**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 March 31, 2004**                     |
|                                                               |   |                                                                                          |
| **o**                                                              |   | **TRANSITION REPORT UNDER****SECTION 13 OR 15(d) OF****THE EXCHANGE ACT**                     |   |
|                                                               |   |                                                                                          |
| **Commission  file number   0-13343**               |
|                                                               |   |                                                                                          |
| **Illini  Corporation**                                            |
| (Exact name of  small business issuer as specified in its charter) |
|                                                               |
| **Illinois**                                                       |   | **37-1135429**                                                                                |
| (State or other  jurisdiction of  incorporation or organization)   |   | (I.R.S. EmployerIdentification No.)                                                           |
|                                                                    |        |                                                                                               |        |  |  |

 

**3200West Iles Avenue, Springfield, Illinois   62707**

(Address ofprincipal executive offices)

 

**(217)787-5111**

(Issuer’stelephone number)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

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

 

As of April 30, 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

March 31, 2004

 
| **PART I.**    | **FINANCIAL INFORMATION** |                                                                                                  |
|----------------|---------------------------|-------------------------------------------------------------------------------------------------------|
|           |                      |                                                                                                  |
|           | Item 1.                   | Financial Statements  (Unaudited)                                                                     |   |
|           |                      |                                                                                                  |   |
|           |                      | Consolidated Balance  Sheets  March 31, 2004 and December 31, 2003                                    |   |
|           |                      |                                                                                                  |   |
|           |                      | Consolidated  Statements of Income / (Loss)  Three Months Ended March 31, 2004 and 2003               |   |
|           |                      |                                                                                                  |   |
|           |                      | Consolidated  Statements of Shareholders’ Equity  Three Months Ended March 31, 2004 and 2003     |   |
|           |                      |                                                                                                  |   |
|           |                      | Consolidated  Statements of Comprehensive Income / (Loss)  Three Months Ended March 31, 2004 and 2003 |   |
|           |                      |                                                                                                  |   |
|           |                      | Consolidated  Statements of Cash Flows  Three Months Ended March 31, 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 of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. These statements involve important known and unknown risks,uncertainties and other factors and can be identified by phrases using“estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,”“potential,” “future,” “may,” “should” and similar expressions or words.  Such forward-looking statements are subjectto risk and uncertainties which could cause actual results to differ materiallyfrom those projected.  Such risks anduncertainties include potential change in interest rates, competitive factorsin the financial services industry, general economic conditions, the effect ofnew legislation and other risks detailed in documents filed by IlliniCorporation with the Securities and Exchange Commission from time to time.*

 

2

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**PARTI.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**March 31, 2004 and December 31, 2003**

**Unaudited**

 
|                                                                                       |   | **March 31,  2004**         |        | **December  31,  2003** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|-------------------------|--------|
|                                                                                       |   | **(dollars  in thousands)** |        |
| **ASSETS**                                                                                 |   |                        |        |                    |   |
| Cash and due  from banks                                                                   |   | **$**                       | **5,216**   | ** **              | $      | 8,623 |   |
| Interest-bearing  deposits in other banks                                                  |   | **31**                      | ** **  | 31                      |   |
| Federal funds  sold                                                                        |   | **5,744**                   | ** **  | 7,262                   |   |
| Cash and cash  equivalents                                                                 |   | **10,991**                  | ** **  | 15,916                  |   |
| Investment  securities available for sale, at fair value                                   |   | **39,332**                  | ** **  | 47,172                  |   |
| Loans held for  sale                                                                       |   | **15,207**                  | ** **  | 15,287                  |   |
| Loans, net of  the allowance for loan losses of $2,678 and $2,359                          |   | **171,130**                 | ** **  | 170,846                 |   |
| Federal Home  Loan Bank stock                                                              |   | **815**                     | ** **  | 813                     |   |
| Premises and  equipment                                                                    |   | **6,102**                   | ** **  | 6,255                   |   |
| Accrued interest  receivable                                                               |   | **1,556**                   | ** **  | 1,838                   |   |
| Other real  estate owned                                                                   |   | **3,482**                   | ** **  | 3,918                   |   |
| Goodwill                                                                                   |   | **1,856**                   | ** **  | 1,856                   |   |
| Other assets                                                                               |   | **1,493**                   | ** **  | 858                     |   |
| Total Assets                                                                               |   | **$**                       | **251,964** | ** **              | $      | 264,759 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                             |   |                        | ** **  |                    |   |
| Noninterest-bearing  demand deposits                                                       |   | **$**                       | **33,124**  | ** **              | $      | 34,400 |   |
| Interest-bearing  deposits:                                                                |   |                        | ** **  |                    |   |
| NOW and money  market accounts                                                             |   | **55,001**                  | ** **  | 59,490                  |   |
| Savings deposits                                                                           |   | **22,408**                  | ** **  | 21,408                  |   |
| Time deposits,  $100,000 and over                                                          |   | **15,853**                  | ** **  | 18,319                  |   |
| Other time  deposits                                                                       |   | **84,955**                  | ** **  | 92,998                  |   |
| Total Deposits                                                                             |   | **211,341**                 | ** **  | 226,615                 |   |
| Federal funds  purchased and Securities sold under agreements to repurchase                |   | **2,041**                   | ** **  | 528                     |   |
| Borrowings                                                                                 |   | **13,334**                  | ** **  | 11,347                  |   |
| Subordinated  debentures                                                                   |   | **9,000**                   | ** **  | 9,000                   |   |
| Accrued interest  payable                                                                  |   | **847**                     | ** **  | 1,082                   |   |
| Other  liabilities                                                                         |   | **954**                     | ** **  | 1,146                   |   |
| Total  Liabilities                                                                         |   | **237,517**                 | ** **  | 249,718                 |   |
|                                                                                       |   |                        | ** **  |                    |   |
| Shareholders’  equity                                                                 |   |                        | ** **  |                    |   |
| Preferred stock,  $0.01 par value, authorized and unissued   10,000,000 shares        |   | **—**                  | ** **  | —                  |   |
| Common stock,  $0.01 par value, authorized 45,000,000 shares;571,789 shares issued         |   | **6**                       | ** **  | 6                       |   |
| Capital surplus                                                                            |   | **9,038**                   | ** **  | 9,070                   |   |
| Retained  earnings                                                                         |   | **11,170**                  | ** **  | 12,068                  |   |
| Accumulated  other comprehensive income                                                    |   | **1,310**                   | ** **  | 1,101                   |   |
| Less:  Treasury shares, at cost, 157,260 shares  for 2004, and160,088 shares for 2003 |   | **(7,077**                  | **)**       | (7,204                  | )      |
| Total  Shareholders’ Equity                                                           |   | **14,447**                  | ** **  | 15,041                  |   |
| Total  Liabilities and Shareholders’ Equity                                           |   | **$**                       | **251,964** | ** **              | $      | 264,759 |   |

 

See accompanying notes to unaudited consolidatedfinancial statements.

