 |   |   |   |   |   |
| Premises and  equipment                              |   | **7,063**                         | ** **  | **2.5** |   |   |   |   |   | 6,682 |   | 2.7 |   |   |   |   |   |
| Other real  estate owned                             |   | **568**                           | ** **  | **0.2** |   |   |   |   |   | 427 |   | 0.2 |   |   |   |   |   |
| Other assets(3)                                      |   | **7,281**                         | ** **  | **2.6** |   |   |   |   |   | 5,731 |   | 2.3 |   |   |   |   |   |
| **Total assets**                                     |   | **$**                             | **278,888** | ** ** | **100.0** | **%** |   |   |   |   | $ | 245,008 |   | 100.0 | % |   |   |   |   |
|                                                 |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest  bearing deposits                       |   | **$**                             | **32,788**  | ** ** | **11.8** | **%** |   |   |   |   | $ | 28,100 |   | 11.5 | % |   |   |   |   |
| Interest bearing  demand                             |   | **58,376**                        | ** **  | **20.9** | ** ** | **$** | **284** | ** ** | **1.97** | **%** | 54,297 |   | 22.2 |   | $ | 543 |   | 4.06 | % |
| Savings                                              |   | **18,450**                        | ** **  | **6.6** | ** ** | **67** | ** ** | **1.47** |   | 16,658 |   | 6.8 |   | 82 |   | 2.00 |   |
| Time deposits  less than $100,000                    |   | **102,765**                       | ** **  | **36.9** | ** ** | **1,110** | ** ** | **4.38** |   | 80,217 |   | 32.7 |   | 1,187 |   | 6.00 |   |
| Total core  deposits                                 |   | **212,379**                       | ** **  | **76.2** | ** ** | **1,461** | ** ** | **2.79** |   | 179,272 |   | 73.2 |   | 1,812 |   | 4.10 |   |
| Time  deposits  $100,000 and over               |   | **30,924**                        | ** **  | **11.1** | ** ** | **332** | ** ** | **4.35** |   | 28,439 |   | 11.6 |   | 401 |   | 5.71 |   |
| Total deposits                                       |   | **243,303**                       | ** **  | **87.3** | ** ** | **1,793** | ** ** | **2.99** |   | 207,711 |   | 84.8 |   | 2,213 |   | 4.32 |   |
| Short-term  borrowings                               |   | **722**                           | ** **  | **0.3** | ** ** | **5** | ** ** | **2.78** |   | 3,229 |   | 1.3 |   | 58 |   | 7.22 |   |
| Long-term borrowings                                 |   | **8,447**                         | ** **  | **3.0** | ** ** | **144** | ** ** | **6.93** |   | 6,000 |   | 2.4 |   | 100 |   | 6.74 |   |
| Preferred  securities of trust subsidiary(4)         |   | **9,000**                         | ** **  | **3.2** | ** ** | **237** | ** ** | **10.53** |   | 6,000 |   | 2.5 |   | 94 |   | 6.38 |   |
| Total interest  bearing liabilities                  |   | **228,684**                       | ** **  | **82.0** | ** ** | **2,179** | ** ** | **3.86** |   | 194,840 |   | 79.5 |   | 2,465 |   | 5.13 |   |
| Other  liabilities                                   |   | **3,446**                         | ** **  | **1.2** |   |   |   |   |   | 3,219 |   | 1.3 |   |   |   |   |   |
| Total  liabilities                                   |   | **264,918**                       | ** **  | **95.0** |   |   |   |   |   | 226,159 |   | 92.3 |   |   |   |   |   |
| Stockholders’  Equity                           |   | **13,970**                        | ** **  | **5.0** |   |   |   |   |   | 18,849 |   | 7.7 |   |   |   |   |   |
| **Total liabilities and stockholders’  equity** |   | **$**                             | **278,888** | ** ** | **100.0** | **%** |   |   |   |   | $ | 245,008 |   | 100.0 | % |   |   |   |   |
| **Net interest margin**                              |   |                              |        |   |   | **$** | **2,593** | ** ** | **4.07** | **%** |   |   |   |   | $ | 2,212 |   | 3.96 | % |

 

----

(1)       Income amounts arepresented on a fully taxable equivalent basis (FTE), which is defined as incomeon earning assets that is subject to either a reduced rate or zero rate ofincome tax, adjusted to give effect to the appropriate incremental federalincome tax rate and adjusted for non-deductible carrying costs, whereapplicable.  Where appropriate, yieldcalculations include these adjustments. The federal statutory rate was 34% for all periods presented.

