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

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 
| **ý**                                         |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|----------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                               |   |                                                                                               |
| **For  quarterly period ended June 30, 2004** |
|                                               |   |                                                                                               |
| **o**                                              |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                          |
|                                               |   |                                                                                               |
| **Commission  file number 0-13343**                |

 

**IlliniCorporation**

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

 

| **Illinois**                                                         |   | **37-1135429**                        |
|----------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)     |   | (I.R.S. Employer  Identification No.) |
|                                                                 |   |                                  |
| **3200  West Iles Avenue, Springfield,   Illinois  62707** |
| (Address of  principal executive offices)                            |
|                                                                 |   |                                  |
| **(217)  787-5111**                                                  |
| (Issuer’s  telephone number)                                    |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
|   | Yes ý  No o |
|--------|------------------|

 

As of July 31, 2004,there were 414,529 shares of common stock, $0.01 par value outstanding.

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

 

 

----

 

**ILLINI CORPORATION**

INDEX TO FORM10-QSB

June 30, 2004

 
| **PART I.  FINANCIAL INFORMATION** |                                                                                                              |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                              |   |
| Item 1.                                 | Financial Statements  (Unaudited)                                                                                 |   |
|                                    |                                                                                                              |   |
|                                    | Consolidated Balance Sheets  June 30, 2004 and December 31, 2003                                        |   |
|                                    |                                                                                                              |   |
|                                    | Consolidated  Statements of Income / (Loss)  Three and Six Months Ended June 30, 2004 and 2003               |   |
|                                    |                                                                                                              |   |
|                                    | Consolidated  Statements of Shareholders’ Equity  Six Months Ended June 30, 2004 and 2003               |   |
|                                    |                                                                                                              |   |
|                                    | Consolidated  Statements of Comprehensive Income / (Loss)  Three and Six Months Ended June 30, 2004 and 2003 |   |
|                                    |                                                                                                              |   |
|                                    | Consolidated  Statements of Cash Flows  Six Months Ended June 30, 2004 and 2003                              |   |
|                                    |                                                                                                              |   |
|                                    | Notes  to Unaudited Consolidated Financial Statements                                                             |   |
|                                    |                                                                                                              |   |
| Item 2.                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                       |   |
|                                    |                                                                                                              |   |
| Item 3.                                 | Controls and Procedures                                                                                           |   |
|                                    |                                                                                                              |   |
| **PART II.  OTHER INFORMATION**    |                                                                                                              |
|                                    |                                                                                                              |
| **SIGNATURES**                          |                                                                                                              |

 

**Information ConcerningForward-Looking Statements**

*Statements contained in this Form 10-QSB which are nothistorical facts are “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements involve important known andunknown risks, uncertainties and other factors and can be identified by phrasesusing “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,”“predict,” “potential,” “future,” “may,” “should” and similar expressions orwords.  Such forward-looking statementsare subject to risk and uncertainties which could cause actual results to differmaterially from those projected.  Such risksand uncertainties include potential change in interest rates, competitivefactors in the financial services industry, general economic conditions, theeffect of new legislation and other risks detailed in documents filed by IlliniCorporation with the Securities and Exchange Commission from time to time.*

 

2

----

 

**PARTI.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**June 30, 2004 and December 31,2003**

**Unaudited**

 
|                                                                                                                    |   | **June 30,    2004**   |        | **December 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|-----------------------------|--------|
|                                                                                                                    |   | **(dollars  in thousands)** |        |
| **ASSETS**                                                                                                              |   |                        |        |                        |   |
| Cash  and due from banks                                                                                                |   | **$**                       | **5,892**   |                        | $      | 8,623 |   |
| Interest-bearing  deposits in other banks                                                                               |   | **32**                      | ** **  | 31                          |   |
| Federal  funds sold                                                                                                     |   | **14,895**                  | ** **  | 7,262                       |   |
| Cash  and cash equivalents                                                                                              |   | **20,819**                  | ** **  | 15,916                      |   |
| Investment  securities available for sale, at fair value                                                                |   | **37,832**                  | ** **  | 47,172                      |   |
| Loans  held for sale                                                                                                    |   | **—**                  | ** **  | 15,287                      |   |
| Loans,  net of the allowance for loan losses of $2,635 and $2,359                                                       |   | **165,512**                 | ** **  | 170,846                     |   |
| Federal  Home Loan Bank stock                                                                                           |   | **838**                     | ** **  | 813                         |   |
| Premises  and equipment                                                                                                 |   | **6,165**                   | ** **  | 6,255                       |   |
| Accrued  interest receivable                                                                                            |   | **1,368**                   | ** **  | 1,838                       |   |
| Other  real estate owned                                                                                                |   | **3,324**                   | ** **  | 3,918                       |   |
| Goodwill                                                                                                                |   | **1,856**                   | ** **  | 1,856                       |   |
| Other  assets                                                                                                           |   | **2,116**                   | ** **  | 858                         |   |
| Total  Assets                                                                                                           |   | **$**                       | **239,830** | ** **                  | $      | 264,759 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                           |   |                        | ** **  |                        |   |
| Noninterest-bearing  demand deposits                                                                                    |   | **$**                       | **32,301**  | ** **                  | $      | 34,400 |   |
| Interest-bearing  deposits:                                                                                             |   |                        | ** **  |                        |   |
| NOW  and money market accounts                                                                                          |   | **59,111**                  | ** **  | 59,490                      |   |
| Savings  deposits                                                                                                       |   | **22,086**                  | ** **  | 21,408                      |   |
| Time  deposits, $100,000 and over                                                                                       |   | **13,825**                  | ** **  | 18,319                      |   |
| Other  time deposits                                                                                                    |   | **74,847**                  | ** **  | 92,998                      |   |
| Total  Deposits                                                                                                         |   | **202,170**                 | ** **  | 226,615                     |   |
| Federal  funds purchased and securities sold under agreements to repurchase                                             |   | **534**                     | ** **  | 528                         |   |
| Borrowings                                                                                                              |   | **13,322**                  | ** **  | 11,347                      |   |
| Subordinated  debentures                                                                                                |   | **9,000**                   | ** **  | 9,000                       |   |
| Accrued  interest payable                                                                                               |   | **806**                     | ** **  | 1,082                       |   |
| Other  liabilities                                                                                                      |   | **882**                     | ** **  | 1,146                       |   |
| Total  Liabilities                                                                                                      |   | **226,714**                 | ** **  | 249,718                     |   |
|                                                                                                                    |   |                        | ** **  |                        |   |
| Shareholders’  equity                                                                                              |   |                        | ** **  |                        |   |
| Preferred  stock, $0.01 par value, authorized and unissued 10,000,000 shares                                            |   | **—**                  | ** **  | —                      |   |
| Common  stock, $0.01 par value, authorized 45,000,000 shares; 571,789 shares issued                                     |   | **6**                       | ** **  | 6                           |   |
| Capital  surplus                                                                                                        |   | **9,038**                   | ** **  | 9,070                       |   |
| Retained  earnings                                                                                                      |   | **10,674**                  | ** **  | 12,068                      |   |
| Accumulated  other comprehensive income                                                                                 |   | **475**                     | ** **  | 1,101                       |   |
| Less:  Cost of 157,260 and 160,088 treasury  shares at June 30, 2004 and December 31, 2003, respectively |   | **(7,077**                  | **)**       | (7,204                      | )      |
| Total  Shareholders’ Equity                                                                                        |   | **13,116**                  | ** **  | 15,041                      |   |
| Total  Liabilities and Shareholders’ Equity                                                                        |   | **$**                       | **239,830** | ** **                  | $      | 264,759 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

3

----

 