 

3

----

 

**ILLINI CORPORATION AND SUBSIDIARIES**

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

**Three Months Ended March 31, 2004 and2003**

**(Unaudited)**

 
|                                                                        |                                               | **2004**                                           |       | **2003**   |   |
|-----------------------------------------------------------------------------|----------------------------------------------------|----------------------------------------------------|------------|------------|--------|
|                                                                        |                                               | **(dollars  in thousands, except per share data)** |       |
|                                                                        |                                               |                                               |       |       |   |
| Interest income:                                                            |                                               |                                               |       |       |   |
| Loans, including  fees                                                      |                                               | **$**                                              | **2,922**  | ** ** | $      | 3,636 |   |
| Investment  securities:                                                     |                                               |                                               | ** ** |       |   |
| Taxable                                                                     |                                               | **290**                                            | ** ** | 269        |   |
| Exempt from  federal income taxes                                           |                                               | **181**                                            | ** ** | 232        |   |
| Federal Funds sold  and interest-bearing deposits                           |                                               | **6**                                              | ** ** | 42         |   |
| Total interest  income                                                      |                                               | **3,399**                                          | ** ** | 4,179      |   |
| Interest  expense:                                                          |                                               |                                               | ** ** |       |   |
| Deposits:                                                                   |                                               |                                               | ** ** |       |   |
| NOW and money  market accounts                                              |                                               | **108**                                            | ** ** | 183        |   |
| Savings deposits                                                            |                                               | **33**                                             | ** ** | 49         |   |
| Time deposits,  $100,000 and over                                           |                                               | **126**                                            | ** ** | 216        |   |
| Other time  deposits                                                        |                                               | **661**                                            | ** ** | 1,055      |   |
| Federal funds  purchased and Securities sold under agreements to repurchase |                                               | **9**                                              | ** ** | 6          |   |
| Borrowings                                                                  |                                               | **99**                                             | ** ** | 97         |   |
| Subordinated  debentures                                                    |                                               | **244**                                            | ** ** | 244        |   |
| Total interest  expense                                                     |                                               | **1,280**                                          | ** ** | 1,850      |   |
| Net interest  income                                                        |                                               | **2,119**                                          | ** ** | 2,329      |   |
| Provision for  loan losses                                                  |                                               | **1,390**                                          | ** ** | 150        |   |
| Net interest  income after provision for loan losses                        |                                               | **729**                                            | ** ** | 2,179      |   |
| Noninterest  income:                                                        |                                               |                                               | ** ** |       |   |
|                                                                        |                                               |                                               |       |       |   |
| Service charges  on deposit accounts                                        |                                               | **350**                                            | ** ** | 324        |   |
| Other fee income                                                            |                                               | **78**                                             | ** ** | 131        |   |
| Mortgage loan  servicing fees                                               |                                               | **21**                                             | ** ** | (5         | )      |
| Gains on sales  of mortgage loans                                           |                                               | **14**                                             | ** ** | 57         |   |
| Gains on sale of  other real estate owned                                   |                                               | **20**                                             | ** ** | 5          |   |
| Other                                                                       |                                               | **20**                                             | ** ** | 26         |   |
| Total  noninterest income                                                   |                                               | **503**                                            | ** ** | 538        |   |
| Noninterest  expense:                                                       |                                               |                                               | ** ** |       |   |
| Salaries and  employee benefits                                             |                                               | **1,265**                                          | ** ** | 1,186      |   |
| Net occupancy  expense                                                      |                                               | **185**                                            | ** ** | 195        |   |
| Equipment  expense                                                          |                                               | **48**                                             | ** ** | 61         |   |
| Data processing  fees                                                       |                                               | **201**                                            | ** ** | 185        |   |
| Supplies expense                                                            |                                               | **34**                                             | ** ** | 47         |   |
| Communication  and transportation expense                                   |                                               | **118**                                            | ** ** | 114        |   |
| Marketing and  advertising expense                                          |                                               | **53**                                             | ** ** | 44         |   |
| Correspondent  bank fees                                                    |                                               | **54**                                             | ** ** | 77         |   |
| Loan foreclosure  and other real estate owned expense                       |                                               | **524**                                            | ** ** | 35         |   |
| Professional  fees                                                          |                                               | **166**                                            | ** ** | 153        |   |
| Regulatory fees                                                             |                                               | **22**                                             | ** ** | 23         |   |
| Other                                                                       |                                               | **153**                                            | ** ** | 152        |   |
| Total  noninterest expense                                                  |                                               | **2,823**                                          | ** ** | 2,272      |   |
|                                                                        | Income (loss)  before income tax expense (benefit) |                                               | **(1,591** | **)**      | 445    |   |
| Income tax  expense (benefit)                                               |                                               | **(693**                                           | **)**      | 96         |   |
|                                                                        | Net income  (loss)                                 |                                               | **$**      | **(898**   | **)**  | $ | 349 |   |
| Basic and  diluted earnings (loss) per share                                |                                               | **$**                                              | **(2.18**  | **)**      | $      | .85 |   |

 

See accompanying notes to unaudited consolidatedfinancial statements.

 

4

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

**Three Months Ended March 31, 2004 and2003**

**(Unaudited)**

 
|                                       |   | **Three  Months Ended  March 31,** |       |
|--------------------------------------------|--------|------------------------------------|------------|
|                                       |   | **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)                         |   | **(898**                           | **)**      | **349** | ** ** |
| Dividends on  common stock                 |   | **—**                         | ** ** | **(102** | **)** |
| End of period  balance                     |   | **11,170**                         | ** ** | **12,132** | ** ** |
|                                       |   |                               | ** ** |   | ** ** |
| 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 gain  on securities, net of tax |   | **209**                            | ** ** | **13** | ** ** |
| End of period  balance                     |   | **1,310**                          | ** ** | **1,477** | ** ** |
|                                       |   |                               | ** ** |   | ** ** |
| Total  Shareholders’ Equity           |   | **$**                              | **14,447** |   | **$** | **15,481** |   |

 

See accompanying notes to unaudited consolidatedfinancial statements.