(2)       Nonaccrual loans areincluded in the loan balances.  Interestincome includes related fee income of $88,000 in 2002 and $75,000 in 2001.

(3)       Average securities balancesare based on amortized historical cost, excluding SFAS 115 adjustments to fairvalue, which are included in other assets.

(4)       The average balance for theCorporation is based on monthly average balances verses a daily averagebalance.

 

12

----

 

**Net Interest Income — Rate/VolumeVariance Analysis(*)**

** **
|                                      |   | **Quarter  ended March 31, 2002  as compared to  quarter ended March 31, 2001** |       |
|-------------------------------------------|--------|---------------------------------------------------------------------------------|------------|
|                                      |   | **Changes in  Income/Expense**                                                  |       | **Volume  Effect** |   | **Rate  Effect** |   |
|                                      |   | **(dollars  in thousands)**                                                     |       |
|                                      |   |                                                                            | ** ** |   | ** ** |   | ** ** |
| Short-term  investments                   |   | $                                                                               | (50        | ) | $ | 19 |   | $ | (69 | ) |
| Investment  securities:                   |   |                                                                            |       |   |   |   |   |
| Taxable                                   |   | (147                                                                            | )          | (83 | ) | (64 | ) |
| Tax-exempt                                |   | 21                                                                              |       | 13 |   | 8 |   |
| Total securities                          |   | (126                                                                            | )          | (70 | ) | (56 | ) |
| Loans:                                    |   |                                                                            |       |   |   |   |   |
| Commercial                                |   | 204                                                                             |       | 390 |   | (186 | ) |
| Agriculture                               |   | (52                                                                             | )          | 40 |   | (92 | ) |
| Real Estate:                              |   |                                                                            |       |   |   |   |   |
| Commercial                                |   | 181                                                                             |       | 375 |   | (194 | ) |
| Agriculture                               |   | (23                                                                             | )          | (8 | ) | (15 | ) |
| Residential                               |   | (45                                                                             | )          | (30 | ) | (15 | ) |
| Consumer, net                             |   | 6                                                                               |       | 11 |   | (5 | ) |
| Credit card                               |   | —                                                                          |       | 3 |   | (3 | ) |
| Total loans                               |   | 271                                                                             |       | 781 |   | (510 | ) |
| Total interest  income                    |   | 95                                                                              |       | 730 |   | (635 | ) |
|                                      |   |                                                                            |       |   |   |   |   |
| Interest bearing  demand                  |   | (259                                                                            | )          | 41 |   | (300 | ) |
| Savings                                   |   | (15                                                                             | )          | 9 |   | (24 | ) |
| Time deposits,  less than $100,000        |   | (77                                                                             | )          | 334 |   | (411 | ) |
| Total core  deposits                      |   | (351                                                                            | )          | 384 |   | (735 | ) |
| Time deposits,  $100,000 and over         |   | (69                                                                             | )          | 35 |   | (104 | ) |
| Total deposits                            |   | (420                                                                            | )          | 419 |   | (839 | ) |
| Short-term debt                           |   | (53                                                                             | )          | (45 | ) | (8 | ) |
| Long-term debt                            |   | 44                                                                              |       | 41 |   | 3 |   |
| Preferred  securities of subsidiary trust |   | 143                                                                             |       | 47 |   | 96 |   |
| Total debt                                |   | 134                                                                             |       | 43 |   | 91 |   |
| Total interest  expense                   |   | (286                                                                            | )          | 462 |   | (748 | ) |
|                                      |   |                                                                            |       |   |   |   |   |
| Net interest  income                      |   | $                                                                               | 381        |   | $ | 268 |   | $ | 113 |   |

 

----

(*)  Fully taxable equivalentbasis

NOTE:   The change in interest which can not beattributed to only a change in volume or a change in rate, but insteadrepresents a combination of the two factors, has been allocated to the rateeffect.

