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

**Washington,D.C.  20549**

 

**FORM 10-QSB**

 
| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |       |
|------------|---------------------------------------------------------------------------------------------------|------------|
|       |                                                                                              |       |
|       | **For quarterly period ended September 30, 2005**                                            |       |
|       |                                                                                              |       |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF  THE EXCHANGE ACT**                   | ** ** |

 

**Commissionfile number   0-13343**

 

**IlliniCorporation**

(Exactname of small business issuer as specified in its charter)

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

 

**3200West Iles Avenue, Springfield, Illinois   62711**

(Addressof principal executive offices)

 

**(217)787-5111**

(Issuer’stelephone number)

 

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

 

Yes  ý  No o

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

 

Yes  o  No ý

 

As of November 8,2005, there were 541,029 shares of common stock, $0.01 par value outstanding.

 

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

 

 

----

 

**ILLINICORPORATION**

INDEXTO FORM 10-QSB

September 30,2005

 
| **PART I.  FINANCIAL INFORMATION** |                                                                                                                    |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                    |   |
| Item 1.                                 | Financial Statements (Unaudited)                                                                                        |   |
|                                    |                                                                                                                    |   |
|                                    | Consolidated  Balance Sheets  September 30, 2005 and December 31, 2004                                        |   |
|                                    |                                                                                                                    |   |
|                                    | Consolidated Statements of Income / (Loss)  Three and Nine Months Ended September 30, 2005 and 2004                |   |
|                                    |                                                                                                                    |   |
|                                    | Consolidated Statements of Shareholders’ Equity  Nine Months Ended September 30, 2005 and 2004                |   |
|                                    |                                                                                                                    |   |
|                                    | Consolidated Statements of Comprehensive Income /  (Loss)  Three and Nine Months Ended September 30, 2005 and 2004 |   |
|                                    |                                                                                                                    |   |
|                                    | Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2005 and 2004                               |   |
|                                    |                                                                                                                    |   |
|                                    | Notes to Unaudited Consolidated Financial Statements                                                                    |   |
|                                    |                                                                                                                    |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |   |
|                                    |                                                                                                                    |   |
| Item 3.                                 | Controls and  Procedures                                                                                                |   |
|                                    |                                                                                                                    |   |
| **PART II. OTHER INFORMATION**     |                                                                                                                    |
|                                    |                                                                                                                    |
| **SIGNATURES**                          |                                                                                                                    |

 

**InformationConcerning Forward-Looking Statements**

 

*Statements contained inthis Form 10-QSB which are not historical facts are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. Thesestatements involve important known and unknown risks, uncertainties and otherfactors and can be identified by phrases using “estimate,” “anticipate,” “believe,”“project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should”and similar expressions or words.  Suchforward-looking statements are subject to risk and uncertainties which couldcause actual results to differ materially from those projected.  Such risks and uncertainties includepotential change in interest rates, competitive factors in the financialservices industry, general economic conditions, the effect of new legislationand other risks detailed in documents filed by Illini Corporation with theSecurities and Exchange Commission from time to time.*

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**September 30,2005 and December 31, 2004**

**(Unaudited)**

 
| ** **                                                                                                                                                  | ** ** | **September 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **(dollars in thousands)**   | ** **  |
| **ASSETS**                                                                                                                                                  | ** ** | ** **                   | ** **  | ** **                  | ** ** |
| Cash and due from banks                                                                                                                                     | ** ** | **$**                        | **5,872**   |                        | $          | 8,136 |   |
| Interest-bearing deposits in other banks                                                                                                                    | ** ** | **79**                       |        | 66                          |       |
| Federal funds sold                                                                                                                                          | ** ** | **677**                      |        | 3,359                       |       |
| Cash and cash equivalents                                                                                                                                   | ** ** | **6,628**                    |        | 11,561                      |       |
| Investment securities available for sale, at fair value                                                                                                     | ** ** | **81,346**                   |        | 56,161                      |       |
| Loans, net of allowance for loan losses of $2,065 and $2,412                                                                                                | ** ** | **142,296**                  |        | 156,160                     |       |
| Federal Home Loan Bank stock                                                                                                                                | ** ** | **897**                      |        | 863                         |       |
| Premises and equipment                                                                                                                                      | ** ** | **5,897**                    |        | 5,903                       |       |
| Accrued interest receivable                                                                                                                                 | ** ** | **1,821**                    |        | 1,649                       |       |
| Other real estate owned                                                                                                                                     | ** ** | **1,106**                    |        | 994                         |       |
| Goodwill                                                                                                                                                    | ** ** | **1,856**                    |        | 1,856                       |       |
| Other assets                                                                                                                                                | ** ** | **5,987**                    |        | 2,369                       |       |
| Total Assets                                                                                                                                                | ** ** | **$**                        | **247,834** |                        | $          | 237,516 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                               | ** ** | ** **                   | ** **  | ** **                  | ** ** |
| Noninterest-bearing demand deposits                                                                                                                         | ** ** | **$**                        | **34,034**  | ** **                  | $          | 37,569 |   |
| Interest-bearing deposits:                                                                                                                                  |       |                         |        |                        |       |
| NOW and money market accounts                                                                                                                               | ** ** | **53,075**                   |        | 57,797                      |       |
| Savings deposits                                                                                                                                            | ** ** | **21,432**                   |        | 21,902                      |       |
| Time deposits, $100,000 and over                                                                                                                            | ** ** | **23,317**                   |        | 13,209                      |       |
| Other time deposits                                                                                                                                         | ** ** | **76,593**                   |        | 68,242                      |       |
| Total Deposits                                                                                                                                              | ** ** | **208,451**                  |        | 198,719                     |       |
| Federal funds purchased and securities sold under agreements to  repurchase                                                                                 | ** ** | **1,285**                    |        | 1,392                       |       |
| Borrowings                                                                                                                                                  | ** ** | **9,000**                    |        | 13,298                      |       |
| Subordinated debentures                                                                                                                                     | ** ** | **9,000**                    |        | 9,000                       |       |
| Accrued interest payable                                                                                                                                    | ** ** | **709**                      |        | 813                         |       |
| Other liabilities                                                                                                                                           | ** ** | **1,356**                    |        | 869                         |       |
| Total Liabilities                                                                                                                                           | ** ** | **229,801**                  |        | 224,091                     |       |
|                                                                                                                                                        |       |                         |        |                        |       |
| Shareholders’ equity                                                                                                                                   |       |                         |        |                        |       |
| Preferred stock, $0.01 par value, authorized and unissued 10,000,000  shares                                                                                | ** ** | **—**                   |        | —                      |       |
| Common stock, $0.01 par value, authorized 45,000,000 shares;698,289  shares issued at September 30, 2005 and 571,789 shares at December 31,  2004 | ** ** | **7**                        |        | 6                           |       |
| Capital surplus                                                                                                                                             | ** ** | **13,059**                   |        | 9,038                       |       |
| Retained earnings                                                                                                                                           | ** ** | **11,649**                   |        | 10,615                      |       |
| Accumulated other comprehensive income                                                                                                                      | ** ** | **395**                      |        | 843                         |       |
| Less: Treasury shares, at cost, 157,260 shares                                                                                                              | ** ** | **(7,077**                   | )           | (7,077                      | )          |
| Total Shareholders’ Equity                                                                                                                             | ** ** | **18,033**                   |        | 13,425                      |       |
| Total Liabilities and Shareholders’ Equity                                                                                                             | ** ** | **$**                        | **247,834** |                        | $          | 237,516 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