 

**ILLINI CORPORATION AND SUBSIDIARIES**

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

**Three Months Ended March 31, 2004 and2003**

**(Unaudited)**

 
|                                                                                                         |   | **Three  Months Ended  March 31,** |     |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------------------|----------|
|                                                                                                         |   | **2004**                           |     | **2003** |   |
|                                                                                                         |   | **(dollars  in thousands)**        |     |
| Net Income  (loss)                                                                                           |   | **$**                              | **(898** | ) | $ | 349 |   |
| Other  comprehensive income, unrealized gains on securities, net of reclassification  adjustment, net of tax |   | **209**                            |     | 13 |   |
| Comprehensive  income (loss)                                                                                 |   | **$**                              | **(689** | ) | $ | 362 |   |

 

See accompanying notes to unaudited consolidatedfinancial statements.

 

5

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Three Months Ended March 31, 2004 and2003**

**(Unaudited)**

 
|                                                                                      |   | **2004**                    |       | **2003**   |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                                                      |   | **(dollars  in thousands)** |       |
| Cash flows from  operating activities:                                                    |   |                        |       |       |   |
| Net income  (loss)                                                                        |   | **$**                       | **(898**   | **)**      | $      | 349 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                        | ** ** |       |   |
| Depreciation                                                                              |   | **200**                     | ** ** | 191        |   |
| Provision for  loan losses                                                                |   | **1,390**                   | ** ** | 150        |   |
| Investment  security amortization, net                                                    |   | **18**                      | ** ** | 37         |   |
| Federal Home  Loan Bank stock dividend                                                    |   | **(2**                      | **)**      | (21        | )      |
| Gains on sales  of mortgage loans                                                         |   | **(14**                     | **)**      | (57        | )      |
| Valuation  allowance established for other real estate owned                              |   | **455**                     | ** ** | —     |   |
| Gains on sales  of other real estate owned                                                |   | **(20**                     | **)**      | (5         | )      |
| Decrease in  accrued interest receivable                                                  |   | **282**                     | ** ** | 104        |   |
| Decrease in  accrued interest payable                                                     |   | **(235**                    | **)**      | (175       | )      |
| Origination of  secondary market mortgage loans                                           |   | **(2,031**                  | **)**      | (4,791     | )      |
| Proceeds from  the sales of secondary market mortgage loans                               |   | **2,125**                   | ** ** | 5,182      |   |
| Other, net                                                                                |   | **(946**                    | **)**      | (757       | )      |
| Net cash  provided by operating activities                                                |   | **324**                     | ** ** | 207        |   |
| Cash flows from  investing activities:                                                    |   |                        | ** ** |       |   |
| Proceeds from  maturities and paydowns of investment securities available for sale        |   | **9,860**                   | ** ** | 5,598      |   |
| Purchases of  investment securities available for sale                                    |   | **(1,710**                  | **)**      | (3,921     | )      |
| Net (increase)  decrease in loans                                                         |   | **(1,754**                  | **)**      | 4,081      |   |
| Purchases of  premises and equipment                                                      |   | **(47**                     | **)**      | (134       | )      |
| Proceeds from  sales of other real estate owned                                           |   | **81**                      | ** ** | 303        |   |
| Net cash  provided by investing activities                                                |   | **6,430**                   | ** ** | 5,927      |   |
| Cash flows from  financing activities:                                                    |   |                        | ** ** |       |   |
| Net decrease in  noninterest-bearing demand deposits                                      |   | **(1,276**                  | **)**      | (2,107     | )      |
| Net increase  (decrease) in NOW, money market accounts and savings deposits               |   | **(3,489**                  | **)**      | 2,166      |   |
| Net increase  (decrease) in time deposits, $100,000 and over                              |   | **(2,466**                  | **)**      | 2,605      |   |
| Net decrease in  other time deposits                                                      |   | **(8,043**                  | **)**      | (323       | )      |
| Net increase in  federal funds purchased                                                  |   | **1,510**                   | ** ** | —     |   |
| Net increase in  securities sold under agreements to repurchase                           |   | **3**                       | ** ** | 5          |   |
| Proceeds from  sale of treasury shares                                                    |   | **95**                      | ** ** | —     |   |
| Proceeds of  borrowings                                                                   |   | **6,000**                   | ** ** | —     |   |
| Repayment of  borrowings                                                                  |   | **(4,013**                  | **)**      | (13        | )      |
| Cash dividends  paid                                                                      |   | **—**                  | ** ** | (102       | )      |
| Net cash  provided by (used in) financing activities                                      |   | **(11,679**                 | **)**      | 2,231      |   |
|                                                                                      |   |                        | ** ** |       |   |
| Net increase  (decrease) in cash and cash equivalents                                     |   | **(4,925**                  | **)**      | 8,365      |   |
|                                                                                      |   |                        | ** ** |       |   |
| Cash and cash  equivalents at beginning of period                                         |   | **15,916**                  | ** ** | 19,853     |   |
|                                                                                      |   |                        | ** ** |       |   |
| Cash and cash  equivalents at end of period                                               |   | **$**                       | **10,991** | ** ** | $      | 28,218 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

6

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**ILLINI CORPORATION AND SUBSIDIARIES**

**Notes to Unaudited ConsolidatedFinancial Statements**

**March 31, 2004**

 

(1)                                  Basisof Presentation

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-QSB and, therefore, do not include all of theinformation and notes required by accounting principles generally accepted inthe 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 amounts inthe 2003 consolidated financial statements have been reclassified to conform tothe 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 has beenderived from the audited consolidated balance sheet of the Corporation as ofthat date.

 

Results for thethree months ended March 31, 2004 may not be indicative of the annualperformance of Illini Corporation or the subsidiary banks, Illini Bank and FarmersState Bank of Camp Point (“the subsidiary banks”).  Management of the Corporation has made estimates and assumptionsrelating to the reporting of assets and liabilities and the disclosure ofcontingent assets and liabilities to prepare the consolidated financialstatements (unaudited) in conformity with accounting principles generallyaccepted in the United States of America. Actual results could differ from those estimates.