 

13

----

 

**NoninterestIncome**

 
|                                       |   | **Three  months ended  March 31,** |       | **Percent  Change** |       |
|--------------------------------------------|--------|------------------------------------|------------|---------------------|------------|
|                                       |   | **2002**                           |       | **2001**            |       | **2002/2001** |   |
|                                       |   |                               | ** ** |                | ** ** |   | ** ** |
| Service charges  on deposit accounts       |   | **$**                              | **278**    |                | $          | 333 | ** ** | **(16.5** | **)%** |
| Other fee income                           |   | **81**                             |       | 68                  | ** ** | **19.1** |   |
| Mortgage loan  servicing fees              |   | **34**                             |       | 59                  | ** ** | **(42.4** | **)** |
| Gains on sales  of mortgage loans          |   | **18**                             |       | 43                  | ** ** | **(58.1** | **)** |
| Gains on sales  of other real estate owned |   | **(4**                             | **)**      | 6                   | ** ** | **(166.7** | **)** |
| Other                                      |   | **31**                             |       | 30                  | ** ** | **3.3** | ** ** |
|                                       |   | **$**                              | **438**    | ** **          | $          | 539 |   | **(18.7** | **)%** |

 

Thedecrease of $101,000 in non-interest income is primarily due to a decrease inmortgage loan servicing fees of $50,000 caused by the amortization of mortgageservicing rights and a decrease in loan volume.  Also, service charges on deposit accounts decreased $55,000 due toreduced fees on transaction accounts.

** **

**Noninterest Expense**

 
|                                       |   | **Three  months ended   March 31,** |       | **Percent  Change** |       |
|--------------------------------------------|--------|-------------------------------------|------------|---------------------|------------|
|                                       |   | **2002**                            |       | **2001**            |       | **2002/2001** |   |
|                                       |   |                                | ** ** |                | ** ** |   | ** ** |
| Salaries and  employee benefits            |   | **$**                               | **1,245**  |                | $          | 1,010 | ** ** | **23.3** | **%** |
| Net occupancy  expense                     |   | **189**                             |       | 199                 | ** ** | **(5.0** | **)** |
| Equipment  expense                         |   | **81**                              |       | 104                 | ** ** | **(22.1** | **)** |
| Data processing                            |   | **150**                             |       | 183                 | ** ** | **(18.0** | **)** |
| Supplies                                   |   | **54**                              |       | 43                  | ** ** | **25.6** | ** ** |
| Communication  and transportation          |   | **109**                             |       | 104                 | ** ** | **4.8** | ** ** |
| Marketing and  advertising                 |   | **60**                              |       | 57                  | ** ** | **5.3** | ** ** |
| Correspondent  and processing fees         |   | **86**                              |       | 71                  | ** ** | **21.1** | ** ** |
| Loan and other  real estate owned expenses |   | **19**                              |       | 14                  | ** ** | **35.7** | ** ** |
| Professional  fees                         |   | **161**                             |       | 186                 | ** ** | **(13.4** | **)** |
| Regulatory fees                            |   | **23**                              |       | 33                  | ** ** | **(30.3** | **)** |
| Other                                      |   | **124**                             |       | 139                 | ** ** | **(10.8** | **)** |
|                                       |   | **$**                               | **2,301**  | ** **          | $          | 2,143 |   | **7.4** | **%** |

 

Totalnon-interest expense increased $158,000 to $2.301 million for the three monthsended March 31, 2002.  The net increasesin these expenses are due to higher salaries and employee benefits of $235,000,which is a direct result of increases in employee benefit plan costs, incentiveplan costs and cost of living increases to base salaries.  The cost increase to salaries and benefitswas somewhat offset by reductions in equipment expense, net occupancy expense,data processing expense, professional fees, regulatory fees, and otheroperating expenses in the amount of $106,000. Management continues to control these costs and explore opportunities toreduce them.