3

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**ILLINI CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFINCOME / (LOSS)**

**Three Months and Nine MonthsEnded September 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended  September 30,**        |       | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                          | ** ** | **2004**                                  |       | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest income:                                                            | ** ** | ** **                                        | ** ** | ** **                                |       | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                                       | ** ** | **$**                                             | **2,544**  | ** **                                | $          | 2,613 |   | **$** | **7,447** | ** ** | $ | 8,511 |   |
| Investment securities:                                                      | ** ** | ** **                                        | ** ** | ** **                                |       | ** ** | ** ** | ** ** | ** ** |
| Taxable                                                                     | ** ** | **647**                                           | ** ** | 256                                       |       | **1,671** | ** ** | 772 |   |
| Exempt from federal income taxes                                            | ** ** | **161**                                           | ** ** | 195                                       |       | **512** | ** ** | 555 |   |
| Federal funds sold and interest-bearing deposits                            | ** ** | **21**                                            | ** ** | 35                                        |       | **81** | ** ** | 65 |   |
| Total interest income                                                       | ** ** | **3,373**                                         | ** ** | 3,099                                     |       | **9,711** | ** ** | 9,903 |   |
| Interest expense:                                                           |       |                                              | ** ** |                                      |       |   | ** ** |   |   |
| Deposits:                                                                   |       |                                              | ** ** |                                      |       |   | ** ** |   |   |
| NOW and money market accounts                                               | ** ** | **220**                                           | ** ** | 131                                       |       | **595** | ** ** | 351 |   |
| Savings deposits                                                            | ** ** | **45**                                            | ** ** | 33                                        |       | **138** | ** ** | 100 |   |
| Time deposits, $100,000 and over                                            | ** ** | **182**                                           | ** ** | 97                                        |       | **393** | ** ** | 334 |   |
| Other time deposits                                                         | ** ** | **557**                                           | ** ** | 502                                       |       | **1,541** | ** ** | 1,719 |   |
| Federal funds purchased and securities sold under agreements to  repurchase | ** ** | **15**                                            | ** ** | 4                                         |       | **35** | ** ** | 16 |   |
| Borrowings                                                                  | ** ** | **64**                                            | ** ** | 100                                       |       | **218** | ** ** | 295 |   |
| Subordinated debentures                                                     | ** ** | **244**                                           | ** ** | 244                                       |       | **717** | ** ** | 717 |   |
| Total interest expense                                                      | ** ** | **1,327**                                         | ** ** | 1,111                                     |       | **3,637** | ** ** | 3,532 |   |
| Net interest income                                                         | ** ** | **2,046**                                         | ** ** | 1,988                                     |       | **6,074** | ** ** | 6,371 |   |
| Provision for loan losses                                                   | ** ** | **—**                                        | ** ** | 212                                       |       | **—** | ** ** | 1,602 |   |
| Net interest income after provision for loan losses                         | ** ** | **2,046**                                         | ** ** | 1,776                                     |       | **6,074** | ** ** | 4,769 |   |
| Noninterest income:                                                         |       |                                              | ** ** |                                      |       |   | ** ** |   |   |
| Service charges on deposit accounts                                         | ** ** | **388**                                           | ** ** | 422                                       |       | **1,107** | ** ** | 1,189 |   |
| Other fee income                                                            | ** ** | **48**                                            | ** ** | 72                                        |       | **188** | ** ** | 227 |   |
| Mortgage loan servicing fees                                                | ** ** | **26**                                            | ** ** | 24                                        |       | **57** | ** ** | 114 |   |
| Gains (losses) on sales/transfers of mortgage loans                         | ** ** | **36**                                            | ** ** | 17                                        |       | **64** | ** ** | (195 | ) |
| Investment securities gains                                                 | ** ** | **—**                                        | ** ** | —                                    |       | **63** | ** ** | 27 |   |
| Gains (losses) on sale of other real estate owned                           | ** ** | **4**                                             | ** ** | (29                                       | )          | **(7** | **)** | (64 | ) |
| Other                                                                       | ** ** | **140**                                           | ** ** | 45                                        |       | **287** | ** ** | 147 |   |
| Total noninterest income                                                    | ** ** | **642**                                           | ** ** | 551                                       |       | **1,759** | ** ** | 1,445 |   |
| Noninterest expense:                                                        |       |                                              | ** ** |                                      |       |   | ** ** |   |   |
| Salaries and employee benefits                                              | ** ** | **1,045**                                         | ** ** | 1,263                                     |       | **3,069** | ** ** | 3,947 |   |
| Net occupancy expense                                                       | ** ** | **192**                                           | ** ** | 182                                       |       | **549** | ** ** | 550 |   |
| Equipment expense                                                           | ** ** | **47**                                            | ** ** | 55                                        |       | **130** | ** ** | 154 |   |
| Data processing fees                                                        | ** ** | **180**                                           | ** ** | 152                                       |       | **517** | ** ** | 532 |   |
| Supplies expense                                                            | ** ** | **44**                                            | ** ** | 54                                        |       | **124** | ** ** | 122 |   |
| Communication and transportation expense                                    | ** ** | **109**                                           | ** ** | 125                                       |       | **367** | ** ** | 375 |   |
| Marketing and advertising expense                                           | ** ** | **69**                                            | ** ** | 82                                        |       | **189** | ** ** | 211 |   |
| Correspondent bank fees                                                     | ** ** | **66**                                            | ** ** | 72                                        |       | **193** | ** ** | 170 |   |
| Loan foreclosure and other real estate owned expense                        | ** ** | **56**                                            | ** ** | 338                                       |       | **172** | ** ** | 1,778 |   |
| Professional fees                                                           | ** ** | **132**                                           | ** ** | 157                                       |       | **445** | ** ** | 459 |   |
| Regulatory fees                                                             | ** ** | **31**                                            | ** ** | 36                                        |       | **111** | ** ** | 82 |   |
| Other                                                                       | ** ** | **165**                                           | ** ** | 44                                        |       | **443** | ** ** | 393 |   |
| Total noninterest expense                                                   | ** ** | **2,136**                                         | ** ** | 2,560                                     |       | **6,309** | ** ** | 8,773 |   |
| Income (loss) before income tax expense (benefit)                           | ** ** | **552**                                           | ** ** | (233                                      | )          | **1,524** | ** ** | (2,559 | ) |
| Income tax expense (benefit)                                                | ** ** | **118**                                           | ** ** | (169                                      | )          | **328** | ** ** | (1,204 | ) |
| Net income (loss)                                                           | ** ** | **$**                                             | **434**    | ** **                                | $          | (64 | ) | **$** | **1,196** | ** ** | $ | (1,355 | ) |
| Basic and diluted earnings (loss) per share                                 | ** ** | **$**                                             | **0.80**   | ** **                                | $          | (0.15 | ) | **$** | **2.30** | ** ** | $ | (3.27 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