 

(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  March 31,**                 |       |
|---------------------------------------------|--------|----------------------------------------------------|------------|
|                                        |   | **2004**                                           |       | **2003** |   |
|                                        |   | **(dollars  in thousands, except per share data)** |       |
| Net Income /  (Loss)                        |   | **$**                                              | **(898**   | ) | $ | 349 |   |
|                                        |   |                                               | ** ** |   | ** ** |
| Weighted average  common shares outstanding |   | **412,540**                                        |       | 411,701 |   |
|                                             |        |                                                    |            |  |  |  |  |

 

(3)                      Useof Estimates in the Preparation of Financial Statements

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period.  Actual results coulddiffer from those estimates. Significant estimates that are particularly sensitive to change are theallowance for loan losses and the value of other real estate owned.

 

7

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(4)                      AllowanceFor Loan Losses

 

In originating loans, the Corporation recognizes that credit losseswill be experienced and the risk of loss will vary with, among other things,current economic conditions; the type of loan being made; the creditworthinessof the borrower over the term of the loan; and in the case of a collateralizedloan, the quality of the collateral for such loan.  The allowance for loan losses represents the Corporation’sestimate of the allowance necessary to provide for probable incurred losses in theloan portfolio.  In making this determination,the Corporation analyzes the ultimate collectibility of the loans in itsportfolio, incorporating feedback provided by internal loan staff, theindependent loan review function and information provided by examinationsperformed by regulatory agencies.  TheCorporation makes an ongoing evaluation as to the adequacy of the allowance forloan losses.  Transactions in theallowance for loan losses for the three months ended March 31, 2004 and 2003are summarized below:

 
|                             |   | **Three  months ended  March 31,** |        |
|----------------------------------|--------|------------------------------------|-------------|
|                             |   | **2004**                           |        | **2003** |   |
|                             |   | **(dollars  in thousands)**        |        |
| **Allowance for Loan Losses:**   |   |                               |        |   |   |
| Balance at  beginning of period  |   | **$**                              | **2,359**   |   | $ | 2,468 |   |
|                             |   |                               |        |   |   |
| Charge-offs                      |   | **(1,080**                         | )           | (363 | ) |
| Recoveries                       |   | **9**                              |        | 41 |   |
| Net charge-offs                  |   | **(1,071**                         | )           | (322 | ) |
|                             |   |                               |        |   |   |
| Provision  charged to operations |   | **1,390**                          |        | 150 |   |
| Balance at end  of period        |   | **$**                              | **2,678**   |   | $ | 2,296 |   |
| Average loans  outstanding       |   | **$**                              | **189,859** |   | $ | 207,792 |   |

 

(5)                      RegulatoryExamination 

 

During March of 2004 a safety and soundness examination was commencedby the primary regulators of Illini Bank (Illini).

 

Illini operates in a regulated industry and may be subject from time totime to regulatory constraints imposed by federal and state bankingregulators.  Although Illini at thistime is not subject to restrictions other than normal regulatory oversight, thelevel of Illini’s non-performing assets may result in management agreeing torestrictions on certain of its operations until non-performing assets arereduced to an acceptable level, or other conditions that may be imposed by regulatorsare satisfied.

 

8

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

 

THREE MONTHS ENDEDMARCH 31, 2004

 

SELECTED FINANCIALRESULTS

 

The following table shows selected financial results and measures forthe three months ended March 31, 2004 compared with the same period in 2003.

 
|                            |   | **Three  Months Ended March 31,** |   |
|---------------------------------|--------|-----------------------------------|--------|
|                            |   | **2004**                          |   | **2003** |   | **Change** |   | **Change-%** |   |
|                            |   | **(dollars  in thousands)**       |   |
| Net income  (loss)              |   | $                                 | (898   | ) | $ | 349 |   | $ | (1,247 | ) | (357.3 | )% |
| Average assets                  |   | 256,416                           |   | 280,400 |   | (23,984 | ) | (8.6 | )% |
| Average equity                  |   | 15,304                            |   | 15,528 |   | (224 | ) | (1.4 | )% |
| Return on assets                |   | (1.40                             | )%     | 0.50 | % | (1.90 | )% | (380.0 | )% |
| Return on equity                |   | (23.54                            | )%     | 9.12 | % | (32.66 | )% | (358.1 | )% |
| Efficiency ratio                |   | 104.22                            | %      | 76.28 | % | 27.94 | % | 36.6 | % |
| Dividend payout  ratio          |   | 0.00                              | %      | 29.49 | % | (29.49 | )% | (100.00 | )% |
| Equity to assets  ratio         |   | 5.97                              | %      | 5.54 | % | 0.43 | % | 7.8 | % |
| Tier 1 leverage  ratio          |   | 6.06                              | %      | 5.93 | % | 0.13 | % | 2.2 | % |
| Total risk-based  capital ratio |   | 11.38                             | %      | 10.84 | % | 0.54 | % | 5.0 | % |
|                                 |        |                                   |        |  |  |  |  |  |  |  |  |  |

 

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 recordeda net operating loss of $898,000 for the three months ended March 31, 2004,down $1,247,000 from the same period in 2003. The return on average equity for the three months ended March 31, 2004was a negative 23.5% as compared to positive 9.1% for the same period endedMarch 31, 2003.  Similarly, basic anddiluted earnings per share for the three months ended March 31, 2004 was $(2.18)per share versus $0.85 for the same quarter in 2003, representing a decrease of356.5%.  Three main activitiescontributed to the decrease in earnings during the first quarter of 2004:  a provision for loan losses in the amount of$1,390,000; the reduction in the carrying values on two properties in otherreal estate owned; and the decline in net interest income. These items arediscussed in more detail in the Results of Operations section of this document.

 

**FINANCIAL CONDITION**

 

Average earning assets of the Corporation for thefirst three months of 2004 decreased by $24.9 million (9.6%) to $234.1 million,from $259.0 million for the same period in 2003.

 

Average loans decreased $17.9 million (8.6%) to $189.9million for the three months ended March 31, 2004, compared to $207.8 millionfor the same period in 2003. Residential real estate loans experienced a growth in average balancesof $2.4 million, as a return of low interest rates during the first quarter sparkeda

 

9

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second wave of mortgageloan refinancings.  Declines in averagebalances were seen in the other major categories of the loan portfolio, rangingfrom the $10.4 million decrease in commercial real estate loans, to $3.4million in consumer and credit card loans, $2.9 million in agricultural loans,$2.5 million in commercial loans, and $1.1 million in agricultural real estateloans.  These decreases are reflectiveof management’s continued efforts to remove marginal credits from the books ofIllini and focus on strengthening the remaining loan relationships.