 

14

----

 

**CREDIT QUALITY**

 

Grossloans totaled $212.8 million at March 31, 2002, an increase of $13.8 million,or 6.93%, from $199.0 million at December 31, 2001.  The provision for loan losses has increased to $210,000 for thethree months ended March 31, 2002 as compared to $100,000 for the same periodin 2001.  At March 31, 2002 theallowance as a percent of total loans increased to 1.08% as compared to 1.06% atDecember 31, 2001.  Management believesthe allowance for loan losses is adequate to support any anticipated losses.

 
|                            |   | **Three  Months Ended  March 31,** |       |
|---------------------------------|--------|------------------------------------|------------|
|                            |   | **2002**                           |       | **2001** |   |
|                            |   | **(dollars  in thousands)**        |       |
| **Allowance for Loan Losses:**  |   |                               |       |   |   |
| Balance at  beginning of period |   | **$**                              | **2,103**  |   | $ | 2,188 |   |
| Provision  charged to expense   |   | **210**                            |       | 100 |   |
| Charge-offs                     |   | **21**                             |       | 65 |   |
| Less:  recoveries          |   | **6**                              |       | 11 |   |
| Net charge-offs                 |   | **15**                             |       | 54 |   |
| Balance at end  of period       |   | **$**                              | **2,298**  |   | $ | 2,234 |   |
|                            |   |                               |       |   |   |
| **Net Charge-Off Ratios**(1):   |   |                               | ** ** |   |   |
| Commercial                      |   | **(0.01**                          | **)%**     | 0.09 | % |
| Real Estate                     |   | **0.00**                           | ** ** | 0.13 |   |
| Installment                     |   | **0.20**                           | ** ** | 0.20 |   |
| Credit Cards                    |   | **3.99**                           | ** ** | 0.42 |   |
| Totals                          |   | **0.03**                           | **%**      | 0.13 | % |
|                                 |        |                                    |            |  |  |  |  |  |

 

----

(1) Ratios to averageloans are presented on an annualized basis

 

IlliniCorporation’s primary business of making commercial, real estate, and consumerloans entails potential losses, the magnitude of which depends on a variety ofeconomic factors 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.  Theprovision for loan losses is up $110,000 for the three months ended March 31,2002 as compared to the comparable period in the prior year.  Net charge-offs decreased to $15,000 for thethree months ended March 31, 2002 as compared to $54,000 for the comparableperiod in the prior year.

 

Managementfeels that credit quality systems and controls, along with the creation of aformalized credit administration function, improves credit quality.  Illini Corporation has a 1.08% allowance togross loans ratio as of March 31, 2002 compared to 1.06% and 1.27% as ofDecember 31, 2001 and March 31, 2001, respectively.

 

AtMarch 31, 2002, impaired loans totaled $4.3 million, of which $167,000 of loansare not past due 90 days, compared to $212,000, which were not past due 90days, at December 31, 2001. Non-performing assets have declined $200,000 from December 31,2001.  As reported in the 10-KSBnon-performing assets totaled $5.3 million. Eight borrowers make up $3.8 million or 69.73% of the totalnon-performing assets.  Six loans arecommercial real estate in various stages of foreclosure and total $3.4 million,two loans totaling $425,000 are being worked toward a restructure of thedebt.  The balance of the non-performingassets are two 1-4 family mortgages in foreclosure, and two commercial realestate properties in other real estate owned pending sale.  Management continues to vigorously pursuethe collection of the loans.

 