4

----

 

**ILLINI CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

**Nine Months Ended September 30,2005 and 2004**

**(Unaudited)**

 
| ** **                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
| Common Stock                              |       |                                      |       |   |   |
| Beginning of year balance                 | ** ** | **$**                                     | **6**      | ** ** | **$** | **6** | ** ** |
| Issuance of shares from private placement | ** ** | **1**                                     | ** ** | **—** | ** ** |
| End of period balance                     | ** ** | **7**                                     | ** ** | **6** | ** ** |
| ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Capital  Surplus                          | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Beginning of year balance                 | ** ** | **9,038**                                 | ** ** | **9,070** | ** ** |
| Sale of treasury stock                    | ** ** | **—**                                | ** ** | **(32** | **)** |
| Issuance of shares from private placement | ** ** | **4,021**                                 | ** ** | **—** | ** ** |
| End of period balance                     | ** ** | **13,059**                                | ** ** | **9,038** | ** ** |
| ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Retained  Earnings                        | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Beginning of year balance                 | ** ** | **10,615**                                | ** ** | **12,068** | ** ** |
| Net income (loss)                         | ** ** | **1,196**                                 | ** ** | **(1,355** | **)** |
| Dividends on common stock                 | ** ** | **(162**                                  | **)**      | **(144** | **)** |
| End of period balance                     | ** ** | **11,649**                                | ** ** | **10,569** | ** ** |
| ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Treasury  Stock                           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Beginning of year balance                 | ** ** | **(7,077**                                | **)**      | **(7,204** | **)** |
| Sale of treasury stock                    | ** ** | **—**                                | ** ** | **127** | ** ** |
| End of period balance                     | ** ** | **(7,077**                                | **)**      | **(7,077** | **)** |
| ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Accumulated  Other Comprehensive Income   | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Beginning of year balance                 | ** ** | **843**                                   | ** ** | **1,101** | ** ** |
| Unrealized loss on securities, net of tax | ** ** | **(448**                                  | **)**      | **(76** | **)** |
| End of period balance                     | ** ** | **395**                                   | ** ** | **1,025** | ** ** |
| ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Total  Shareholders’ Equity          | ** ** | **$**                                     | **18,033** | ** ** | **$** | **13,561** | ** ** |

 

See accompanying notes to unaudited consolidated financial statements.

 

**ILLINI CORPORATION ANDSUBSIDIARIES**

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

**Three Months and Nine MonthsEnded September 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                           | ** ** | **(dollars in thousands)**                 | ** ** | **(dollars in thousands)**                | ** ** |
| Net Income  (loss)                                                                                                   | ** ** | **$**                                      | **434**    |                                      | $          | (64 | ) | **$** | **1,196** |   | $ | (1,355 | ) |
| Other comprehensive income, unrealized gains (losses) on securities,  net of reclassification adjustment, net of tax | ** ** | **(306**                                   | **)**      | 550                                       | ** ** | **(448** | **)** | (76 | ) |
| Comprehensive  income (loss)                                                                                         | ** ** | **$**                                      | **128**    |                                      | $          | 486 | ** ** | **$** | **748** |   | $ | (1,431 | ) |

 

See accompanying notes to unaudited consolidated financial statements.

 

5

----

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**NineMonths Ended September 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **2005**                   | ** ** | **2004**   |   |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|--------|
| ** **                                                                                          | ** ** | **(dollars in thousands)** |       |
| Cash flows from operating activities:                                                               |       |                       | ** ** |       |   |
| Net income (loss)                                                                                   | ** ** | **$**                      | **1,196**  | ** ** | $      | (1,355 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities: |       |                       | ** ** |       |   |
| Depreciation                                                                                        | ** ** | **428**                    | ** ** | 533        |   |
| Provision for loan losses                                                                           | ** ** | **—**                 | ** ** | 1,602      |   |
| Investment security amortization, net                                                               | ** ** | **55**                     | ** ** | 55         |   |
| Gains on sales of investment securities, net                                                        | ** ** | **(63**                    | **)**      | (27        | )      |
| Federal Home Loan Bank stock dividend                                                               | ** ** | **(34**                    | **)**      | (37        | )      |
| (Gains) losses on sales of premises and equipment                                                   | ** ** | **(2**                     | **)**      | 1          |   |
| (Gains) losses on sales of mortgage loans, net                                                      | ** ** | **(64**                    | **)**      | 195        |   |
| Valuation allowance established or direct write-down for other real  estate owned                   | ** ** | **—**                 | ** ** | 1,203      |   |
| Losses on sales of other real estate owned                                                          | ** ** | **7**                      | ** ** | 64         |   |
| (Increase) decrease in accrued interest receivable                                                  | ** ** | **(172**                   | **)**      | 163        |   |
| Decrease in accrued interest payable                                                                | ** ** | **(104**                   | **)**      | (490       | )      |
| Origination of secondary market mortgage loans                                                      | ** ** | **(5,955**                 | **)**      | (3,993     | )      |
| Proceeds from the sales of secondary market mortgage loans                                          | ** ** | **6,019**                  | ** ** | 13,628     |   |
| Other, net                                                                                          | ** ** | **(2,876**                 | **)**      | (1,184     | )      |
| Net cash provided by (used in) operating activities                                                 | ** ** | **(1,565**                 | **)**      | 10,358     |   |
| Cash flows from investing activities:                                                               |       |                       | ** ** |       |   |
| Proceeds from sales of investment securities available for sale                                     | ** ** | **2,602**                  | ** ** | 1,545      |   |
| Proceeds from maturities and paydowns of investment securities  available for sale                  | ** ** | **7,794**                  | ** ** | 14,246     |   |
| Purchases of investment securities available for sale                                               | ** ** | **(36,276**                | **)**      | (17,649    | )      |
| Net decrease in loans                                                                               | ** ** | **13,543**                 | ** ** | 13,806     |   |
| Purchases of premises and equipment                                                                 | ** ** | **(422**                   | **)**      | (418       | )      |
| Proceeds from sale of premises and equipment                                                        | ** ** | **2**                      | ** ** | 21         |   |
| Proceeds from sales of other real estate owned                                                      | ** ** | **202**                    | ** ** | 592        |   |
| Net cash provided by (used in) investing activities                                                 | ** ** | **(12,555**                | **)**      | 12,143     |   |
| Cash flows from financing activities:                                                               |       |                       | ** ** |       |   |
| Net decrease in noninterest-bearing deposit accounts                                                | ** ** | **(3,535**                 | **)**      | (322       | )      |
| Net increase (decrease) in NOW, money market accounts and savings  deposits                         | ** ** | **(5,192**                 | **)**      | 773        |   |
| Net increase (decrease) in time deposits, $100,000 and over                                         | ** ** | **10,108**                 | ** ** | (4,482     | )      |
| Net increase (decrease) in other time deposits                                                      | ** ** | **8,351**                  | ** ** | (19,484    | )      |
| Net increase (decrease) in securities sold under agreements to  repurchase                          | ** ** | **(107**                   | **)**      | 160        |   |
| Proceeds from sale of treasury shares                                                               | ** ** | **—**                 | ** ** | 95         |   |
| Proceeds from issuance of shares from private placement, net of  expenses                           | ** ** | **4,022**                  | ** ** | —     |   |
| Proceeds of borrowings                                                                              | ** ** | **—**                 | ** ** | 6,000      |   |
| Repayment of borrowings                                                                             | ** ** | **(4,298**                 | **)**      | (4,038     | )      |
| Cash dividends paid                                                                                 | ** ** | **(162**                   | **)**      | (144       | )      |
| Net cash provided by (used in) financing activities                                                 | ** ** | **9,187**                  | ** ** | (21,442    | )      |
|                                                                                                |       |                       | ** ** |       |   |
| Net increase (decrease) in cash and cash equivalents                                                | ** ** | **(4,933**                 | **)**      | 1,059      |   |
| Cash and cash equivalents at beginning of period                                                    | ** ** | **11,561**                 | ** ** | 15,916     |   |
|                                                                                                |       |                       | ** ** |       |   |
| Cash and cash equivalents at end of period                                                          | ** ** | **$**                      | **6,628**  | ** ** | $      | 16,975 |   |
| Supplemental Disclosures                                                                            |       |                       | ** ** |       |   |
| Transfer of loans held for sale to loan portfolio                                                   | ** ** | **$**                      | **—** | ** ** | 5,457  |   |
| Transfer of loans to other real estate owned                                                        | ** ** | **$**                      | **321**    | ** ** | 819    |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