 

Average balances of the securities portfolio increasedby $4.5 million for the three months ended March 31, 2004, as compared to thesame period in 2003.  This increase wasmore than offset by a decrease of $11.7 million in short-term investments inthe period-to-period comparison.

 

During the latter part of 2003, management made theconscious decision to reduce its exposure to out of the area certificates ofdeposit as a funding source for loan and investment activity.  The impact of this decision continues to beseen in the Corporation’s deposit portfolio, as time deposits less than$100,000 decreased $23.4 million and time deposits $100,000 and over decreased$8.0 million, respectively, for the first quarter of 2004 as compared to thesame period in 2003.  These declineswere partially offset by the overall reductions in the investment and loanportfolios, 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 74 basis points, to 2.51% forthe first quarter of 2004, as compared to 3.25% for the same period in2003.  As a result, the Corporation wasable to maintain its net interest margin for the three months ended March 31,2004 at 3.78%, a reduction of only 4 basis points from the 3.82% reported forthe first quarter of 2003.

 

The subsidiary banks maintain an overnight federalfunds line of credit with an unaffiliated financial institution and acollateralized borrowing capacity with the Federal Home Loan Bank of Chicago.

 

**RESULTS OF OPERATIONS**

 

This discussion should be read in conjunction with the consolidatedfinancial statements, notes, and tables included elsewhere in this report andin the 2003 Illini Corporation Annual Report on Form 10-KSB (2003 Form 10-KSB).

 

Net Interest Income

 

The following tables show average balances and related interest incomeor interest expense, with the resulting average yield or rate by category ofaverage earning assets or interest bearing liabilities.  Interest income and the resulting netinterest income are shown on a tax equivalent basis.

 

10

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**Consolidated Average Balances, Interest Income/Expense andYield/Rates**

 
|                                             |   | **Three  months ended March 31,** |        |
|--------------------------------------------------|--------|-----------------------------------|-------------|
|                                             |   | **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                          |   | **$**                             | **3,000**   | ** ** | **$** | **6** | ** ** | **0.81** | % | $ | 14,742 |   | $ | 42 |   | 1.15 | % |
| Investment  securities (3)                       |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Taxable                                          |   | **29,834**                        | ** **  | **290** | ** ** | **3.88** |   | 23,071 |   | 269 |   | 4.66 |   |
| Tax-exempt (1)                                   |   | **13,690**                        | ** **  | **262** | ** ** | **7.66** |   | 15,979 |   | 336 |   | 8.42 |   |
| Total securities                                 |   | **43,524**                        | ** **  | **552** | ** ** | **5.07** |   | 39,050 |   | 605 |   | 6.20 |   |
| Loans                                            |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Commercial (1)                                   |   | **37,119**                        | ** **  | **544** | ** ** | **5.88** |   | 39,656 |   | 665 |   | 6.80 |   |
| Agriculture                                      |   | **13,329**                        | ** **  | **169** | ** ** | **5.07** |   | 16,206 |   | 222 |   | 5.56 |   |
| Real estate                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Commercial                                       |   | **89,928**                        | ** **  | **1,414** | ** ** | **6.31** |   | 100,325 |   | 1,784 |   | 7.21 |   |
| Agriculture                                      |   | **5,642**                         | ** **  | **105** | ** ** | **7.46** |   | 6,717 |   | 129 |   | 7.78 |   |
| Residential                                      |   | **37,774**                        | ** **  | **554** | ** ** | **5.89** |   | 35,388 |   | 614 |   | 7.04 |   |
| Consumer, net                                    |   | **5,380**                         | ** **  | **113** | ** ** | **8.39** |   | 8,686 |   | 193 |   | 9.02 |   |
| Credit card                                      |   | **687**                           | ** **  | **29** | ** ** | **17.13** |   | 814 |   | 35 |   | 17.45 |   |
| Total loans                                      |   | **189,859**                       | ** **  | **2,928** | ** ** | **6.18** |   | 207,792 |   | 3,642 |   | 7.11 |   |
| Allowance for  loan losses                       |   | **(2,242**                        | )           |   |   |   | ** ** | (2,552 | **)** |   | ** ** |   | ** ** |
| Net loans (1)  (2)                               |   | **187,617**                       | ** **  | **2,928** | ** ** | **6.26** |   | 205,240 |   | 3,642 |   | 7.20 |   |
| Total  interest-earning assets                   |   | **234,141**                       | ** **  | **3,486** | ** ** | **5.97** |   | 259,032 |   | 4,289 |   | 6.71 |   |
| Other assets                                     |   | **22,275**                        |        |   |   |   |   | 21,368 |   |   |   |   |   |
| Total assets                                     |   | **$**                             | **256,416** |   |   |   |   |   | $ | 280,400 |   |   |   |   |   |
| **LIABILITIES**                                  |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                        |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                         |   | **$**                             | **56,311**  | ** ** | **$** | **108** | ** ** | **0.77** | % | $ | 57,722 |   | $ | 183 |   | 1.29 | % |
| Savings                                          |   | **21,791**                        | ** **  | **33** | ** ** | **0.60** |   | 20,576 |   | 49 |   | 0.97 |   |
| Time deposits  less than $100,000                |   | **86,916**                        | ** **  | **661** | ** ** | **3.05** |   | 110,291 |   | 1,055 |   | 3.88 |   |
| Time deposits  $100,000 and over                 |   | **15,937**                        | ** **  | **126** | ** ** | **3.18** |   | 23,897 |   | 216 |   | 3.67 |   |
| Total  interest-bearing deposits                 |   | **180,955**                       | ** **  | **928** | ** ** | **2.06** |   | 212,486 |   | 1,503 |   | 2.87 |   |
| Short-term  borrowings                           |   | **2,256**                         | ** **  | **9** | ** ** | **1.59** |   | 657 |   | 6 |   | 3.40 |   |
| Long-term  borrowings                            |   | **12,016**                        | ** **  | **99** | ** ** | **3.30** |   | 8,382 |   | 97 |   | 4.70 |   |
| Subordinated  debentures (4)                     |   | **9,000**                         | ** **  | **244** | ** ** | **10.86** |   | 9,000 |   | 244 |   | 10.98 |   |
| Total  interest-bearing liabilities              |   | **204,227**                       | ** **  | **1,280** | ** ** | **2.51** |   | 230,525 |   | 1,850 |   | 3.25 |   |
| Other  liabilities                               |   | **36,885**                        |        |   |   |   |   | 34,347 |   |   |   |   |   |
| Shareholders’  equity                       |   | **15,304**                        |        |   |   |   |   | 15,528 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | **$**                             | **256,416** |   |   |   |   |   | $ | 280,400 |   |   |   |   |   |
| **Net interest margin**                          |   |                              |        | **$** | **2,206** | ** ** | **3.78** | % |   |   | $ | 2,439 |   | 3.82 | % |

 

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

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $109,000 in 2004 and $115,000in 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.