15

----

 
| **Credit  Quality**                  |   | **March 31,  2002**         |       | **December  31,  2001** |       | **March 31,  2001** |       |
|--------------------------------------|--------|-----------------------------|------------|-------------------------|------------|---------------------|------------|
|                                 |   | **(dollars  in thousands)** |       |
| **Nonperforming assets:**            |   |                        |       |                    |       |                |       |
| Accruing loans  past due 90 days     |   | **$**                       | **—** |                    | $          | —              |       | $ | — |   |
| Nonaccrual                           |   | **4,169**                   |       | 4,920                   |       | 1,922               |       |
| Renegotiated                         |   | **—**                  |       | —                  |       | —              |       |
| Other real  estate owned             |   | **921**                     |       | 370                     |       | 459                 |       |
| Total  nonperforming assets          |   | **$**                       | **5,090**  |                    | $          | 5,290               |       | $ | 2,381 |   |
|                                 |   |                        |       |                    |       |                |       |
| **Key ratios**:                      |   |                        | ** ** |                    | ** ** |                | ** ** |
| Nonperforming  loans to ending loans |   | **1.96**                    | **%**      | 2.47                    | %          | 1.09                | %          |
| Allowance to  total loans            |   | **1.08**                    |       | 1.06                    |       | 1.27                |       |
| Allowance to  nonperforming loans    |   | **55.12**                   |       | 42.74                   |       | 116.23              |       |

 

IlliniCorporation’s loan underwriting guidelines and credit review procedures andpolicies are designed to protect the Corporation from credit losses.  Illini Corporation’s process for monitoringloan quality includes detailed monthly trend analysis of delinquencies andnonperforming assets.  Management andthe board of directors monitor potential problem loans, changes to thewatchlist, and extensions of credit outside of the loan policy.  Management extensively monitors significantcredit relationships through appraisals, assessment of the financial conditionof borrowers, restrictions on out-of-area lending, and avoidance of loanconcentrations.

 

Asdiscussed in the Corporation’s 2001 Form 10-KSB and previous Form 10-QSBreports, management has implemented several initiatives to improve creditquality.  These steps included a newofficer driven problem loan identification system, a revamped allowance forloan losses adequacy determination process, a new loan policy, and improvedreporting systems (credit quality and production).  Management is committed to continuing these initiatives and hassupplemented these efforts in 2002 by engaging an outside firm to perform acomprehensive review of each bank’s loan portfolio to assess its credit qualityand the effectiveness of management’s loan quality systems and controls.

 

**CAPITALRESOURCES**

 

The current economic and regulatory environment places increasedemphasis on capital strength.  A strongcapital position, which is vital to the continued profitability of IlliniCorporation, also promotes depositor and investor confidence and provides asolid foundation for the future growth of the organization.  Illini Corporation has satisfied its capitalrequirements principally through the retention of earnings.  At March 31, 2002, Tier 1 risk-basedcapital, total risk-based capital and leverage capital ratios were 6.67%, 9.80%and 5.40%, respectively, as compared to 6.75%, 10.04% and 5.35% for the periodending December 31, 2001.  The decreasein all categories except for leverage capital is due to growth in the firstthree months of 2002.  The increase inleverage capital is due to amortization of identifiable intangible assets.  As of March 31, 2002, the Corporation’ssubsidiary banks met the criteria to be classified as “well capitalized.”

 

Earnings retention is affected by the board of director’s declarationof cash dividends.  The dividend payoutratio is an indicator of the level of earnings retained.  The Board of Directors of the Corporationconsiders the capital strength of the Corporation and the banks in determiningthe appropriate level of cash dividends to be paid to shareholders.  The dividend payout ratio for the threemonths ended March 31, 2002 was 31.90% as 

 

16

----

 

compared to 46.28% for the three months ended March 31, 2001.  The dividend per share for the three monthsended March 31, 2002 is unchanged from the same period in 2001.

 

**LIQUIDITY**

 

Illini Corporation’s policy is to manage interest rate risk to a levelwhich places limits on the sensitivity of its earnings to changes in marketinterest rates.  An explanation of theasset/liability management process is found in the Corporation’s 2001 Form10-KSB, beginning on page 15.  Interest rate risk management at IlliniCorporation is executed through the use of on-balance sheet investmentproducts.

 

The assets portion of the balance sheet provides liquidity primarilythrough loan principal repayments, maturities of investment securities, andsales of investment securities available for sale.  The liability side of the balance sheet provides liquiditythrough various customers’ interest-bearing and noninterest-bearing depositaccounts.  Short-term borrowings are anadditional source of liquidity and represent Illini Corporation’s incrementalborrowing capacity.