**ILLINICORPORATION AND SUBSIDIARIES**

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

**ThreeMonths and Six Months Ended June 30, 2004 and 2003**

**(Unaudited)**

 
|                                                                        |   | **Three  Months Ended  June 30,**             |       | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------------------|------------|--------------------------------------|--------|
|                                                                        |   | **2004**                                           |       | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                        |   | **(dollars  in thousands, except per share data)** |       |
| Interest  income:                                                           |   |                                               |       |                                 |   |   |   |   |   |
| Loans,  including fees                                                      |   | **$**                                              | **2,976**  | ** **                           | $      | 3,198 |   | **$** | **5,898** | ** ** | $ | 6,834 |   |
| Investment  securities:                                                     |   |                                               | ** ** |                                 |   |   | ** ** |   | ** ** |
| Taxable                                                                     |   | **226**                                            | ** ** | 185                                  |   | **516** | ** ** | 454 |   |
| Exempt  from federal income taxes                                           |   | **179**                                            | ** ** | 229                                  |   | **360** | ** ** | 461 |   |
| Federal  funds sold and interest-bearing deposits                           |   | **24**                                             | ** ** | 54                                   |   | **30** | ** ** | 96 |   |
| Total  interest income                                                      |   | **3,405**                                          | ** ** | 3,666                                |   | **6,804** | ** ** | 7,845 |   |
| Interest  expense:                                                          |   |                                               | ** ** |                                 |   |   | ** ** |   |   |
| Deposits:                                                                   |   |                                               | ** ** |                                 |   |   | ** ** |   |   |
| NOW  and money market accounts                                              |   | **112**                                            | ** ** | 134                                  |   | **220** | ** ** | 317 |   |
| Savings  deposits                                                           |   | **34**                                             | ** ** | 41                                   |   | **67** | ** ** | 90 |   |
| Time  deposits, $100,000 and over                                           |   | **111**                                            | ** ** | 213                                  |   | **237** | ** ** | 429 |   |
| Other  time deposits                                                        |   | **556**                                            | ** ** | 1,016                                |   | **1,217** | ** ** | 2,071 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |   | **3**                                              | ** ** | 4                                    |   | **12** | ** ** | 10 |   |
| Borrowings                                                                  |   | **96**                                             | ** ** | 98                                   |   | **195** | ** ** | 195 |   |
| Subordinated  debentures                                                    |   | **229**                                            | ** ** | 229                                  |   | **473** | ** ** | 473 |   |
| Total  interest expense                                                     |   | **1,141**                                          | ** ** | 1,735                                |   | **2,421** | ** ** | 3,585 |   |
| Net  interest income                                                        |   | **2,264**                                          | ** ** | 1,931                                |   | **4,383** | ** ** | 4,260 |   |
| Provision  for loan losses                                                  |   | **—**                                         | ** ** | —                               |   | **1,390** | ** ** | 150 |   |
| Net  interest income after provision for loan losses                        |   | **2,264**                                          | ** ** | 1,931                                |   | **2,993** | ** ** | 4,110 |   |
| Noninterest  income:                                                        |   |                                               | ** ** |                                 |   |   | ** ** |   |   |
| Service  charges on deposit accounts                                        |   | **417**                                            | ** ** | 339                                  |   | **767** | ** ** | 663 |   |
| Other  fee income                                                           |   | **77**                                             | ** ** | 132                                  |   | **155** | ** ** | 263 |   |
| Mortgage  loan servicing fees                                               |   | **69**                                             | ** ** | (3                                   | )      | **90** | ** ** | (8 | ) |
| Gains  (losses) on sales/transfers of mortgage loans                        |   | **(226**                                           | **)**      | 80                                   |   | **(212** | **)** | 137 |   |
| Investment  securities gains                                                |   | **27**                                             | ** ** | —                               |   | **27** | ** ** | — |   |
| Gains  (losses) on sale of other real estate owned                          |   | **(55**                                            | **)**      | 9                                    |   | **(35** | **)** | 14 |   |
| Other                                                                       |   | **82**                                             | ** ** | 41                                   |   | **102** | ** ** | 67 |   |
| Total  noninterest income                                                   |   | **391**                                            | ** ** | 598                                  |   | **894** | ** ** | 1,136 |   |
| Noninterest  expense:                                                       |   |                                               | ** ** |                                 |   |   | ** ** |   |   |
| Salaries  and employee benefits                                             |   | **1,419**                                          | ** ** | 1,189                                |   | **2,684** | ** ** | 2,375 |   |
| Net  occupancy expense                                                      |   | **183**                                            | ** ** | 192                                  |   | **368** | ** ** | 387 |   |
| Equipment  expense                                                          |   | **51**                                             | ** ** | 54                                   |   | **99** | ** ** | 115 |   |
| Data  processing fees                                                       |   | **179**                                            | ** ** | 203                                  |   | **380** | ** ** | 388 |   |
| Supplies  expense                                                           |   | **34**                                             | ** ** | 44                                   |   | **68** | ** ** | 91 |   |
| Communication  and transportation expense                                   |   | **132**                                            | ** ** | 116                                  |   | **250** | ** ** | 230 |   |
| Marketing  and advertising expense                                          |   | **76**                                             | ** ** | 41                                   |   | **129** | ** ** | 85 |   |
| Correspondent  bank fees                                                    |   | **44**                                             | ** ** | 83                                   |   | **98** | ** ** | 160 |   |
| Loan  foreclosure and other real estate owned expense                       |   | **916**                                            | ** ** | 201                                  |   | **1,440** | ** ** | 236 |   |
| Professional  fees                                                          |   | **136**                                            | ** ** | 148                                  |   | **302** | ** ** | 301 |   |
| Regulatory  fees                                                            |   | **24**                                             | ** ** | 35                                   |   | **46** | ** ** | 58 |   |
| Other                                                                       |   | **196**                                            | ** ** | 186                                  |   | **349** | ** ** | 338 |   |
| Total  noninterest expense                                                  |   | **3,390**                                          | ** ** | 2,492                                |   | **6,213** | ** ** | 4,764 |   |
| Income  before income tax expense                                           |   | **(735**                                           | **)**      | 37                                   |   | **(2,326** | **)** | 482 |   |
| Income  tax expense                                                         |   | **(342**                                           | **)**      | (10                                  | )      | **(1,035** | **)** | 86 |   |
| Net  income                                                                 |   | **$**                                              | **(393**   | **)**                                | $      | 47 |   | **$** | **(1,291** | **)** | $ | 396 |   |
| Basic  and diluted earnings per share                                       |   | **$**                                              | **(0.95**  | **)**                                | $      | 0.11 |   | **$** | **(3.12** | **)** | $ | 0.96 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

4

----

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

**SixMonths Ended June 30, 2004 and 2003**

**(Unaudited)**

 
|                                                 |   | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------|--------|--------------------------------------|------------|
|                                                 |   | **2004**                             |       | **2003** |   |
|                                                 |   | **(dollars  in thousands)**          |       |
| Common  Stock                                        |   |                                 |       |   |   |
| Beginning  of year balance                           |   | **$**                                | **6**      | ** ** | $ | 6 |   |
| End  of period balance                               |   | **6**                                | ** ** | 6 |   |
|                                                 |   |                                 | ** ** |   |   |
| Capital  Surplus                                     |   |                                 | ** ** |   |   |
| Beginning  of year balance                           |   | **9,070**                            | ** ** | 9,070 |   |
| Sale  of treasury stock                              |   | **(32**                              | **)**      | — |   |
| End  of period balance                               |   | **9,038**                            | ** ** | 9,070 |   |
|                                                 |   |                                 | ** ** |   |   |
| Retained  Earnings                                   |   |                                 | ** ** |   |   |
| Beginning  of year balance                           |   | **12,068**                           | ** ** | 11,885 |   |
| Net  income (loss)                                   |   | **(1,291**                           | **)**      | 396 |   |
| Dividends  on common stock                           |   | **(103**                             | **)**      | (205 | ) |
| End  of period balance                               |   | **10,674**                           | ** ** | 12,076 |   |
|                                                 |   |                                 | ** ** |   |   |
| Treasury  Stock                                      |   |                                 | ** ** |   |   |
| Beginning  of year balance                           |   | **(7,204**                           | **)**      | (7,204 | ) |
| Sale  of treasury stock                              |   | **127**                              | ** ** | — |   |
| End  of period balance                               |   | **(7,077**                           | **)**      | (7,204 | ) |
|                                                 |   |                                 | ** ** |   |   |
| Accumulated  Other Comprehensive Income              |   |                                 | ** ** |   |   |
| Beginning  of year balance                           |   | **1,101**                            | ** ** | 1,464 |   |
| Unrealized  gains (losses) on securities, net of tax |   | **(626**                             | **)**      | 369 |   |
| End  of period balance                               |   | **475**                              | ** ** | 1,833 |   |
|                                                 |   |                                 | ** ** |   |   |
| Total  Shareholders’ Equity                     |   | **$**                                | **13,116** | ** ** | $ | 15,781 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME / (LOSS)**

**ThreeMonths and Six Months Ended June 30, 2004 and 2003**

**(Unaudited)**

 
|                                                                                                                  |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                                                                                                  |   | **2004**                               |       | **2003**                             |       | **2004** |   | **2003** |   |
|                                                                                                                  |   | **(dollars  in thousands)**            |       | **(dollars  in thousands)**          |       |
| Net  Income (loss)                                                                                                    |   | **$**                                  | **(393**   | **)**                                | $          | 47 | ** ** | **$** | **(1,291** | **)** | $ | 396 |   |
| Other  comprehensive income, unrealized gains (losses) on securities, net of  reclassification adjustment, net of tax |   | **(835**                               | **)**      | 356                                  | ** ** | **(626** | **)** | 369 |   |
| Comprehensive  income (loss)                                                                                          |   | **$**                                  | **(1,228** | **)**                                | $          | 403 | ** ** | **$** | **(1,917** | **)** | $ | 765 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