6

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**ILLINICORPORATION AND SUBSIDIARIES**

**Notesto Unaudited Consolidated Financial Statements**

**September 30,2005**

 

(1)                                  Basis of Presentation

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions to Form 10-QSB and, therefore, do notinclude all of the information and notes required by accounting principlesgenerally accepted in the United States of America for complete consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  For further information, refer to theconsolidated financial statements and footnotes included in the IlliniCorporation (“Corporation”) Annual Report on Form 10-KSB for the yearended December 31, 2004.  Certainamounts in the 2004 consolidated financial statements have been reclassified toconform to the 2005 presentation.  Suchreclassifications have no effect on previously reported consolidated net incomeor shareholders’ equity.  Theconsolidated balance sheet of the Corporation as of December 31, 2004 hasbeen derived from the audited consolidated balance sheet of the Corporation asof that date.

 

Resultsfor the three and nine months ended September 30, 2005 may not beindicative of the annual performance of the Corporation or the subsidiary banks,Illini Bank 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  September 30,**        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                          | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net Income  (loss)                          | ** ** | **$**                                             | **434**    |                                      | $          | (64 | ) | **$** | **1,196** |   | $ | (1,355 | ) |
| ** **                                  | ** ** | ** **                                        | ** ** | ** **                                |       | ** ** | ** ** | ** ** | ** ** |
| Weighted  average common shares outstanding | ** ** | **541,029**                                       |       | 414,529                                   | ** ** | **519,251** |   | 413,868 |   |
|                                             |            |                                                   |            |                                           |            |  |  |  |  |  |  |  |  |

 

(3)                                  Use of 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.

 

7

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(4)                                  Allowance For Loan Losses

 

In originatingloans, the Corporation recognizes that loan losses will be experienced and therisk of loss will vary with, among other things, current economic conditions;the type of loan being made; the creditworthiness of the borrower over the termof the loan; and in the case of a collateralized loan, the quality of thecollateral for such loan.  The allowancefor loan losses represents the Corporation’s estimate of the allowancenecessary to provide for probable incurred losses in the loan portfolio.  In making this determination, the Corporationanalyzes the ultimate collectibility of the loans in its portfolio, incorporatingfeedback provided by internal loan staff, the independent loan review functionand information provided 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 lossesfor the nine months ended September 30, 2005 and 2004 are summarizedbelow:

 
| ** **                       | ** ** | **Nine months ended  September 30,** | ** **  |
|----------------------------------|------------|-------------------------------------------|-------------|
| ** **                       | ** ** | **2005**                                  | ** **  | **2004** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**                | ** **  |
| **Allowance  for Loan Losses:**  | ** ** | ** **                                | ** **  | ** ** | ** ** |
| Balance at  beginning of period  | ** ** | **$**                                     | **2,412**   |   | $ | 2,359 |   |
|                             |       |                                      |        |   |   |
| Charge-offs                      | ** ** | **(613**                                  | )           | (1,353 | ) |
| Recoveries                       | ** ** | **266**                                   |        | 129 |   |
| Net  charge-offs                 | ** ** | **(347**                                  | )           | (1,224 | ) |
|                             |       |                                      |        |   |   |
| Provision  charged to operations |       | —                                    |        | 1,602 |   |
| Balance at  end of period        | ** ** | **$**                                     | **2,065**   |   | $ | 2,737 |   |
| Average  loans outstanding       | ** ** | **$**                                     | **149,548** |   | $ | 177,870 |   |

 

(5)                                  Regulatory Matters 

 

The Corporationoperates in a regulated industry and is subject to various regulatoryconstraints, including some which limit the amount of dividends that may bepaid by a subsidiary bank or which require prior regulatory approval.  At September 30,2005, Illini Bank had retained earnings of approximately $4,024,000 availableto be paid to the Corporation and still be considered well capitalized andFarmers State Bank of Camp Point had retained earnings of approximately$726,000 available to be paid to the Corporation and still be considered wellcapitalized.

 

In July 2004,Illini Corporation approved a resolution requested by the Federal Reserve Bankof Chicago (FRB-Chicago) that includes prior regulatory approval for payment ofdividends to shareholders.  The resultsof a subsequent review conducted by the FRB-Chicago in June 2005 indicatedan improvement in the overall condition of the Corporation.  The resolution was rescinded at the September 2005meeting of the Corporation’s Board of Directors.