 

Illini Corporation uses a comprehensive analysis of its asset/liabilityfunction, including a review of its funds management policy and its principalmeasure of liquidity.  The Corporationimplemented a new measure of liquidity measurement, called “Basic Surplus,”which redefines liquid assets as the total assets held by the Corporation whichcan be converted to cash in thirty days or less, reduced by short termliabilities.  As of March 31, 2002, themost recent calculation, Illini Corporation’s core liquidity was $19.0 million,or 7.89 of total average assets.

 

Management believes the formula provides an accurate measurement ofliquidity and provides management with a comprehensible and consistent tool todevelop pricing and profitability strategies. Based on the new measurement and as compared to peer banks, managementbelieves the liquidity position of the banks is strong.

 

17

----

 

**PART II.  OTHERINFORMATION**

 

Item1 Legal Proceedings 

Mary Quinn v. Illini Corporation and Illinois StockTransfer Co.,

Sangamon County Case No. 98 CH 240

 

Illini Corporationadopted a Shareholder Rights Agreement on June 20, 1997, and named IllinoisStock Transfer Company (“ISTC”) as its rights agent thereunder.  Illini Corporation was notified in May 1998of a threatened complaint against ISTC by an Illini Corporation shareholder.  The shareholder, Mary K. Quinn (“Quinn”),who owns 21 shares of stock in Illini Corporation, filed suit against ISTC onJune 9, 1998 in the Seventh Judicial Circuit Court, Sangamon County,Illinois.  Quinn sought to compel ISTCto distribute rights certificates to Illini Corporation’s shareholders andfurther sought to certify all Illini Corporation shareholders as a class.  Quinn asserted that Ida R. Noll became anacquiring person under the Rights Agreement on April 16, 1998, and that theRights Agreement was triggered.  ISTChas vigorously contested Quinn’s assertions that Ida R. Noll was an acquiringperson, that the Rights Agreement had been triggered, and that ISTC had a dutyto distribute rights certificates.

 

On June 9, 1998,Quinn filed a Motion to Certify the Class, which was granted on December 29,1998.  On January 13, 1999, Quinn filedan Amended Complaint adding Illini Corporation as a defendant to heraction.  Both Illini Corporation andISTC answered the Amended Complaint and denied that Ida R. Noll was anacquiring person.  Quinn asserted thatshe was entitled to recover her attorneys’ fees from Illini Corporation andISTC.

 

Quinn filed aMotion for Summary Judgment that asked the Court to determine as a matter oflaw that Ida R. Noll became an acquiring person on April 16, 1998, that theRights Agreement was triggered as a result and that Illini Corporation and ISTChad a duty to distribute rights certificates to all shareholders as of April16, 1998, except for Ida R. Noll. Illini Corporation opposed Quinn’s Motion for Summary Judgment, whichwas heard by the Court on June 18, 1999. On June 29, 1999, the Court entered an Opinion and Order denying Quinn’sMotion for Summary Judgment.

 

On or about May 6,1999, counsel for Quinn advised Illini Corporation’s counsel of her intent toseek an injunction that would preclude Illini Corporation from completing itsacquisition of the Farmers State Bank of Camp Point (Camp Point), pendingfurther order of the Court.  Quinnsubsequently filed a Motion for Preliminary Injunction and a Memorandum of Lawin Support of her Motion.  Quinn arguedthat the class (consisting of all Illini Corporation’s shareholders as of April16, 1998, except for Ida R. Noll) would be irreparably harmed if the Camp Pointmerger closed prior to a determination on the merits of her suit.  Illini Corporation filed extensive briefs inopposition to the Motion for Preliminary Injunction, and the Court heard theMotion on July 1, 1999.  The Courtentered a written Order on July 13, 1999, denying the Motion for PreliminaryInjunction.

 

Quinn’s counselfiled a Motion for Reconsideration of the Orders denying Quinn’s Motion forSummary Judgment and Motion for Preliminary Injunction.  Illini Corporation and ISTC filed a Motionfor Summary Judgment on August 25, 1999. At a hearing held on October 18, 1999, the Court granted IlliniCorporation and ISTC’s Motion for Summary Judgment and denied Quinn’s Motionfor Reconsideration.  An Order wassubsequently entered on January 12, 2000.