5

----

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Six Months Ended June 30, 2004and 2003**

**(Unaudited)**

 
|                                                                                      |   | **2004**                    |       | **2003**   |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                                                      |   | **(dollars  in thousands)** |       |
| Cash  flows from operating activities:                                                    |   |                        |       |       |   |
| Net  income (loss)                                                                        |   | **$**                       | **(1,291** | **)**      | $      | 396 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                        | ** ** |       |   |
| Depreciation                                                                              |   | **380**                     | ** ** | 385        |   |
| Provision  for loan losses                                                                |   | **1,390**                   | ** ** | 150        |   |
| Investment  security amortization, net                                                    |   | **33**                      | ** ** | 111        |   |
| Gains  on sales of investment securities, net                                             |   | **(27**                     | **)**      | —     |   |
| Federal  Home Loan Bank stock dividend                                                    |   | **(25**                     | **)**      | (33        | )      |
| (Gains)  losses on sales/transfers of mortgage loans                                      |   | **212**                     | ** ** | (137       | )      |
| Valuation  allowance established for other real estate owned                              |   | **1,003**                   | ** ** | —     |   |
| (Gains)  losses on sales of other real estate owned                                       |   | **35**                      | ** ** | (14        | )      |
| Decrease  in accrued interest receivable                                                  |   | **470**                     | ** ** | 663        |   |
| Decrease  in accrued interest payable                                                     |   | **(276**                    | **)**      | (154       | )      |
| Origination  of secondary market mortgage loans                                           |   | **(2,442**                  | **)**      | (10,545    | )      |
| Proceeds  from the sales of secondary market mortgage loans                               |   | **12,060**                  | ** ** | 11,016     |   |
| Other,  net                                                                               |   | **(1,173**                  | **)**      | (1,304     | )      |
| Net  cash provided by operating activities                                                |   | **10,349**                  | ** ** | 534        |   |
| Cash  flows from investing activities:                                                    |   |                        | ** ** |       |   |
| Proceeds  from sales of investment securities available for sale                          |   | **1,545**                   | ** ** | —     |   |
| Proceeds  from maturities and paydowns of investment securities available for sale        |   | **12,987**                  | ** ** | 14,521     |   |
| Purchases  of investment securities available for sale                                    |   | **(6,173**                  | **)**      | (12,033    | )      |
| Net  decrease in loans                                                                    |   | **8,614**                   | ** ** | 8,073      |   |
| Purchases  of premises and equipment                                                      |   | **(290**                    | **)**      | (214       | )      |
| Proceeds  from sales of other real estate owned                                           |   | **343**                     | ** ** | 416        |   |
| Net  cash provided by investing activities                                                |   | **17,026**                  | ** ** | 10,763     |   |
| Cash  flows from financing activities:                                                    |   |                        | ** ** |       |   |
| Net  decrease in noninterest-bearing demand deposits                                      |   | **(2,099**                  | **)**      | (2,807     | )      |
| Net  increase in NOW, money market accounts and savings deposits                          |   | **299**                     | ** ** | 2,979      |   |
| Net  increase (decrease) in time deposits, $100,000 and over                              |   | **(4,494**                  | **)**      | 1,775      |   |
| Net  decrease in other time deposits                                                      |   | **(18,151**                 | **)**      | (3,252     | )      |
| Net  increase (decrease) in securities sold under agreements to repurchase                |   | **6**                       | ** ** | (50        | )      |
| Proceeds  from sale of treasury shares                                                    |   | **95**                      | ** ** | —     |   |
| Proceeds  of borrowings                                                                   |   | **6,000**                   | ** ** | —     |   |
| Repayment  of borrowings                                                                  |   | **(4,025**                  | **)**      | (24        | )      |
| Cash  dividends paid                                                                      |   | **(103**                    | **)**      | (205       | )      |
| Net  cash used in financing activities                                                    |   | **(22,472**                 | **)**      | (1,584     | )      |
|                                                                                      |   |                        | ** ** |       |   |
| Net  increase in cash and cash equivalents                                                |   | **4,903**                   | ** ** | 9,713      |   |
|                                                                                      |   |                        | ** ** |       |   |
| Cash  and cash equivalents at beginning of period                                         |   | **15,916**                  | ** ** | 19,853     |   |
|                                                                                      |   |                        | ** ** |       |   |
| Cash  and cash equivalents at end of period                                               |   | **$**                       | **20,819** | ** ** | $      | 29,566 |   |
|                                                                                      |   |                        | ** ** |       |   |
| Supplemental  Disclosures                                                                 |   |                        | ** ** |       |   |
| Transfer  of loans held for sale to loan portfolio                                        |   | **$**                       | **5,457**  | ** ** | $      | — |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

6

----

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**Notes to Unaudited ConsolidatedFinancial Statements**

**June 30, 2004**

 

(1)                                  Basisof Presentation

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions to Form 10-QSB and, therefore, do not includeall of the information and notes required by accounting principles generallyaccepted in the United States of America for complete consolidated financialstatements.  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, 2003.  Certain amountsin the 2003 consolidated financial statements have been reclassified to conformto the 2004 presentation.  Suchreclassifications have no effect on previously reported consolidated net incomeor shareholders’ equity.  Theconsolidated balance sheet of the Corporation as of December 31, 2003 hasbeen derived from the audited consolidated balance sheet of the Corporation asof that date.

 

Resultsfor the three and six months ended June 30, 2004 may not be indicative ofthe annual performance of Illini Corporation or the subsidiary banks, IlliniBank and Farmers 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 theconsolidated financial statements (unaudited) in conformity with accountingprinciples generally accepted in the United States of America.  Actual results could differ from thoseestimates.

 

(2)                                  Earnings/ (Loss) per Common Share

 

Earningsper share represents income available to common shareholders divided by theweighted average number of shares outstanding during the period.  The Corporation has no common equivalentshares that could cause dilution.  Thefollowing information was used in the computation of basic and diluted earningsper share.

 
|                                        |   | **Three  Months Ended  June 30,**             |       | **Six Months  Ended  June 30,** |       |
|---------------------------------------------|--------|----------------------------------------------------|------------|--------------------------------------|------------|
|                                        |   | **2004**                                           |       | **2003**                             |       | **2004** |   | **2003** |   |
|                                        |   | **(dollars  in thousands, except per share data)** |       |
| Net  Income                                 |   | **$**                                              | **(393**   | **)**                                | $          | 47 | ** ** | **$** | **(1,291** | **)** | $ | 396 |   |
|                                        |   |                                               | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Weighted  average common shares outstanding |   | **414,529**                                        |       | 411,701                              | ** ** | **413,535** |   | 411,701 |   |
|                                             |        |                                                    |            |                                      |            |  |  |  |  |  |  |  |  |

 

(3)                      Useof Estimates in the Preparation of Financial Statements

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported period.  Actualresults could differ from those estimates. Significant estimates that are particularly sensitive to change are theallowance for loan losses and the value of other real estate owned.

 

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(4)                      AllowanceFor Loan Losses

 

In originating loans, the Corporation recognizes thatcredit losses will be experienced and the risk of loss will vary with, amongother things, current economic conditions; the type of loan being made; thecreditworthiness of the borrower over the term of the loan; and in the case ofa collateralized loan, the quality of the collateral for such loan.  The allowance for loan losses represents theCorporation’s estimate of the allowance necessary to provide for probableincurred losses in the loan portfolio. In making this determination, the Corporation analyzes the ultimatecollectibility of the loans in its portfolio, incorporating feedback providedby internal loan staff, the independent loan review function and informationprovided by examinations performed by regulatory agencies.  The Corporation makes an ongoing evaluationas to the adequacy of the allowance for loan losses.  Transactions in the allowance for loan losses for the six monthsended June 30, 2004 and 2003 are summarized below:

 
|                             |   | **Six months  ended  June 30,** |        |
|----------------------------------|--------|--------------------------------------|-------------|
|                             |   | **2004**                             |        | **2003** |   |
|                             |   | **(dollars  in thousands)**          |        |
| **Allowance  for Loan Losses:**  |   |                                 |        |   |   |
| Balance  at beginning of period  |   | **$**                                | **2,359**   | ** ** | $ | 2,468 |   |
|                             |   |                                 | ** **  |   |   |
| Charge-offs                      |   | **(1,149**                           | **)**       | (732 | ) |
| Recoveries                       |   | **35**                               | ** **  | 68 |   |
| Net  charge-offs                 |   | **(1,114**                           | **)**       | (664 | ) |
|                             |   |                                 | ** **  |   |   |
| Provision  charged to operations |   | **1,390**                            | ** **  | 150 |   |
| Balance  at end of period        |   | **$**                                | **2,635**   | ** ** | $ | 1,954 |   |
| Average  loans outstanding       |   | **$**                                | **183,469** | ** ** | $ | 203,343 |   |

 

(5)                      RegulatoryExamination 

 

Illini operates in a regulated industry and is subjectto various regulatory constraints, including some which limit the amount ofdividends that may be paid by a subsidiary bank or which require priorregulatory approval.  At June 30,2004 Illini Bank had retained earnings of approximately $2,600,000 available tobe paid to the Corporation and still be considered well capitalized and FarmersState Bank of Camp Point had retained earnings of approximately $750,000 to bepaid to the Corporation and still be considered well capitalized.  The memorandum of understanding discussedbelow requires prior regulatory approval before the payment of any dividends byIllini Bank.