 

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**PART I - Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005**

 

**SELECTED FINANCIAL RESULTS**

 

The following table shows selectedfinancial results and measures for the three and nine months ended September 30,2005 compared with the same period in 2004.

 
| ** **                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **Change** | ** ** | **Change-  %** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Change-  %** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| Net income                     | ** ** | **$**                                     | **434**    | ** **                               | $          | (64 | ) | $ | 498 |   | 778.1 | % | **$** | **1,196** | ** ** | $ | (1,355 | ) | $ | 2,551 |   | 188.3 | % |
| Average assets                 | ** ** | **251,461**                               | ** ** | 240,448                                  |       | 11,013 |   | 4.6 | % | **248,551** | ** ** | 247,435 |   | 1,116 |   | 0.5 | % |
| Average equity                 | ** ** | **17,878**                                | ** ** | 13,392                                   |       | 4,486 |   | 33.5 | % | **17,155** | ** ** | 13,967 |   | 3,188 |   | 22.8 | % |
| Return on assets               | ** ** | **0.68**                                  | **%**      | (0.11                                    | )%         | 0.79 | % | 718.2 | % | **0.64** | **%** | (0.73 | )% | 1.37 | % | 187.7 | % |
| Return on equity               | ** ** | **9.63**                                  | **%**      | (1.90                                    | )%         | 11.53 | % | 606.8 | % | **9.32** | **%** | (12.92 | )% | 22.24 | % | 172.1 | % |
| Efficiency ratio               | ** ** | **77.06**                                 | **%**      | 97.26                                    | %          | (20.20 | )% | (20.8 | )% | **77.94** | **%** | 108.56 | % | (30.62 | )% | (28.2 | )% |
| Dividend payout ratio          | ** ** | **12.47**                                 | **%**      | (64.77                                   | )%         | 77.24 | % | 119.3 | % | **13.02** | **%** | (10.69 | )% | 23.71 | % | 221.8 | % |
| Equity to assets ratio         | ** ** | **7.11**                                  | **%**      | 5.57                                     | %          | 1.54 | % | 27.6 | % | **6.90** | **%** | 5.64 | % | 1.26 | % | 22.3 | % |
| Tier 1 leverage ratio          | ** ** | **8.61**                                  | **%**      | 6.14                                     | %          | 2.47 | % | 40.2 | % |   |   |   |   |   |   |   |   |
| Total risk-based capital ratio | ** ** | **15.68**                                 | **%**      | 12.03                                    | %          | 3.65 | % | 30.3 | % |   |   |   |   |   |   |   |   |
|                                |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Definitions ofratios:

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

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

Efficiencyratio - noninterest expense divided by noninterest income plus taxableequivalent net interest income.

Dividendpayout ratio - dividends per share divided by net income per share.

Equity toassets ratio - average equity divided by average assets.

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

Totalrisk-based capital ratio - Total risk based capital divided by total riskweighted assets.

 

TheCorporation recorded net income of $434,000 for the three months ended September 30,2005, up $498,000 from the net operating loss of $64,000 for the same period in2004, and net income of $1,196,000 for the nine months ended September 30,2005, up $2,551,000 from the net operating loss of $1,355,000 for the sameperiod in 2004.  The return on averageequity for the three months ended September 30, 2005 was 9.63% as comparedto a negative 1.9% for the same period in 2004. The return on average equity for the nine months ended September 30,2005 was 9.32% as compared to a negative 12.92% for the same period in2004.  Similarly, basic and dilutedearnings (loss) per share for the three months ended September 30, 2005were $0.80 per share versus $(0.15) for the same period in 2004, representingan increase of 633.3%.  Basic and dilutedearnings (loss) per share for the nine months ended September 30, 2005were $2.30 per share versus $(3.27) for the same period in 2004, representingan increase of 170.3%.  The first ninemonths of 2005 reflected more normalized earnings for the Corporation.  The operating loss in the first nine monthsof 2004 was primarily the result of four main activities: the large provisionfor loan losses; the reduction in the carrying values on three properties inother real estate owned; the loss on sales of mortgage loans; and an increasein salaries and employee benefits expense. These items are discussed in moredetail in the Results of Operations section of this document.

 

9

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**FINANCIAL CONDITION**

 

Average earning assets of theCorporation for the first nine months of 2005 decreased by $0.3 million (0.1%)to $225.0 million, compared to $225.3 million for the same period in 2004.

 

Average loans decreased $19.5million (11.7%) to $147.3 million for the three months ended September 30,2005, compared to $166.8 million for the same period in 2004.  Declines in average balances were seen in allmajor categories of the loan portfolio, ranging from decreases of $5.7 millionin agricultural loans, $5.4 million in commercial real estate loans, to $3.7million in commercial loans, $2.4 million in residential real estate loans,$1.4 million in consumer and credit card loans, and $0.8 million inagricultural real estate loans.

 

Average loansdecreased $28.4 million (16.0%) to $149.5 million for the nine months ended September 30,2005, compared to $177.9 million for the same period in 2004.  Residential real estate loans experienced adecline in average balances of $7.7 million from year ago averages, as IlliniBank sold $15.2 million in residential real estate loans that were classifiedas held for sale during the second quarter of 2004.  Declines in average balances were seen in theother major categories of the loan portfolio, ranging from a $7.8 million decreasein commercial loans, to $5.7 million in commercial real estate loans, $4.7million in agricultural loans, $1.6 million in consumer and credit card loans,and $0.8 million in agricultural real estate loans.  These decreases are reflective of management’sefforts during the course of 2004 and continuing into 2005 to eliminate certainloan relationships and reduce concentrations of credit in the main categoriesof loans.

 

Averagebalances of the securities portfolio increased by $38.1 million for the threemonths and $32.2 million for the nine months ended September 30, 2005, ascompared to the same periods in 2004. Illini Bank purchased short-term U.S. Treasury Notes and U.S. Agenciesprimarily from the proceeds from loan payoffs, and a successful certificate ofdeposit promotion offered during the first quarter of 2005.

 

The impact ofmanagement’s decision in the latter part of 2003 to reduce its exposure to outof the area certificates of deposit as a funding source for loan and investmentactivity continued to be seen in the Corporation’s deposit portfolio.  Average balances for time deposits less than$100,000 decreased $4.2 million. Average balances for time deposits $100,000and over increased by $8.4 million, and $2.5 million for the three month andnine month periods of 2005, respectively, as compared to the same periods in2004.  These increases reflected theCorporation’s ability to acquire deposits from public entities in the marketsthe Corporation serves, at rates below those being demanded for out of the areacertificates of deposit.  The net effectof the shift in the composition of time deposits portfolios was an increase inthe Corporation’s funding costs of 15 basis points, to 2.53% for the first ninemonths of 2005, as compared to 2.38% for the same period in 2004.  The increase in funding costs, combined witha shift in the composition of earning assets from loans to securities and thelower yield associated with the securities portfolio, resulted in a compressionof the Corporation’s net interest margin of 16 basis points, from 3.92% as of September 30,2004, to 3.76% as of September 30, 2005.