 

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Net interest margin is a measure of the net return on interest-earningassets and is computed by dividing annualized net interest income by theaverage of total interest-earning assets for the period.

 

Net interest income on a tax equivalent basis for the first quarter of2004 was $2.2 million, down $233,000 (9.5%) from the $2.4 million reported forthe same quarter in 2003.  This decreaseresulted from changes in the volume of assets and liabilities, as well aschanges in interest rates.

 

Provision for Loan Losses

 

The amount of the provision for loan losses is basedon management’s evaluations of the loan portfolio, with particular attentiondirected toward nonperforming, impaired and other potential problem loans.  During these evaluations, consideration isalso given to such factors as management’s evaluation of specific loans, thelevel and composition of impaired loans, other nonperforming loans, otheridentified potential problem loans, historical loss experience, results ofexaminations by regulatory agencies, results of any independent asset qualityreview process, the market value of collateral, the estimate of discounted cashflows, the strength and availability of guarantees, concentrations of credits,and various other factors, including concentration of credit risk in variousindustries and current economic conditions.

 

The provision for loan losses charged to operating expense for thethree months ended March 31, 2004 was $1,390,000, up significantly from the$150,000 reported during the first quarter of 2003.  During the first quarter of 2004, Illini Bank charged-offimpaired loans totaling $909,000.  Twocredit relationships in particular, which had previously been identified bymanagement and had a reserve of approximately $607,000 allocated to them atDecember 31, 2003, comprised $753,000 of this total.  As a consequence of these charge-offs, as well as an increase inimpaired loans and an increase in classified assets as a result of improvedreporting systems (credit quality and production), management determined torecord a provision of $1,350,000 to Illini Bank’s allowance for loanlosses.  Management believes that the allowancefor loan losses is a level estimated to be adequate to cover probable incurredlosses in its loan portfolio.

 

Management remains watchful of credit quality issues and believes thatcurrent issues with the portfolio are reflective of a challenging economicenvironment.  Should the economicclimate fail to improve, borrowers may experience difficulty, and consequently,the level of nonperforming loans, charge-offs and delinquencies could rise andrequire further increases in the provision for loan losses.  Management continues to monitor the loanportfolio.

 

Noninterest Income

 

Non-interest income for the three months ended March 31, 2004 was$503,000, down $35,000 (6.5%) from the $538,000 reported at March 31,2003.  Service charges on depositaccounts increased $26,000, reflecting the impact of changes in overdraftcharges implemented during the first quarter. Also experiencing increases from the like period in 2003 were mortgageloan servicing fees (up $26,000), which was aided by a slowdown in mortgageloan prepayments, and gain on sale of other real estate owned (up $15,000). Theslowdown in mortgage loan prepayments, however, had a negative effect on otherfee income, the primary component of which is real estate application fees,which was down $53,000, and in the gain on sales of mortgage loans, down$43,000, respectively, from the same period in 2003. This trend has continuedduring the second quarter of 2004 with a loss of $228,000 from mortgage bankingoperations through May 10, 2004.

 

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Noninterest Expense

 

Non-interest expense for the first quarter of 2004 was $2,823,000, up$551,000 when compared to the first quarter of 2003.  This increase was focused in two primary areas, salaries andemployee benefits (up $79,000) and loan foreclosure and other real estate ownedexpense (up $489,000).

 

The increase in salaries and employee benefits was primarily the resultof a general increase in the number of employees, which included the hiring ofa president at one of the subsidiary banks and the addition of a senior officerat the corporate level.  The hiring ofthese two individuals occurred during the first quarter of 2004 and the thirdquarter of 2003, respectively.

 

The increase in loan foreclosure and other real estateowned expense was primarily related to the other real estate ownedcategory.  In the latter part of thefirst quarter of 2004, Illini Bank began reevaluating other real estate owned,looking for alternative sales channels and obtaining additional information toexpedite the sale of these properties. Two of these properties have been held by Illini Bank for over ayear.  Efforts to sell these propertieshave been unsuccessful to date.  Afterconsultation with outside experts and after review and evaluation of theproperties, current economic and market conditions and potential costs of sale,management determined it prudent to reduce the carrying value of these twoproperties by an aggregate amount of $455,000. In addition, for one of the two above properties, management contractedfor the remaining two units to be completed so as to make these units suitablefor leasing.  These costs will beexpensed as incurred.

 

**CREDITQUALITY**

 

Allowance for Loan Losses

 

When the subsidiary banks (Banks) originate loans,they recognize that credit losses will be experienced, and that all these loanscarry varying degrees of risk, such as: economic conditions; the creditworthiness of the 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 loan losses is based on estimates,and ultimate losses will vary from current estimates.  These estimates are reviewed on a monthly basis, and asadjustments, either positive or negative, are deemed necessary, a correspondingincrease or decrease is made in the provision for loan losses.

 

At March 31, 2004, the allowance for loan losses was$2.7 million, or 1.42% of total loans. This compares to the $2.4 million (1.25%) and $2.3 million (1.13%)reported at December 31, 2003 and March 31, 2003, respectively.  The change from December 31, 2003 is due tothe continued level of nonperforming loans, the increase in impaired loans andthe downgrading of some of those loans late in the first quarter of 2004.

 

Illini Corporation’s primary business of makingcommercial, real estate, and consumer loans entails potential losses, themagnitude of which depends on a variety of economic factors affectingborrowers, which are beyond the control of the Corporation.  Accordingly, a significant factor in the Corporation’spast and future operating results is the level of the provision for loanlosses.