 

During March of 2004 a safety and soundnessexamination was commenced by the primary regulators of Illini Bank (Illini).

 

In May Illini Bank entered into a memorandum ofunderstanding with the F.D.I.C. and the Illinois Office of Banks and RealEstate, which includes prior regulatory approval for payment of dividends byIllini Bank.  In July IlliniCorporation approved a resolution requested by the Federal Reserve Bank ofChicago that includes restrictions similar to the above memorandum ofunderstanding.  Cost associated withcompliance to these agreements will be minimal, primarily related to additionalreporting requirements while the agreements are in effect.  Management believes that these agreementsshould have no material adverse affects on the operations or financialperformance of the company.

 

8

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**PARTI - Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**THREEAND SIX MONTHS ENDED JUNE 30, 2004**

 

**SELECTEDFINANCIAL RESULTS**

 

The following table shows selected financial resultsand measures for the three and six months ended June 30, 2004 comparedwith the same period in 2003.

 
|                            |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|---------------------------------|--------|---------------------------------------|------------|-------------------------------------|--------|
|                            |   | **2004**                              |       | **2003**                            |   | **Change** |   | **Change- %** |   | **2004** |   | **2003** |   | **Change** |   | **Change- %** |   |
|                            |   | **(dollars  in thousands)**           |       |
| Net  income                     |   | **$**                                 | **(393**   | **)**                               | $      | 47 |   | $ | (440 | ) | (936.2 | )% | **$** | **(1,291** | **)** | $ | 396 |   | $ | (1,687 | ) | (426.1 | )% |
| Average  assets                 |   | **245,395**                           | ** ** | 280,398                             |   | (35,003 | ) | (12.5 | )% | **250,773** | ** ** | 280,372 |   | (29,599 | ) | (10.6 | )% |
| Average  equity                 |   | **13,947**                            | ** ** | 15,901                              |   | (1,954 | ) | (12.3 | )% | **14,270** | ** ** | 15,669 |   | (1,399 | ) | (9.0 | )% |
| Return  on assets               |   | **(0.64**                             | **)%**     | 0.07                                | %      | (0.71 | )% | (1,014.3 | )% | **(1.03** | **)%** | 0.28 | % | (1.31 | )% | (467.9 | )% |
| Return  on equity               |   | **(11.30**                            | **)%**     | 1.19                                | %      | (12.49 | )% | (1,049.6 | )% | **(18.14** | **)%** | 5.10 | % | (23.24 | )% | (455.7 | )% |
| Efficiency  ratio               |   | **129.58**                            | **%**      | 94.43                               | %      | 35.15 | % | 37.3 | % | **115.57** | **%** | 84.83 | % | 30.74 | % | 36.3 | % |
| Dividend  payout ratio          |   | **(26.37**                            | **)%**     | 218.99                              | %      | (245.36 | )% | (112.1 | )% | **(8.01** | **)%** | 51.98 | % | (59.99 | )% | (115.4 | )% |
| Equity  to assets ratio         |   | **5.68**                              | **%**      | 5.67                                | %      | 0.01 | % | 0.2 | % | **5.69** | **%** | 5.59 | % | 0.10 | % | 1.8 | % |
| Tier  1 leverage ratio          |   | **6.06**                              | **%**      | 5.91                                | %      | 0.15 | % | 2.6 | % |   | ** ** |   |   |   |   |   |   |
| Total  risk-based capital ratio |   | **11.80**                             | **%**      | 10.89                               | %      | 0.91 | % | 8.4 | % |   | ** ** |   |   |   |   |   |   |
|                                 |        |                                       |            |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Definitions of ratios:

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

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

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

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

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

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

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

 

The Corporation recorded a net operating loss of$393,000 for the three months ended June 30, 2004, down $440,000 from thenet income of $47,000 for the same period in 2003, and a net operating loss of$1,291,000 for the six months ended June 30, 2004, down $1,687,000 fromthe net income of $396,000 for the first half of 2003.  The return on average equity for the threemonths ended June 30, 2004 was a negative 11.30% as compared to positive1.19% for the same period ended June 30, 2003.  Return on average equity for the six-month period endedJune 30, 2004 was a negative 18.14% as compared to a positive 5.10% forthe same period in 2003.  Similarly,basic and diluted earnings per share for the three months ended June 30,2004 was $(0.95) per share versus $0.11 for the same quarter in 2003,representing a decrease of 963.6%. Basic and diluted earnings per share for the six months endedJune 30, 2004 was $(3.12) per share versus $0.96 for the same period in2003, representing a decrease of 425.0%. Three main activities contributed to the decrease in earnings during thesecond quarter of 2004:  the reductionin the carrying values on two properties in other real estate owned; the losson sales of mortgage loans; and an increase in salaries and employee benefitsexpense. These items are discussed in more detail in the Results of Operationssection of this document.

 

9

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**FINANCIAL CONDITION**

 

Average earning assets ofthe Corporation for the first six months of 2004 decreased by $29.8 million(11.5%) to $228.7 million, from $258.5 million for the same period in 2003.

 

Average loans decreased$21.7 million (10.9%) to $177.2 million for the three months ended June 30,2004, compared to $198.9 million for the same period in 2003.  Declines in average balances were seen inmajor categories of the loan portfolio, ranging from the $6.5 million decreasein commercial real estate loans, to $4.9 million in commercial loans, $4.5million in residential real estate loans, $3.3 million in consumer and creditcard loans, and $2.5 million in agricultural loans.  These decreases are reflective of management’s continued effortsto remove marginal credits from the books of Illini Bank (“Illini”) and focuson strengthening the remaining loan relationships.  In addition, during the second quarter of 2004, Ilini sold allloans that were classified as held for sale, except for $5.5 million that wastransferred into Illini’s loan portfolio at lower of cost or market.  As of March 31, 2004 the amount ofthese loans totaled $15.2 million. Illini experienced a loss on the sale or transfer of these loans in theamount of $226,000, which is reflected on Illini’s income statement.  These loans were sold or transferred due tothe decrease in activity in the secondary market.

 

Average loans decreased$19.8 million (9.7%) to $183.5 million for the six months ended June 30,2004, compared to $203.3 million for the same period in 2003.  Declines in average balances were seen inmajor categories of the loan portfolio, ranging from the $8.4 million decreasein commercial real estate loans, to $3.7 million in commercial loans, $3.3million in consumer and credit card loans, $2.7 million in agricultural loans,and $1.1 million in residential real estate loans.  These decreases are reflective of management’s continued effortsto remove marginal credits from the books of Illini and focus on strengtheningthe remaining loan relationships.

 

Average balances of thesecurities portfolio decreased by $2.4 million for the three months andincreased $1.1 million for the six months ended June 30, 2004, as comparedto the same periods in 2003.  Thisincrease was more than offset by a decrease of $10.8 million in short-terminvestments from June 30, 2003 to June 30, 2004 in the six-monthperiod-to-period comparison.

 

During the latter part of2003, management made the conscious decision to reduce its exposure to out ofthe area certificates of deposit as a funding source for loan and investmentactivity.  The impact of this decisioncontinues to be seen in the Corporation’s deposit portfolio, as time depositsless than $100,000 decreased $27.2 million and time deposits $100,000 and overdecreased $8.5 million, respectively, for the first half of 2004 as compared tothe same period in 2003.  These declineswere partially offset by reductions in the loan portfolio and in short-terminvestments, along with an increase in borrowings from the Federal Home LoanBank of Chicago, a lower cost alternative funding source.  The net effect of these actions was areduction in the Corporation’s funding costs of 70 basis points, to 2.43% forthe first half of 2004, as compared to 3.13% for the same period in 2003.  As a result, the Corporation was able toincrease its net interest margin for the six months ended June 30, 2004 to4.00%, an increase of 50 basis points from the 3.50% reported for the firsthalf of 2003.