 

The subsidiary banks maintain anovernight federal funds line of credit with an unaffiliated financialinstitution and a collateralized borrowing capacity with the Federal Home LoanBank of Chicago.

 

**RESULTS OF OPERATIONS**

 

This discussion should be read inconjunction with the consolidated financial statements, notes, and tablesincluded elsewhere in this report and in the 2004 Illini Corporation AnnualReport on Form 10-KSB (2004 Form 10-KSB).

 

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Net InterestIncome

 

The following tables show averagebalances and related interest income or interest expense, with the resultingaverage yield or rate by category of average earning assets or interest bearingliabilities.  Interest income and theresulting net interest income are shown on a tax equivalent basis.

 

**Consolidated Average Balances, InterestIncome/Expense and Yield/Rates**

 
| ** **                                      | ** ** | **Three months ended September 30,** | ** **  |
|-------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                      | ** ** | **2005**                                  | ** **  | **2004** | ** ** |
| ** **                                      | ** ** | **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                          | ** ** | **$**                                     | **2,520**   | ** ** | **$** | **21** | ** ** | **3.35** | **%** | $ | 11,654 |   | $ | 35 |   | 1.19 | % |
| Investment securities (3)                       |       |                                      |        |   |   |   | ** ** |   |   |   |   |   |   |
| Taxable                                         | ** ** | **69,329**                                | ** **  | **647** | ** ** | **3.73** | ** ** | 28,282 |   | 256 |   | 3.63 |   |
| Tax-exempt (1)                                  | ** ** | **11,591**                                | ** **  | **234** | ** ** | **8.07** | ** ** | 14,510 |   | 283 |   | 7.79 |   |
| Total securities                                | ** ** | **80,920**                                | ** **  | **881** | ** ** | **4.36** | ** ** | 42,792 |   | 539 |   | 5.04 |   |
| Loans                                           |       |                                      |        |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial (1)                                  | ** ** | **25,261**                                | ** **  | **478** | ** ** | **7.50** | ** ** | 28,971 |   | 436 |   | 5.97 |   |
| Agriculture                                     | ** ** | **6,717**                                 | ** **  | **121** | ** ** | **7.17** | ** ** | 12,389 |   | 161 |   | 5.15 |   |
| Real estate                                     |       |                                      |        |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial                                      | ** ** | **84,355**                                | ** **  | **1,441** | ** ** | **6.78** | ** ** | 89,785 |   | 1,410 |   | 6.23 |   |
| Agriculture                                     | ** ** | **4,727**                                 | ** **  | **81** | ** ** | **6.80** | ** ** | 5,512 |   | 93 |   | 6.71 |   |
| Residential                                     | ** ** | **22,767**                                | ** **  | **364** | ** ** | **6.34** | ** ** | 25,194 |   | 401 |   | 6.31 |   |
| Consumer, net                                   | ** ** | **3,488**                                 | ** **  | **70** | ** ** | **7.96** | ** ** | 4,279 |   | 91 |   | 8.40 |   |
| Credit card                                     | ** ** | **—**                                | ** **  | **—** | ** ** | **—** | ** ** | 640 |   | 26 |   | 16.05 |   |
| Total loans                                     | ** ** | **147,315**                               | ** **  | **2,555** | ** ** | **6.88** | ** ** | 166,770 |   | 2,618 |   | 6.23 |   |
| Allowance for loan losses                       | ** ** | **(2,321**                                | )           |   | ** ** | ** ** | ** ** | (2,640 | ) | ** ** | ** ** | ** ** | ** ** |
| Net loans (1) (2)                          | ** ** | **144,994**                               | ** **  | **2,555** | ** ** | **6.99** | ** ** | 164,130 |   | 2,618 |   | 6.33 |   |
| Total interest-earning assets                   | ** ** | **228,434**                               | ** **  | **3,457** | ** ** | **6.00** | ** ** | 218,576 |   | 3,192 |   | 5.79 |   |
| Other assets                                    | ** ** | **23,027**                                |        |   |   |   | ** ** | 21,872 |   |   |   |   |   |
| Total assets                                    | ** ** | **$**                                     | **251,461** |   |   |   |   | ** ** | $ | 240,448 |   |   |   |   |   |
| **LIABILITIES**                                 |       |                                      |        |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  liabilities:                  |       |                                      |        |   |   |   | ** ** |   |   |   |   |   |   |
| Deposits:                                       |       |                                      |        |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing demand                         | ** ** | **$**                                     | **54,370**  | ** ** | **$** | **220** | ** ** | **1.61** | **%** | $ | 59,911 |   | $ | 131 |   | 0.87 | % |
| Savings                                         | ** ** | **22,441**                                | ** **  | **45** | ** ** | **0.80** | ** ** | 21,971 |   | 33 |   | 0.60 |   |
| Time deposits less than $100,000                | ** ** | **77,647**                                | ** **  | **557** | ** ** | **2.85** | ** ** | 74,010 |   | 502 |   | 2.69 |   |
| Time deposits $100,000 and over                 | ** ** | **22,051**                                | ** **  | **182** | ** ** | **3.28** | ** ** | 13,694 |   | 97 |   | 2.81 |   |
| Total interest-bearing deposits                 | ** ** | **176,509**                               | ** **  | **1,004** | ** ** | **2.26** | ** ** | 169,586 |   | 763 |   | 1.79 |   |
| Short-term borrowings                           | ** ** | **1,639**                                 | ** **  | **15** | ** ** | **3.51** | ** ** | 567 |   | 4 |   | 2.49 |   |
| Long-term borrowings                            | ** ** | **10,456**                                | ** **  | **64** | ** ** | **2.44** | ** ** | 13,308 |   | 100 |   | 2.97 |   |
| Subordinated debentures (4)                     | ** ** | **9,000**                                 | ** **  | **244** | ** ** | **10.74** | ** ** | 9,000 |   | 244 |   | 10.74 |   |
| Total interest-bearing liabilities              | ** ** | **197,604**                               | ** **  | **1,327** | ** ** | **2.66** | ** ** | 192,461 |   | 1,111 |   | 2.29 |   |
| Other  liabilities                              | ** ** | **35,979**                                |        |   |   |   | ** ** | 34,595 |   |   |   |   |   |
| Shareholders’  equity                      | ** ** | **17,878**                                |        |   |   |   | ** ** | 13,392 |   |   |   |   |   |
| Total liabilities and shareholders’ equity | ** ** | **$**                                     | **251,461** |   |   |   |   | ** ** | $ | 240,448 |   |   |   |   |   |
| **Net  interest margin**                        | ** ** | ** **                                | ** **  | **$** | **2,130** | ** ** | **3.70** | **%** |   |   | $ | 2,081 |   | 3.78 | % |

 

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

 

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adjustments.  The federal statutory rate was 34% for allperiods presented.