 

Quinn’s counselannounced on October 18, 1999, the intention to petition the Court for an orderdirecting Illini Corporation and ISTC to pay Quinn’s attorneys’ fees pursuantto the attorney fee provision of the Rights Agreement.  Quinn’s fee petition was heard anddenied.  Quinn has filed a pendingappeal as to all adverse orders.  TheCorporation is vigorously contesting the appeal.  Oral argument was held before the Illinois Appellate Court forthe Fourth District on July 18, 2000.

 

On July 31, 2000,the Appellate Court issued an order reversing the trial court’s order grantingsummary judgment to Illini Corporation and remanding the case for trial.  The Appellate Court found that genuine issueof material fact remained concerning whether the Illini Corporation board ofdirectors acted in good faith (1) in

 

18

----

 

determining on April 30,1998 that Ida Noll’s acquisition of shares was inadvertent and (2) inamending the agreement on June 30, 1998. The Appellate Court also reversed the trial court’s order denyingQuinn’s request for costs, expenses and attorneys fees, finding that the feeprovision of the Rights Agreement did not require one who brought an action toenforce the agreement to prevail in that action in order to recover fees.  As of December 31, 2001, Illini Corporationhas accrued its best estimate as a contingency reserve for this litigation tocover expenses and attorneys fees, although such amounts shall be subject tofurther discovery.

 

The case has beenremanded to the trial court.  UponQuinn’s motion the trial court permitted Quinn to add Mrs. Noll as a party tothe action.  Quinn subsequently filed amotion to compel an additional deposition of Burnard K. McHone, President,Illini Corporation, with respect to a certain Stock Purchase Agreement pursuantto which shares owned by Mrs. Noll’s family were redeemed by IlliniCorporation.  The trial court denied themotion to compel finding that Quinn failed to show any basis that the StockPurchase Agreement was relevant to her claims in the lawsuit.  Defendants filed a motion to vacate thetrial court’s order to add Mrs. Noll as a party to the action.  The trial court vacated the prior order inDecember, 2001.  Illini anticipates thatthe case will be tried in the Summer of 2002.

 

Mary Quinn v. Ida R. Noll, Burnard McHone, et al.

Sangamon County Case No. 01 CH 377

 

On August 14,2001, Mary Quinn filed a four count complaint against Ida Noll and severalpresent and former members of Illini Corporation’s Board of Directors in theSeventh Judicial Circuit, Sangamon County, Illinois.  The named defendants in the action are Ida Noll, Burnard McHone,William Etherton, Ronald Thunman, Thomas Black, John Pickrell, KennethDeverman, Larry Curtin, Robert Olson and William McCubbin.  Quinn purports to allege derivative causesof action arising out of Illini entering into a Stock Purchase Agreement withIda R. Noll and others.  Quinn assertsthat the defendants caused Illini to breach the Shareholder Rights Agreement,that the directors breached their fiduciary duty, and usurped a businessopportunity of the Shareholders.  Quinnalso seeks rescission of the Stock Purchase Agreement.  The directors named as defendants in the actionare represented by the law firm of Samuels, Miller, Schreoder, Jackson & Sly.  Attorney James Jackson of the Samuels Millerfirm has filed a motion to dismiss the complaint on behalf of thedirectors.  Illini Corporation hasengaged Howard & Howard Attorneys, P.C. to intervene in the action on itsbehalf.

 

Quinn seeksrecovery of her attorney’s fees in the derivative action pursuant to theattorney fee provision of the Shareholder Rights Agreement.

 

Item2 Changes in Securities - none

 

Item3 Defaults Upon Senior Securities - none

 

Item4 Submission of Matters to a Vote of Security Holders -

 

A special Meeting of Shareholders of the Company was held on March 21, 2002, for thepurpose of approving certain amendments to the Articles of Incorporation.  Proxies for the meeting were solicited bymanagement pursuant to Regulation 14A under Securities Exchange Act of 1934, and there was nosolicitation in opposition to management’s solicitation.