 

The subsidiary banksmaintain an overnight federal funds line of credit with an unaffiliatedfinancial institution and a collateralized borrowing capacity with the FederalHome Loan Bank of Chicago.

 

**RESULTS OF OPERATIONS**

 

This discussion should beread in conjunction with the consolidated financial statements, notes, and tablesincluded elsewhere in this report and in the 2003 Illini Corporation AnnualReport on Form 10-KSB (2003 Form 10-KSB).

 

10

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Net Interest Income

 

The following tables showaverage balances and related interest income or interest expense, with theresulting average yield or rate by category of average earning assets orinterest bearing liabilities.  Interestincome and the resulting net interest income are shown on a tax equivalentbasis.

 

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

 
|                                             |   | **Three  months ended June 30,** |        |
|--------------------------------------------------|--------|---------------------------------------|-------------|
|                                             |   | **2004**                              |        | **2003** |   |
|                                             |   | **Average  Balance**                  |        | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                             |   | **(dollars  in thousands)**           |        |
| **ASSETS**                                       |   |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                        |   |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                          |   | **$**                                 | **10,527**  | ** ** | **$** | **24** | ** ** | **0.90** | **%** | $ | 20,382 |   | $ | 54 |   | 1.07 | % |
| Investment  securities (3)                       |   |                                  | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Taxable                                          |   | **24,682**                            | ** **  | **226** | ** ** | **3.67** | ** ** | 24,932 |   | 185 |   | 2.97 |   |
| Tax-exempt  (1)                                  |   | **13,607**                            | ** **  | **260** | ** ** | **7.65** | ** ** | 15,707 |   | 331 |   | 8.44 |   |
| Total  securities                                |   | **38,289**                            | ** **  | **486** | ** ** | **5.08** | ** ** | 40,639 |   | 516 |   | 5.08 |   |
| Loans                                            |   |                                  | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial  (1)                                  |   | **33,558**                            | ** **  | **518** | ** ** | **6.19** | ** ** | 38,410 |   | 626 |   | 6.54 |   |
| Agriculture                                      |   | **12,300**                            | ** **  | **145** | ** ** | **4.74** | ** ** | 14,788 |   | 199 |   | 5.40 |   |
| Real  estate                                     |   |                                  | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial                                       |   | **91,122**                            | ** **  | **1,651** | ** ** | **7.27** | ** ** | 97,593 |   | 1,475 |   | 6.06 |   |
| Agriculture                                      |   | **5,854**                             | ** **  | **104** | ** ** | **7.12** | ** ** | 6,024 |   | 118 |   | 7.85 |   |
| Residential                                      |   | **29,139**                            | ** **  | **439** | ** ** | **6.04** | ** ** | 33,613 |   | 581 |   | 6.94 |   |
| Consumer,  net                                   |   | **4,595**                             | ** **  | **96** | ** ** | **8.40** | ** ** | 7,751 |   | 173 |   | 8.97 |   |
| Credit  card                                     |   | **664**                               | ** **  | **29** | ** ** | **17.27** | ** ** | 763 |   | 33 |   | 17.15 |   |
| Total  loans                                     |   | **177,232**                           | ** **  | **2,982** | ** ** | **6.75** | ** ** | 198,942 |   | 3,205 |   | 6.46 |   |
| Allowance  for loan losses                       |   | **(2,664**                            | **)**       |   |   |   | ** ** | (2,078 | ) |   | ** ** |   | ** ** |
| Net  loans (1) (2)                               |   | **174,568**                           | ** **  | **2,982** | ** ** | **6.85** | ** ** | 196,864 |   | 3,205 |   | 6.53 |   |
| Total  interest-earning assets                   |   | **223,384**                           | ** **  | **3,492** | ** ** | **6.27** | ** ** | 257,885 |   | 3,775 |   | 5.87 |   |
| Other  assets                                    |   | **22,011**                            | ** **  |   |   |   | ** ** | 22,513 |   |   |   |   |   |
| Total  assets                                    |   | **$**                                 | **245,395** | ** ** |   |   |   | ** ** | $ | 280,398 |   |   |   |   |   |
| **LIABILITIES**                                  |   |                                  | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |   |                                  | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Deposits:                                        |   |                                  | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  demand                         |   | **$**                                 | **55,981**  | ** ** | **$** | **112** | ** ** | **0.80** | **%** | $ | 57,457 |   | $ | 134 |   | 0.93 | % |
| Savings                                          |   | **22,623**                            | ** **  | **34** | ** ** | **0.60** | ** ** | 21,848 |   | 41 |   | 0.76 |   |
| Time  deposits less than $100,000                |   | **78,941**                            | ** **  | **556** | ** ** | **2.83** | ** ** | 109,017 |   | 1,016 |   | 3.74 |   |
| Time  deposits $100,000 and over                 |   | **14,828**                            | ** **  | **111** | ** ** | **3.00** | ** ** | 24,841 |   | 213 |   | 3.43 |   |
| Total  interest-bearing deposits                 |   | **172,373**                           | ** **  | **813** | ** ** | **1.89** | ** ** | 213,163 |   | 1,404 |   | 2.64 |   |
| Short-term  borrowings                           |   | **552**                               | ** **  | **3** | ** ** | **2.48** | ** ** | 635 |   | 4 |   | 2.79 |   |
| Long-term  borrowings                            |   | **13,322**                            | ** **  | **96** | ** ** | **2.90** | ** ** | 8,371 |   | 98 |   | 4.70 |   |
| Subordinated  debentures (4)                     |   | **9,000**                             | ** **  | **229** | ** ** | **10.21** | ** ** | 9,000 |   | 229 |   | 10.23 |   |
| Total  interest-bearing liabilities              |   | **195,247**                           | ** **  | **1,141** | ** ** | **2.34** | ** ** | 231,169 |   | 1,735 |   | 3.01 |   |
| Other  liabilities                               |   | **36,201**                            | ** **  |   |   |   | ** ** | 33,328 |   |   |   |   |   |
| Shareholders’  equity                       |   | **13,947**                            | ** **  |   |   |   | ** ** | 15,901 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | **$**                                 | **245,395** | ** ** |   |   |   | ** ** | $ | 280,398 |   |   |   |   |   |
| **Net  interest margin**                         |   |                                  |        | **$** | **2,351** | ** ** | **4.22** | **%** |   |   | $ | 2,040 |   | 3.17 | % |

 

11

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

 

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $84,000 in 2004 and$103,000 in 2003.

 

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

 

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

 

Net interest margin is ameasure of the net return on interest-earning assets and is computed bydividing annualized net interest income by the average of totalinterest-earning assets for the period.

 