(2)        Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $84,000 in 2005 and$77,000 in 2004.

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

(4)        Theaverage balance for the Corporation is based on monthly average balances versusa daily average balance.

 

Net interest margin is a measure ofthe net return on interest-earning assets and is computed by dividingannualized net interest income by the average of total interest-earning assetsfor the period.

 

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

 
| ** **                                      | ** ** | **Nine months ended September 30,** | ** **  |
|-------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                      | ** ** | **2005**                                 | ** **  | **2004** | ** ** |
| ** **                                      | ** ** | **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                          | ** ** | **$**                                    | **3,960**   | ** ** | **$** | **81** |   | **2.75** | **%** | $ | 8,427 |   | $ | 65 |   | 1.02 | % |
| Investment securities (3)                       |       |                                     | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Taxable                                         | ** ** | **61,381**                               | ** **  | **1,671** |   | **3.63** | ** ** | 27,602 |   | 772 |   | 3.73 |   |
| Tax-exempt (1)                                  | ** ** | **12,398**                               | ** **  | **742** |   | **7.98** | ** ** | 13,938 |   | 805 |   | 7.70 |   |
| Total securities                                | ** ** | **73,779**                               | ** **  | **2,413** |   | **4.36** | ** ** | 41,540 |   | 1,577 |   | 5.06 |   |
| Loans                                           |       |                                     | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial (1)                                  | ** ** | **25,391**                               | ** **  | **1,369** |   | **7.21** | ** ** | 33,204 |   | 1,498 |   | 6.01 |   |
| Agriculture                                     | ** ** | **8,020**                                | ** **  | **397** |   | **6.62** | ** ** | 12,672 |   | 474 |   | 4.99 |   |
| Real estate                                     |       |                                     | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial                                      | ** ** | **84,572**                               | ** **  | **4,210** |   | **6.66** | ** ** | 90,276 |   | 4,476 |   | 6.60 |   |
| Agriculture                                     | ** ** | **4,833**                                | ** **  | **199** |   | **5.51** | ** ** | 5,669 |   | 302 |   | 7.10 |   |
| Residential                                     | ** ** | **22,906**                               | ** **  | **1,066** |   | **6.22** | ** ** | 30,635 |   | 1,394 |   | 6.06 |   |
| Consumer, net                                   | ** ** | **3,521**                                | ** **  | **210** |   | **7.96** | ** ** | 4,750 |   | 299 |   | 8.40 |   |
| Credit card                                     | ** ** | **305**                                  | ** **  | **27** |   | **12.02** | ** ** | 664 |   | 84 |   | 16.83 |   |
| Total loans                                     | ** ** | **149,548**                              | ** **  | **7,478** |   | **6.69** | ** ** | 177,870 |   | 8,527 |   | 6.39 |   |
| Allowance for loan losses                       | ** ** | **(2,316**                               | **)**       |   |   | ** ** | ** ** | (2,516 | ) | ** ** | ** ** | ** ** | ** ** |
| Net loans (1) (2)                          | ** ** | **147,232**                              | ** **  | **7,478** |   | **6.79** | ** ** | 175,354 |   | 8,527 |   | 6.48 |   |
| Total interest-earning assets                   | ** ** | **224,971**                              | ** **  | **9,972** |   | **5.93** | ** ** | 225,321 |   | 10,169 |   | 6.01 |   |
| Other assets                                    | ** ** | **23,580**                               | ** **  | ** ** |   | ** ** | ** ** | 22,114 |   |   |   |   |   |
| Total assets                                    | ** ** | **$**                                    | **248,551** | ** ** | ** ** |   | ** ** | ** ** | $ | 247,435 |   |   |   |   |   |
| **LIABILITIES**                                 |       |                                     | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       |                                     | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Deposits:                                       |       |                                     | ** **  |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing demand                         | ** ** | **$**                                    | **55,132**  | ** ** | **$** | **595** |   | **1.44** | **%** | $ | 57,410 |   | $ | 351 |   | 0.81 | % |
| Savings                                         | ** ** | **22,743**                               | ** **  | **138** |   | **0.81** | ** ** | 22,128 |   | 100 |   | 0.60 |   |
| Time deposits less than $100,000                | ** ** | **75,730**                               | ** **  | **1,541** |   | **2.72** | ** ** | 79,934 |   | 1,719 |   | 2.86 |   |
| Time deposits $100,000 and over                 | ** ** | **17,276**                               | ** **  | **393** |   | **3.04** | ** ** | 14,815 |   | 334 |   | 3.01 |   |
| Total interest-bearing deposits                 | ** ** | **170,881**                              | ** **  | **2,667** |   | **2.09** | ** ** | 174,287 |   | 2,504 |   | 1.91 |   |
| Short-term borrowings                           | ** ** | **1,505**                                | ** **  | **35** |   | **3.07** | ** ** | 1,123 |   | 16 |   | 1.89 |   |
| Long-term borrowings                            | ** ** | **11,071**                               | ** **  | **218** |   | **2.63** | ** ** | 12,884 |   | 295 |   | 3.05 |   |
| Subordinated debentures (4)                     | ** ** | **9,000**                                | ** **  | **717** |   | **10.65** | ** ** | 9,000 |   | 717 |   | 10.61 |   |
| Total interest-bearing liabilities              | ** ** | **192,457**                              | ** **  | **3,637** |   | **2.53** | ** ** | 197,294 |   | 3,532 |   | 2.38 |   |
| Other liabilities                               | ** ** | **38,939**                               | ** **  | ** ** |   | ** ** | ** ** | 36,174 |   |   |   |   |   |
| Shareholders’ equity                       | ** ** | **17,155**                               | ** **  | ** ** |   | ** ** | ** ** | 13,967 |   |   |   |   |   |
| Total liabilities and shareholders’ equity | ** ** | **$**                                    | **248,551** | ** ** | ** ** |   | ** ** | ** ** | $ | 247,435 |   |   |   |   |   |
| **Net interest margin**                         | ** ** | ** **                               | ** **  | **$** | **6,335** |   | **3.76** | **%** |   |   | $ | 6,637 |   | 3.92 | % |

 

12

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

(2)       Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $355,000 in 2005 and$270,000 in 2004.

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

(6)       Theaverage balance for the Corporation is based on monthly average balances versusa daily average balance.