 

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| **Credit Quality**                  |   | **March 31,  2004**         |       | **December  31,  2003** |   | **March 31,  2003** |   |
|-------------------------------------|--------|-----------------------------|------------|-------------------------|--------|---------------------|--------|
|                                |   | **(dollars  in thousands)** |       |
| **Nonperforming  assets:**          |   |                        |       |                    |   |                |   |
| Accruing loans  past due 90 days    |   | **$**                       | **18**     | ** **              | $      | 9                   |   | $ | 3 |   |
| Nonaccrual                          |   | **5,283**                   | ** ** | 5,505                   |   | 3,391               |   |
| Renegotiated                        |   | **612**                     | ** ** | —                  |   | 623                 |   |
| Other real  estate owned            |   | **3,482**                   | ** ** | 3,918                   |   | 2,058               |   |
| Total  nonperforming assets         |   | **$**                       | **9,395**  | ** **              | $      | 9,432               |   | $ | 6,075 |   |
|                                |   |                        | ** ** |                    |   |                |   |
| **Key  ratios:**                    |   |                        | ** ** |                    |   |                |   |
| Nonperforming  loans to loans       |   | **3.13**                    | **%**      | 2.93                    | %      | 1.97                | %      |
| 90 days  delinquent to ending loans |   | **0.01**                    | ** ** | 0.00                    |   | 0.00                |   |
| Allowance to  total loans           |   | **1.42**                    | ** ** | 1.25                    |   | 1.13                |   |
| Allowance to  nonperforming loans   |   | **45.29**                   | ** ** | 42.79                   |   | 57.16               |   |

 

Nonperforming Assets

 

Nonperforming and renegotiated loans at March 31, 2004 totaled $5.9million, up $399,000 (or 7.2%) from December 31, 2003, and up $1.9 million(47.5%) from March 31, 2003.  Nonaccrualloans comprise the majority of the nonperforming loans.  The classification of a loan as nonaccrualdoes not necessarily indicate that the principal is uncollectible, in whole orin part.  The Banks make a determinationas to the collectibility on a case-by-case basis.  The Banks consider the adequacy of the collateral and the otherresources of the borrower in determining the steps to be taken to collectnonaccrual loans.  The finaldetermination as to the steps taken is made based upon the specific facts ofeach situation.  Alternatives that aretypically considered to collect nonaccrual loans are foreclosure, collectionunder guarantees, loan restructuring, or judicial collection actions.

 

Other real estate owned decreased by $436,000, to $3.5 million, fromthe $3.9 million reported as of December 31, 2003.  See previous discussion of other real estate owned undernoninterest expense.

 

Illini Corporation’s loan underwriting guidelines and credit reviewprocedures and policies are designed to protect the Corporation from creditlosses.  Illini Corporation’s process formonitoring loan quality includes detailed monthly trend analysis ofdelinquencies and nonperforming assets. Management extensively monitors significant credit relationships throughappraisals, assessment of the financial condition of borrowers, restrictions onout-of-area lending, and avoidance of loan concentrations.

 

As discussed in the Corporation’s 2003 Form 10-KSB and previous Form10-QSB reports, management has implemented several initiatives to improvecredit quality.  These steps included anew loan policy and improved reporting systems (credit quality andproduction).  Management is committed tocontinuing these initiatives.

 

Other Potential Problem Loans

 

The Corporationhas other potential problem loans that are currently performing, but where someconcerns exist as to the ability of the borrower to comply with present loanrepayment terms. Excluding nonperforming loans, these loans totaled $7,462,000that management has classified as impaired at March 31, 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. Such

 

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classificationsrelate to specific concerns for each individual borrower and do not relate toany concentration risk common to all loans in this group.

 

**CAPITALRESOURCES**

 

The current economic and regulatory environment places increasedemphasis on capital strength.  A strongcapital position, which is vital to the continued profitability of IlliniCorporation, also promotes depositor and investor confidence and provides asolid foundation for the future growth of the organization.  Illini Corporation has historicallysatisfied its capital requirements principally through the retention ofearnings.

 

The table below shows the various measures of regulatory capital andrelated quarterly ratios.

 
|                                                         |   | **Regulatory  requirements  to be:** |   | **Actual  Regulatory Capital Ratios** |   |
|--------------------------------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|
|                                                         |   | **Adequately  Capitalized**          |   | **Well-  Capitalized**                |   | **March 31,  2004** |   | **December  31,  2003** |   |
| Total risk-based  capital as % of  risk-weighted assets |   | 8.0                                  | %      | 10.0                                  | %      | 11.4 | % | 11.7 | % |
| Tier 1 capital  as % of risk-weighted assets                 |   | 4.0                                  | %      | 6.0                                   | %      | 7.8 | % | 8.3 | % |
| Tier 1 capital  as % quarterly average assets                |   | 4.0                                  | %      | 5.0                                   | %      | 6.1 | % | 6.3 | % |

 

Risk-based capital guidelines require theclassification of assets and some off-balance items in terms of credit-riskexposure and the measuring of capital as a percentage of the risk adjustedasset totals.  Management believes, anddata in the above table show that, as of March 31, 2004 and December 31, 2003the Corporation met all capital adequacy requirements to which it issubject.  As of those dates, theCorporation’s subsidiary banks were “well capitalized” under regulatory promptcorrective action provisions.

 

Earnings retention is affected by the Board ofDirectors’ declaration of cash dividends. The dividend payout ratio is an indicator of the level of earningsretained.  The Board of Directors of theCorporation considers the capital strength of the Corporation and the banks indetermining the appropriate level of cash dividends to be paid toshareholders.  The dividend payout ratiofor the three months ended March 31, 2004 was 0.00% as compared to 29.49% forthe three months ended March 31, 2003. In March, 2004 the Corporation approveda change in meeting times, electing to meet during the first month after eachquarter end, so the performance of the Corporation could be reviewed on acalendar quarter basis.  Consequently,the timing of the declaration of dividends was moved back one month.  As a result, no dividend declaration wasmade in the first quarter of 2004, but instead was declared at April’s meeting.

 

As discussed in the Corporation’s 2003 Form 10-KSB, the Corporation has$9 million of trust preferred securities outstanding.  Twenty Five (25) percent of the Tier 1 capital ratio can becomprised of the trust preferred issue. As of March 31, 2004, the portion eligible for inclusion in the Tier 1computation amounted to approximately $4.3 million.