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

 
|                                             |   | **Six months  ended June 30,** |        |
|--------------------------------------------------|--------|-------------------------------------|-------------|
|                                             |   | **2004**                            |        | **2003** |   |
|                                             |   | **Average  Balance**                |        | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                             |   | **(dollars  in thousands)**         | ** **  |
| **ASSETS**                                       |   |                                |        |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                        |   |                                |        |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                          |   | **$**                               | **6,764**   | ** ** | **$** | **30** | ** ** | **0.88** | **%** | $ | 17,578 |   | $ | 96 |   | 1.10 | % |
| Investment  securities (3)                       |   |                                | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Taxable                                          |   | **27,258**                          | ** **  | **516** | ** ** | **3.78** | ** ** | 24,007 |   | 454 |   | 3.78 |   |
| Tax-exempt  (1)                                  |   | **13,648**                          | ** **  | **522** | ** ** | **7.66** | ** ** | 15,842 |   | 668 |   | 8.44 |   |
| Total  securities                                |   | **40,906**                          | ** **  | **1,038** | ** ** | **5.08** | ** ** | 39,849 |   | 1,122 |   | 5.63 |   |
| Loans                                            |   |                                | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Commercial  (1)                                  |   | **35,339**                          | ** **  | **1,061** | ** ** | **6.02** | ** ** | 39,030 |   | 1,291 |   | 6.67 |   |
| Agriculture                                      |   | **12,815**                          | ** **  | **314** | ** ** | **4.91** | ** ** | 15,493 |   | 421 |   | 5.48 |   |
| Real  estate                                     |   |                                | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Commercial                                       |   | **90,525**                          | ** **  | **3,065** | ** ** | **6.79** | ** ** | 98,951 |   | 3,258 |   | 6.64 |   |
| Agriculture                                      |   | **5,748**                           | ** **  | **209** | ** ** | **7.29** | ** ** | 6,368 |   | 247 |   | 7.81 |   |
| Residential                                      |   | **33,380**                          | ** **  | **993** | ** ** | **5.97** | ** ** | 34,496 |   | 1,196 |   | 6.99 |   |
| Consumer,  net                                   |   | **4,987**                           | ** **  | **209** | ** ** | **8.40** | ** ** | 8,216 |   | 366 |   | 8.99 |   |
| Credit  card                                     |   | **675**                             | ** **  | **58** | ** ** | **17.20** | ** ** | 789 |   | 68 |   | 17.30 |   |
| Total  loans                                     |   | **183,469**                         | ** **  | **5,909** | ** ** | **6.46** | ** ** | 203,343 |   | 6,847 |   | 6.79 |   |
| Allowance  for loan losses                       |   | **(2,453**                          | **)**       |   |   |   | ** ** | (2,314 | ) |   | ** ** |   | ** ** |
| Net  loans (1) (2)                               |   | **181,016**                         | ** **  | **5,909** | ** ** | **6.55** | ** ** | 201,029 |   | 6,847 |   | 6.87 |   |
| Total  interest-earning assets                   |   | **228,686**                         | ** **  | **6,977** | ** ** | **6.12** | ** ** | 258,456 |   | 8,065 |   | 6.29 |   |
| Other  assets                                    |   | **22,087**                          | ** **  |   | ** ** |   | ** ** | 21,916 |   |   |   |   |   |
| Total  assets                                    |   | **$**                               | **250,773** | ** ** |   | ** ** |   | ** ** | $ | 280,372 |   |   |   |   |   |
| **LIABILITIES**                                  |   |                                | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |   |                                | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Deposits:                                        |   |                                | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  demand                         |   | **$**                               | **56,146**  | ** ** | **$** | **220** | ** ** | **0.78** | **%** | $ | 57,589 |   | $ | 317 |   | 1.11 | % |
| Savings                                          |   | **22,207**                          | ** **  | **67** | ** ** | **0.60** | ** ** | 21,215 |   | 90 |   | 0.86 |   |
| Time  deposits less than $100,000                |   | **82,929**                          | ** **  | **1,217** | ** ** | **2.94** | ** ** | 110,096 |   | 2,071 |   | 3.79 |   |
| Time  deposits $100,000 and over                 |   | **15,382**                          | ** **  | **237** | ** ** | **3.09** | ** ** | 23,926 |   | 429 |   | 3.61 |   |
| Total  interest-bearing deposits                 |   | **176,664**                         | ** **  | **1,741** | ** ** | **1.98** | ** ** | 212,826 |   | 2,907 |   | 2.75 |   |
| Short-term  borrowings                           |   | **1,404**                           | ** **  | **12** | ** ** | **1.77** | ** ** | 646 |   | 10 |   | 3.02 |   |
| Long-term  borrowings                            |   | **12,669**                          | ** **  | **195** | ** ** | **3.09** | ** ** | 8,377 |   | 195 |   | 4.70 |   |
| Subordinated  debentures (4)                     |   | **9,000**                           | ** **  | **473** | ** ** | **10.55** | ** ** | 9,000 |   | 473 |   | 10.60 |   |
| Total  interest-bearing liabilities              |   | **199,737**                         | ** **  | **2,421** | ** ** | **2.43** | ** ** | 230,849 |   | 3,585 |   | 3.13 |   |
| Other  liabilities                               |   | **36,766**                          | ** **  |   | ** ** |   | ** ** | 33,854 |   |   |   |   |   |
| Shareholders’  equity                       |   | **14,270**                          | ** **  |   | ** ** |   | ** ** | 15,669 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | **$**                               | **250,773** | ** ** |   | ** ** |   | ** ** | $ | 280,372 |   |   |   |   |   |
| **Net  interest margin**                         |   |                                |        | **$** | **4,556** | ** ** | **4.00** | **%** |   |   | $ | 4,480 | ** ** | 3.50 | % |
|                                                  |        |                                     |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $193,000 in 2004 and$218,000 in 2003.

 

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

 

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

 

Net interest margin is ameasure of the net return on interest-earning assets and is computed bydividing annualized net interest income by the average of totalinterest-earning assets for the period.

 

Net interest income on atax equivalent basis for the first half of 2004 was $4.6 million, up $76,000(1.7%) from the $4.5 million reported for the same quarter in 2003.  This increase resulted from changes in thevolume of assets and liabilities, as well as changes in interest rates.

 

Provision for Loan Losses

 

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

 

The provision for loanlosses charged to operating expense for the six months ended June 30, 2004was $1,390,000, up significantly from the $150,000 reported during the firsthalf of 2003.  During the first quarterof 2004, Illini charged-off impaired loans totaling $909,000.  Two credit relationships in particular,which had previously been identified by management and had an allowance ofapproximately $607,000 allocated to them at December 31, 2003, comprised$753,000 of this total.  As aconsequence of these charge-offs, as well as an increase in impaired loans andan increase in classified assets as a result of improved reporting systems(credit quality and production), management determined to record a provision of$1,350,000 to Illini’s allowance for loan losses during the first quarter of2004.  During the second quarter of2004, management completed their

 

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quarterly evaluation ofthe adequacy of the allowance for loan losses and determined that they did notneed to make a provision to the allowance for loan losses.  Management believes that the allowance forloan losses is a level estimated to be adequate to cover probable incurredlosses in its loan portfolio.

 

Management remainswatchful of credit quality issues and believes that current issues with theportfolio are reflective of a challenging economic environment.  Should the economic climate fail to improve,borrowers may experience difficulty, and consequently, the level ofnonperforming loans, charge-offs and delinquencies could rise and requirefurther increases in the provision for loan losses.  Management continues to monitor the loan portfolio.

 

Noninterest Income

 

Non-interest income forthe second quarter of 2004 was $391,000 and for the six-month period endedJune 30, 2004 was $894,000, down 34.6% and 21.3%, respectively, whencompared to the same periods in 2003. The Corporation continues to experience solid growth in fee income, withservice charges on deposit accounts up $104,000 (15.7%) and mortgage loanservicing fees up $98,000 when compared to the first six months of 2003.  Negatively impacting this growth were thefollowing:  net losses of $212,000 fromthe sale/transfer of mortgage loans (previously mentioned in the March 31,2004 10-QSB); and a reduction of $108,000 in other fee income, compared to thesame six month period in 2003.

 

Noninterest Expense

 

Non-interest expense forthe first six months of 2004 was $6,213,000, an increase of $1,449,000 (30.4%)compared to the first half of 2003. This increase continues to be focused in two primary areas, salaries andemployee benefits, up $309,000 (13.0%), and loan foreclosure and other realestate owned expense, up $1,204,000 (510.2%).

 

During the second quarterof 2004 Illini undertook an organizational restructuring project.  The culmination of this project resulted inthe elimination of two senior level positions. Terms of the employment contracts for these two individuals affordedthese individuals the option of receiving severance pay over a finite period oftime, or in a lump sum payout.  Both individualselected the lump sum payout and those amounts were expensed during the secondquarter.

 

The increase in loanforeclosure and other real estate owned expense was primarily related to theother real estate loan category.  Aspreviously mentioned in the March 2004 Form 10-QSB, Illini reduced thecarrying value of two properties by an aggregate $455,000 during the firstquarter.  During the second quarterIllini reduced the carrying value of two properties by an aggregate amount of$548,000, based upon the values of signed contracts for purchase of those twoproperties, which were received during the latter part of the second quarter.In addition, as indicated in the first quarter, the Corporation was incurringcosts to complete one piece of other real estate owned so that it would besuitable for leasing. Expenses associated with the completion totaled $171,000and were expensed as incurred during the second quarter.  The remaining expenses are related to the maintenanceof several other real estate owned properties.

 

**CREDIT QUALITY**

 

Allowance for Loan Losses

 

When the subsidiary banks(Banks) originate loans, they recognize that credit losses will be experienced,and that all these loans carry varying degrees of risk, such as:  economic conditions; the creditworthiness ofthe

 

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borrower; the type ofloan being made; and, with loans secured by collateral, the quality of thecollateral for the loan.  The allowancefor loan losses represents the Banks’ estimate of the level of allowancenecessary to provide for probable incurred losses in the loan portfolio.  The Banks analyze the collectibility of theloans in their respective portfolios, using information provided by internalloan staff, the loan review function, and information provided by examinationsperformed by regulatory agencies.  TheBanks perform an ongoing evaluation as to the adequacy of the allowance forloan losses.