 

The approved amendments include:

 

19

----

 

Amendingthe Articles of Incorporation to eliminate preemptive rights.  The results of the vote were as follows:

 
| **Shares  Voted  “For”** |                     |   |   |   |   |
|------------------------------------|--------------------------|--------|--------|--------|--------|
| **Shares  “Withheld”**   |                     |   |   |
|                               | **“Withheld”** |   |
| 307,221                            |                     | 7,296  |   | 2,231  |   |

 

Amending the Articles of Incorporation to eliminate cumulative votingfor election of directors.  The resultsof the vote were as follows:

 
| **Shares  Voted  “For”** |                     |   |   |   |   |
|------------------------------------|--------------------------|--------|--------|--------|--------|
| **Shares  “Withheld”**   |                     |   |   |
|                               | **“Withheld”** |   |
| 302,291                            |                     | 12,736 |   | 1,721  |   |

 

Amending the Articles of Incorporation to increase the number ofauthorized shares of common stock to 45,000,000 shares, par value $.01 pershare and to authorize 10,000,000 shares of preferred stock, par value $.01 pershare.  The results of the vote were asfollows:

 
| **Shares  Voted  “For”** |                     |   |   |   |   |
|------------------------------------|--------------------------|--------|--------|--------|--------|
| **Shares  “Withheld”**   |                     |   |   |
|                               | **“Withheld”** |   |
| 300,706                            |                     | 13,366 |   | 2,676  |   |

 

Amendingthe Articles of Incorporation to reduce the required shareholder vote toapprove a merger or sale transaction. The results of the vote were as follows:

 
| **Shares  Voted  “For”** |                     |   |   |   |   |
|------------------------------------|--------------------------|--------|--------|--------|--------|
| **Shares  “Withheld”**   |                     |   |   |
|                               | **“Withheld”** |   |
| 307,059                            |                     | 8,097  |   | 1,592  |   |

 

Adoptinga Qualified Incentive Stock Option Plan for the benefit of executiveemployees.  The results of the vote wereas follows:

 
| **Shares  Voted  “For”** |                     |   |   |   |   |
|------------------------------------|--------------------------|--------|--------|--------|--------|
| **Shares  “Withheld”**   |                     |   |   |
|                               | **“Withheld”** |   |
| 301,097                            |                     | 13,191 |   | 2,460  |   |

 

Adopting a Non-Qualified Incentive Stock Option Plan forthe benefit of the Board of Directors. The results of the vote were as follows:

 
| **Shares  Voted  “For”** |                     |   |   |   |   |
|------------------------------------|--------------------------|--------|--------|--------|--------|
| **Shares  “Withheld”**   |                     |   |   |
|                               | **“Withheld”** |   |
| 298,375                            |                     | 14,680 |   | 3,693  |   |

 

20

----

 

Item5  Other Information - none

 

Item 6  Exhibitsand Reports on Form 8-K

 
| (a)    | Exhibits:                                                                                                                                                                                                                                                                                                 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | The  Exhibits filed herewith are set forth in the Exhibit Index filed as a part of  these Form 10-QSB.                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                      |
| (b)    | Reports  on Form 8-K:                                                                                                                                                                                                                                                                                     |
|   | The  Corporation filed a Form 8-K dated March 21, 2002 amending the Company’s  Articles of Incorporation, and the adoption of a qualified incentive stock  option plan for executive employees of the Corporation and a non-qualified  incentive stock option plan for directors of the Corporation. |

 

21

----

 

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Illini  Corporation             |
|---------------------------------|
| (Registrant)                    |   |
|                            |   |
| By:  /s/ Burnard K. McHone |   | May 8, 2002 |   |
| Burnard  K. McHone              | Date  signed |
| President                       |   |
|                            |   |
| By:  /s/ Deann Hager       |   | May 8, 2002 |   |
| Deann  Hager                    | Date  signed |
| Finance  Manager                |   |

 

22

----

 

**EXHIBIT INDEX**

 

 
| **Number** |   | **Description** |
|------------|--------|-----------------|
|       |   |            |
| (none)     |   | (none)          |

 

23

----