 

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**LIQUIDITY**

 

Illini Corporation’s policy is to manage interest raterisk to a level, which places limits on the sensitivity of its earnings tochanges in market interest rates.  Anexplanation of the asset/liability management process is found in theCorporation’s 2003 Form 10-KSB, beginning onpage 16.

 

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

 

Illini Corporation uses a comprehensive analysis of its asset/liabilityfunction, including a review of its funds management policy and its principalmeasure of liquidity.  The Corporationutilizes a liquidity measurement, called “Basic Surplus,” which redefinesliquid assets as the total available assets held by the Corporation which canbe converted to cash in thirty days or less, reduced by short term liabilities,plus available borrowings.  As of March31, 2004, the most recent calculation, Illini Corporation’s basic surplus was$36.6 million, or 14.4% of total average assets.

 

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

 

**PARTI - Item 3.  Controls and Procedures**

 

An evaluation was performed under the supervision and with theparticipation of the Corporation’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Corporation’s disclosure controls and procedures (as definedin Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, asamended) as of March 31, 2004. Based on that evaluation, the Corporation’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Corporation’s disclosure controls and procedures wereeffective. There have been no significant changes in the Corporation’s internalcontrols or in other factors during the first quarter of 2004 that couldsignificantly affect internal controls. While management concluded the disclosure controls and procedures areadequate in all material respects for SEC reporting purposes, the Corporationis currently reviewing its policies and procedures regarding identification andclassification of impaired loans, its asset review process, and its process forvaluing other real estate owned.

 

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**PARTII.  OTHER INFORMATION**

 

Item 1 Legal Proceedings 

 

Various legal claims have arisen against IlliniCorporation in the normal course of business, which, in the opinion of IlliniCorporation management, will not result in any material liability to IlliniCorporation.  Three (3) cases arepending as of April 29,2004.

 

The first case was filed in 1998 by a shareholder ofIllini Corporation against Illinois Stock Transfer Company, as Rights Agent forIllini Corporation under Illini Corporation’s Shareholder Rights Agreement(“Rights Agreement”), for specific performance of the Rights Agreement, onbehalf of the plaintiff individually and on behalf of a class of IlliniCorporation shareholders.  The complaintalleged that the Rights Agreement was triggered in April of 1998, and theRights Agent had a duty under the Rights Agreement to distribute Rights Certificatesto the shareholders of Illini Corporation. Illini Corporation was added as a Defendant in 1999 and the classcertified.  Plaintiff was seeking torecover attorney’s fees from Illini Corporation in addition to otherrelief.  In January of 2000, the trialcourt entered summary judgment in favor of Illini Corporation and IllinoisStock Transfer Company.  Plaintiffappealed this ruling denying Plaintiff’s summary judgment motion to theIllinois Appellate Court.  The AppellateCourt reversed the Summary Judgment for Defendants and remanded the case fortrial on the issue of whether the Illini Corporation Board of Directors actedin good faith in determining that a shareholder’s acceptance of a gift ofIllini Corporation Stock did not trigger the Rights Agreement, and in IlliniCorporation’s later amendment of the Rights Agreement.  The Appellate Court further ruled thePlaintiff’s attorney’s fees were recoverable under the Rights Agreement.  After a series of unsuccessful motions filedby the plaintiff’s counsel, Illini Corporation entered a motion to remove theplaintiff’s attorney.  The court removedthe attorney for the plaintiff class and appointed new counsel to represent theclass.  The removed counsel filed amotion for reconsideration, which was denied. The new counsel filed a Motion For Direction to remove the classrepresentative, which was granted on January 15, 2003.  On March 7, 2003 the trial court appointed asuccessor class representative. The Corporation has negotiated a settlement ofthe suit with the new class representative and class counsel.  The terms of that settlement have beenagreed upon and approved by the court. The agreement provides for a complete resolution of the shareholderclaims 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 in the trial court by the end of June 2004.

 

The second case was filed in August of 2001 by ashareholder against a former shareholder and several past and present directorsof Illini Corporation.  The complaintpurports to bring a derivative cause of action arising out of the redemption ofthe shares of the former shareholder, which is alleged to have caused thedefendants to breach the Shareholder Rights Agreement.  The complaint seeks rescission of the stockredemption and recovery of plaintiff’s attorney’s fees.  In July 2002, the court ordered thisderivative suit stayed pending a decision in other litigation.  In October 2003, plaintiff moved to dismissthe case without prejudice and for an award of attorney’s fees.  Illini Corporation did not oppose the motionto dismiss the case and that motion was granted.  Illini Corporation did oppose the request for attorney’s feesfiled by plaintiff’s attorney.  The requestfor attorney fees was denied by the Court. The decision of the trial court denying the request that IlliniCorporation pay plaintiff’s attorney’s fees is being appealed to the FourthDistrict, Illinois Appellate Court. Illini will continue to vigorously oppose that request for attorney’sfees.

 

In April 2003, Illini Corporation, its directors, andone of its officers were named as defendants in a complaint filed in theCircuit Court of Sangamon County. Plaintiffs seek to rescind the Stock Purchase Agreement entered into bythe Corporation in 2001 to purchase approximately 30% of its common shares froma minority shareholder group.  The StockPurchase Agreement was a normal business transaction beneficial to theCorporation’s shareholders and was entered into after appropriate due diligenceand consultation with the Corporation’s outside financial advisors.  The Corporation has filed motions to dismisson the basis of a prior

 

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pending action and amotion for a stay of proceedings until review of the case by its independent directors.  Those motions remain pending.  The Corporation will vigorously defend thelawsuit.

 

Item 2     Changesin Securities - none

 

Item 3     DefaultsUpon Senior Securities – none

 

Item 4     Submissionof Matters to a Vote of Security Holders – none

 

Item 5     OtherInformation - none

 

Item 6     Exhibitsand Reports 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 March 31, 2004.

 

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**SIGNATURES**

 

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

 

 
| Illini Corporation |   |
|--------------------|--------|
| (Registrant)       |   |

 

 
| By: /s/Burnard K.  McHone |        | May 14, 2004 |   |
|---------------------------|-------------|--------------|--------|
| Burnard K. McHone         | Date signed |
| President                 |        |

 

 
| By: /s/Dennis B.  Guthrie |        | May 14, 2004 |   |
|---------------------------|-------------|--------------|--------|
| Dennis B. Guthrie         | Date signed |
| Chief Financial Officer   |        |

 

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