 

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

 

At June 30, 2004,the allowance for loan losses was $2.6 million, or 1.57% of total loans.  This compares to the $2.4 million (1.25%)and $2.0 million (0.99%) reported at December 31, 2003 and June 30,2003, respectively.  The change fromDecember 31, 2003 is due to the continued level of nonperforming loans,the increase in impaired loans, and the downgrading of some of those loansduring the first half of 2004.

 

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

 
| **Credit Quality**                  |   | **June 30,  2004**     |       | **December 31,  2003** |   | **June 30,  2003** |   |
|-------------------------------------|--------|-----------------------------|------------|-----------------------------|--------|-------------------------|--------|
|                                |   | **(dollars  in thousands)** |       |
| **Nonperforming assets:**           |   |                        |       |                        |   |                    |   |
| Accruing  loans past due 90 days    |   | **$**                       | **10**     | ** **                  | $      | 9                       |   | $ | 9 |   |
| Nonaccrual                          |   | **3,164**                   | ** ** | 5,505                       |   | 3,616                   |   |
| Renegotiated                        |   | **—**                  | ** ** | —                      |   | 619                     |   |
| Other  real estate owned            |   | **3,324**                   | ** ** | 3,918                       |   | 3,870                   |   |
| Total  nonperforming assets         |   | **$**                       | **6,498**  | ** **                  | $      | 9,432                   |   | $ | 8,114 |   |
|                                |   |                        | ** ** |                        |   |                    |   |
| **Key ratios:**                     |   |                        | ** ** |                        |   |                    |   |
| Nonperforming  loans to loans       |   | **1.89**                    | **%**      | 2.93                        | %      | 2.15                    | %      |
| 90  days delinquent to ending loans |   | **0.01**                    | ** ** | 0.00                        |   | 0.00                    |   |
| Allowance  to total loans           |   | **1.57**                    | ** ** | 1.25                        |   | 0.99                    |   |
| Allowance  to nonperforming loans   |   | **83.02**                   | ** ** | 42.79                       |   | 46.04                   |   |

 

Nonperforming Assets

 

Nonperforming andrenegotiated loans at June 30, 2004 totaled $3.2 million, down $2.3million (or 42.4%) from December 31, 2003, and down $1.1 million (25.2%)from June 30, 2003.  Nonaccrualloans comprise the majority of the nonperforming loans.  Nonaccrual loans decreased primarily due tothe transfer of loans to other real estate owned and the payoff of loansoutstanding.  The classification of aloan as nonaccrual does not necessarily indicate that the principal isuncollectible, in whole or in part.  TheBanks make a determination as to the collectibility on a case-by-casebasis.  The Banks consider the adequacyof the collateral and the other resources of the borrower in determining thesteps to be taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon thespecific facts of each situation. Alternatives that are typically considered to collect nonaccrual loansare foreclosure, collection under guarantees, loan restructuring, or judicialcollection actions.

 

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Other real estate owneddecreased by $594,000, to $3.3 million, from the $3.9 million reported as ofDecember 31, 2003.  The decreasefrom December 31, 2003 was based primarily on the writedown of threeproperties ($1 million), the sale of four properties during the first sixmonths ($285,000) and the addition of two properties during the second quarter($700,000).  See previous discussion ofother real estate owned under noninterest expense.

 

Illini Corporation’s loanunderwriting guidelines and credit review procedures and policies are designedto protect the Corporation from credit losses. Illini Corporation’s process for monitoring loan quality includesdetailed monthly trend analysis of delinquencies and nonperforming assets.  Management extensively monitors significantcredit relationships through appraisals, assessment of the financial conditionof borrowers, restrictions on out-of-area lending, and avoidance of loanconcentrations.

 

As discussed in theCorporation’s 2003 Form 10-KSB and the March 31, 2004 Form 10-QSB reports,management has implemented several initiatives to improve credit quality.  These steps included a new loan policy andimproved reporting systems (credit quality and production).  Management is committed to continuing theseinitiatives.

 

Other Potential Problem Loans

 

The Corporation has otherpotential problem loans that are currently performing, but where some concernsexist as to the ability of the borrower to comply with present loan repaymentterms. Excluding nonperforming loans, these loans totaled $6,097,000 thatmanagement has classified as impaired at June 30, 2004. Managementcurrently considers these loans to be impaired due to declining financialperformance. These classifications are a direct result of improved reportingsystems (credit quality and production). The classification of these loans, however, does not imply thatmanagement expects losses on each of these loans, but believes that a higherlevel of scrutiny and close monitoring is prudent under the circumstances. Suchclassifications relate to specific concerns for each individual borrower and donot relate to any concentration risk common to all loans in this group.

 

**CAPITAL RESOURCES**

 

The current economic andregulatory environment places increased emphasis on capital strength.  A strong capital position, which is vital tothe continued profitability of Illini Corporation, also promotes depositor andinvestor confidence and provides a solid foundation for the future growth ofthe organization.  Illini Corporationhas historically satisfied its capital requirements principally through theretention of earnings.

 

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

 
|                                                   |   | **Regulatory  requirements  to be:** |   | **Actual  Regulatory Capital Ratios** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|
|                                                   |   | **Adequately  Capitalized**          |   | **Well-  Capitalized**                |   | **June 30,  2004** |   | **December 31,  2003** |   |
| Total  risk-based capital as % of risk-weighted assets |   | 8.0                                  | %      | 10.0                                  | %      | 11.9 | % | 11.7 | % |
| Tier  1 capital as % of risk-weighted assets           |   | 4.0                                  | %      | 6.0                                   | %      | 8.0 | % | 8.3 | % |
| Tier  1 capital as % quarterly average assets          |   | 4.0                                  | %      | 5.0                                   | %      | 6.1 | % | 6.3 | % |

 

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Risk-based capitalguidelines require the classification of assets and some off-balance items interms of credit-risk exposure and the measuring of capital as a percentage ofthe risk adjusted asset totals.  Managementbelieves, and data in the above table show that, as of June 30, 2004 andDecember 31, 2003 the Corporation met all capital adequacy requirements towhich it is subject.  As of those dates,the Corporation’s subsidiary banks were “well capitalized” under regulatoryprompt corrective action provisions.

 

Earnings retention isaffected by the Board of Directors’ declaration of cash dividends.  The dividend payout ratio is an indicator ofthe level of earnings retained.  TheBoard of Directors of the Corporation considers the capital strength of theCorporation and the banks in determining the appropriate level of cashdividends to be paid to shareholders. The dividend payout ratio for the three and six months endedJune 30, 2004 was (26.37) and (8.01)% as compared to 218.99% and 51.98%for the three and six months ended June 30, 2003. In March, 2004 theCorporation approved a change in meeting times, electing to meet during thefirst month after each quarter end, so the performance of the Corporation couldbe reviewed on a calendar quarter basis. Consequently, the timing of the declaration of dividends was moved backone month.  As a result, no dividenddeclaration was made in the first quarter of 2004, but instead was declared atApril’s meeting. At its regular quarterly meeting on July 8, 2004, withthe approval of the Federal Reserve Bank of Chicago, the Corporation’s Boardreduced the dividend paid on common stock from $.25 per share per quarter to$.10 per share per quarter.  The recentdecline in earnings, principally due to the higher than normal level ofnon-performing loans and other real estate owned, and losses incurred oncollecting these loans and selling other real estate owned, had reduced desiredcoverage below an acceptable level. This action will allow the Corporation to build its capital reservesback to historical levels.

 

In May Illini Bankentered into a memorandum of understanding with the F.D.I.C. and the IllinoisOffice of Banks and Real Estate, which includes prior approval of dividends byIllini Bank.  In July IlliniCorporation approved a resolution requested by the Federal Reserve Bank ofChicago that includes restrictions similar to the above memorandum ofunderstanding.

 

As discussed in theCorporation’s 2003 Form 10-KSB, the Corporation has $9 million of trustpreferred securities outstanding. Twenty Five (25) percent of the Tier 1 capital ratio can be comprised ofthe trust preferred issue.  As ofJune 30, 2004, the portion eligible for inclusion in the Tier 1computation amounted to approximately $4.2 million.

 

**LIQUIDITY**

 

Illini Corporation’spolicy is to manage interest rate risk to a level, which places limits on thesensitivity of its earnings to changes in market interest rates.  An explanation of the asset/liability managementprocess is found in the Corporation’s 2003 Form 10-KSB, beginning on page 16.

 

The asset portion of thebalance sheet provides liquidity primarily through loan principal repayments,maturities of investment securities, and sales of investment securitiesavailable for sale.  The liability sideof the balance sheet provides liquidity through various customers’interest-bearing and noninterest-bearing deposit accounts.  Short-term borrowings are an additionalsource of liquidity and represent Illini Corporation’s incremental borrowingcapacity.

 

Illini Corporation uses acomprehensive analysis of its asset/liability function, including a review ofits funds management policy and its principal measure of liquidity.  The Corporation utilizes a liquidity measurement,called “Basic Surplus,” which redefines liquid assets as the total availableassets held by the Corporation which can be converted to cash in thirty days orless, reduced by short term liabilities, plus

 

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availableborrowings.  As of June 30, 2004,the most recent calculation, Illini Corporation’s basic surplus was $37.2million, or 14.9% of total average assets.

 

Management believes theformula provides an accurate measurement of liquidity and provides managementwith a comprehensible and consistent tool to develop pricing and profitabilitystrategies.  Based on the newmeasurement and as compared to peer banks, management believes the liquidityposition of the banks is strong.

 

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

 

An evaluation wasperformed under the supervision and with the participation of the Corporation’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Corporation’sdisclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of June 30,2004. Based on that evaluation, the Corporation’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Corporation’sdisclosure controls and procedures were effective. There have been nosignificant changes in the Corporation’s internal controls or in other factorsduring the first six months of 2004 that could significantly affect internalcontrols.  While management concludedthe disclosure controls and procedures are adequate in all material respectsfor SEC reporting purposes, the Corporation is currently reviewing its policiesand procedures regarding identification and classification of impaired loans,its asset review process, and its process for valuing other real estate owned.

 

**PARTII.  OTHER INFORMATION**

 

Item 1 LegalProceedings 

 

Various legal claims havearisen against Illini Corporation in the normal course of business, which, inthe opinion of Illini Corporation management, will not result in any materialliability to Illini Corporation.  Of theThree (3) cases previously reported, two cases are pending and one case hasbeen closed as of July 20, 2004.

 

The first case was filedin 1998 by a shareholder of Illini Corporation against Illinois Stock TransferCompany, as Rights Agent for Illini Corporation under Illini Corporation’sShareholder Rights Agreement (“Rights Agreement”), for specific performance ofthe Rights Agreement, on behalf of the plaintiff individually and on behalf ofa class of Illini Corporation shareholders. The complaint alleged that the Rights Agreement was triggered in April of1998, and the Rights Agent had a duty under the Rights Agreement to distributeRights Certificates to the shareholders of Illini Corporation.  Illini Corporation was added as a Defendantin 1999 and the class certified. Plaintiff was seeking to recover attorney’s fees from Illini Corporationin addition to other relief.  InJanuary of 2000, the trial court entered summary judgment in favor ofIllini Corporation and Illinois Stock Transfer Company.  Plaintiff appealed this ruling denyingPlaintiff’s summary judgment motion to the Illinois Appellate Court.  The Appellate Court reversed the SummaryJudgment for Defendants and remanded the case for trial on the issue of whetherthe Illini Corporation Board of Directors acted in good faith in determining thata shareholder’s acceptance of a gift of Illini Corporation Stock did nottrigger the Rights Agreement, and in Illini Corporation’s later amendment ofthe Rights Agreement.  The AppellateCourt further ruled the Plaintiff’s attorney’s fees were recoverable under theRights Agreement.  After a series ofunsuccessful motions filed by the plaintiff’s counsel, Illini Corporationentered a motion to remove the plaintiff’s attorney.  The court removed the attorney for the plaintiff class andappointed new counsel to represent the class. The removed counsel filed a motion for reconsideration, which wasdenied.  The new counsel filed a MotionFor Direction to remove the class representative, which was granted onJanuary 15,

 

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2003.  On March 7, 2003 the trial courtappointed a successor class representative. The Corporation has negotiated asettlement of the suit with the new class representative and classcounsel.  The terms of that settlementhave been agreed upon and approved by the court.  The agreement provides for a complete resolution of theshareholder claims and a portion of the claims for attorney fees for the classrepresentative.  Illini has accrued forthis expense and it will have no adverse impact on the Corporation.  The court will also be asked to deny the feerequest filed by the attorney for the original class representative. Thatproceeding should be concluded as soon as it is scheduled for hearing by theCourt.  Removed counsel has filed an appealof certain decisions made by the trial court, and that appeal is pending in theFourth Appellate Court of Illinois.

 

The second case was filedin August of 2001 by a shareholder against a former shareholder andseveral past and present directors of Illini Corporation.  The complaint purports to bring a derivativecause of action arising out of the redemption of the shares of the formershareholder, which is alleged to have caused the defendants to breach theShareholder Rights Agreement.  Thecomplaint seeks rescission of the stock redemption and recovery of plaintiff’sattorney’s fees.  In July 2002, thecourt ordered this derivative suit stayed pending a decision in otherlitigation.  In October 2003, plaintiffmoved to dismiss the case without prejudice and for an award of attorney’sfees.  Illini Corporation did not opposethe motion to dismiss the case and that motion was granted.  Illini Corporation did oppose the requestfor attorney’s fees filed by plaintiff’s attorney.  The request for attorney fees was denied by the Court.  The decision of the trial court denying therequest that Illini Corporation pay plaintiff’s attorney’s fees was beingappealed to the Fourth District, Illinois Appellate Court, but plaintiffdismissed the appeal.  The case is nowconcluded.

 

In April 2003,Illini Corporation, its directors, and one of its officers were named asdefendants in a complaint filed in the Circuit Court of Sangamon County.  Plaintiffs seek to rescind the StockPurchase Agreement entered into by the Corporation in 2001 to purchaseapproximately 30% of its common shares from a minority shareholder group.  The Stock Purchase Agreement was a normalbusiness transaction beneficial to the Corporation’s shareholders and wasentered into after appropriate due diligence and consultation with the Corporation’soutside financial advisors.  TheCorporation has filed motions to dismiss on the basis of a prior pending actionand a motion for a stay of proceedings until review of the case by itsindependent directors.  That review hasbeen completed, with a determination by the independent directors that theStock Purchase Agreement was in the best interests of the Corporation and itsshareholders and that the directors acted in good faith in entering into theStock Purchase Agreement.  Thosemotions are still pending.  TheCorporation will vigorously defend the lawsuit.

 

Item 2                Changes inSecurities - none

 

Item 3                Defaults UponSenior Securities – none

 

Item 4                Submission ofMatters to a Vote of Security Holders –

The Annual Meeting ofShareholders of the Corporation was held on May 20, 2004, for the purpose ofelecting five directors each to serve a term of three years and ratifying theappointment of Crowe Chizek and Company LLC as the Corporation’s independentauditors for fiscal year ending December 31, 2004. Proxies for the meetingwere solicited by management pursuant to Regulation 14A under SecuritiesExchange Act of 1934, and there was no solicitation in opposition tomanagement’s solicitation.

 

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All five of Management’snominees for director listed in the proxy statement were elected.  The results of the vote were as follows:

 
|                 |   | **Shares  Voted  “For”** |   | **Shares  “Withheld”** |   | **Broker  Non  Votes** |   |
|----------------------|--------|------------------------------------|--------|----------------------------------|--------|------------------------|--------|
| William  B. McCubbin |   | 331,995                            |   | 14,154                           |   | 0                      |   |
| Burnard  K. McHone   |   | 331,475                            |   | 14,674                           |   | 0                      |   |
| Robert  F. Olson     |   | 335,407                            |   | 10,742                           |   | 0                      |   |
| N.  Ronald Thunman   |   | 331,294                            |   | 14,855                           |   | 0                      |   |
| Jane  Schachtsiek    |   | 335,401                            |   | 10,748                           |   | 0                      |   |

 

The appointment of CroweChizek and Company LLC as the Corporation’s auditors for the fiscal year endingDecember 31, 2004, was ratified. The results of the vote were as follows:

 
|                                          |   | **“For”** |   | **“Against”** |   | **“Abstain”** |   |
|-----------------------------------------------|--------|---------------------|--------|-------------------------|--------|-------------------------|--------|
| Ratification  of Crowe Chizek and Company LLC |   | 338,261             |   | 2,892                   |   | 4,996                   |   |

 

Item 5                OtherInformation - none

 

Item 6                Exhibits andReports on Form 8-K

 

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

 

 

(b)           Reportson Form 8-K :

There were no reports onForm 8-K filed for the quarter ended June 30, 2004.

 

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**SIGNATURES**

 

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

 

 
| Illini Corporation         |        |
|----------------------------|-------------|
| (Registrant)               |
|                       |        |
|                       |        |
| By: /s/ Burnard K.  McHone |        | August 12, 2004 |   |
| Burnard K. McHone          | Date signed |
| President                  |        |
|                       |        |
|                       |        |
| By: /s/ Dennis B.  Guthrie |        | August 12, 2004 |   |
| Dennis B. Guthrie          | Date signed |
| Chief Financial Officer    |        |

 

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