 

Net interest margin is a measure ofthe net return on interest-earning assets and is computed by dividingannualized net interest income by the average of total interest-earning assetsfor the period.

 

Net interest income on a taxequivalent basis for the first nine months of 2005 was $6.3 million, down$302,000 (4.6%) from the $6.6 million reported for the same period in2004.  This decrease resulted fromchanges in the volume of assets and liabilities, as well as changes in interestrates.

 

Provision forLoan Losses

 

The amount ofthe provision for loan losses is based on management’s evaluations of the loanportfolio, with particular attention directed toward nonperforming, impairedand other potential problem loans.  Duringthese evaluations, consideration is also given to such factors as management’sevaluation of specific loans, the level and composition of impaired loans,other nonperforming loans, other identified potential problem loans, historicalloss experience, results of examinations by regulatory agencies, results of anyindependent asset quality review process, the market value of collateral, theestimate of discounted cash flows, the strength and availability of guarantees,concentrations of credits, and various other factors, including concentrationof credit risk in various industries and current economic conditions.

 

Nonperformingloans were $2,779,000 at September 30, 2005, up $68,000 from December 31,2004 and down $177,000 from September 30, 2004.  The increase from year-end 2004 was theresult of seven smaller credits, with an aggregate balance of $672,000 as of September 30,2005, moving into non-performing status; the transfer of two credits to otherreal estate owned, totaling $328,000; the write-down of one credit by $179,000during the third quarter of 2005; and payments received on non-performingassets of $97,000.

 

Consequently, based on management’s analysis, noprovision for loan losses was deemed necessary during the first nine months of2005, as compared to a provision of $1,602,000 made in the first nine months of2004.  The 2004 provision was made as aresult of the analysis, which took into account the fact that there werecharge-offs of $909,000 in impaired loans and an increase in impaired loans andclassified assets.

 

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

 

NoninterestIncome

 

Non-interestincome for the nine months ended September 30, 2005 totaled $1,759,000, up$314,000 (21.7%) from the $1,445,000 reported for the same period in 2004.  A gain of $64,000 on the sale/transfers ofmortgage loans during 2005 compares to the loss of $195,000 reported for the nine-monthperiod in 2004.  Other income increasedby $140,000 (95.2%) to $287,000 during the first nine months in 2005, comparedto $147,000 in 2004.  A pre-tax gain of$69,000 on the sale of Illini Bank’s credit card portfolio, previously 

 

13

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discussed inthe June 30, 2005 10-QSB, and a recovery during the third quarter of 2005of $50,000 related to a salaries and benefits expense incurred in 2004 were themajor contributors to this increase. Partially offsetting these two positives were a decrease in mortgageloan servicing fees of $57,000, and a decrease in other fee income of $39,000.

 

NoninterestExpense

 

Non-interest expense for the ninemonths ended September 30, 2005 totaled $6,309,000, down $2,464,000(28.1%) from the comparable period in 2004. This decrease was focused in two primary areas, loan foreclosure andother real estate owned expense (down $1,606,000), and salaries and employeebenefits (down $878,000).

 

During the first nine months of2004, Illini Bank reduced the carrying value of three pieces of other realestate owned by a total of $1,203,000, based upon the values of signedcontracts on these properties.  A totalof $171,000 was expensed to complete one piece of other real estate owned tomake it suitable for leasing.  Theremaining expenses are related to the maintenance of several other real estateowned properties.  Expenses incurredduring the first nine months of 2005 represent normal costs associated withloan collections and normal loan related expenses.

 

The reduction in salaries andbenefits reflects the continuing positive effects of the corporaterestructuring that occurred during the course of 2004.

 

**CREDIT QUALITY**

 

Allowance forLoan Losses

 

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

 

The allowance for loan losses isbased on estimates, and ultimate losses will vary from current estimates.  These estimates are reviewed on a monthlybasis, and as adjustments, either positive or negative, are deemed necessary, acorresponding increase or decrease is made in the provision for loan losses.

 

At September 30, 2005, theallowance for loan losses was $2.1 million, or 1.43% of total loans.  This compares to the $2.4 million (1.52%) and$2.7 million (1.68%) reported at December 31, 2004 and September 30,2004, respectively.  The change from December 31,2004 represents the partial charge-off on one nonaccrual loan during the firstquarter of 2005 in the amount of $174,000; the partial charge-off of onenonaccrual loan during the third quarter in the amount of $165,000; and thecharge-off of one nonaccrual loan during the third quarter in the amount of$148,000.  The collateral securing theloan that was partially charged off in the first quarter was sold during thethird quarter and a recovery of $85,000 was realized.  The collateral securing the balance of theloan partially charged off in the third quarter appears adequate at the presenttime to protect Illini Bank’s interests.

 

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Illini Corporation’s primarybusiness 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**                 | ** ** | **September 30,  2005** | ** ** | **December 31, 2004** | ** ** | **September 30,  2004** | ** ** |
|------------------------------------|------------|------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(dollars in thousands)**   | ** ** |
| **Nonperforming assets:**          |       |                         |       |                       |       |                         |       |
| Accruing loans past due 90 days    | ** ** | **$**                        | **—** |                       | $          | 19                           |       | $ | 9 |   |
| Nonaccrual                         | ** ** | **2,779**                    |       | 2,711                      |       | 2,956                        |       |
| Renegotiated                       | ** ** | **—**                   |       | —                     |       | —                       |       |
| Other real estate owned            | ** ** | **1,106**                    |       | 944                        |       | 2,878                        |       |
| Total nonperforming assets         | ** ** | **$**                        | **3,885**  |                       | $          | 3,674                        |       | $ | 5,843 |   |
| **Key ratios:**                    | ** ** | ** **                   | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| Nonperforming loans to loans       | ** ** | **1.93**                     | %          | 1.72                       | %          | 1.82                         | %          |
| 90 days delinquent to ending loans | ** ** | **0.00**                     |       | 0.01                       |       | 0.01                         |       |
| Allowance to total loans           | ** ** | **1.43**                     |       | 1.52                       |       | 1.68                         |       |
| Allowance to nonperforming loans   | ** ** | **74.31**                    |       | 88.34                      |       | 92.31                        |       |

 

Nonperforming Assets

 

Nonperforming and renegotiatedloans at September 30, 2005 totaled $2.8 million, up $0.1 million (or2.5%) from December 31, 2004, and down $177,000 (6.0%) from September 30,2004.  Nonaccrual loans comprised all ofthe nonperforming loans at September 30, 2005, and the majority of thenonperforming loans for the other two reporting periods.  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 thecollateral and the other resources of the borrower in determining the steps tobe taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon thespecific facts of each situation. Alternatives that are typically considered to collect nonaccrual loansare foreclosure, collection under guarantees, loan restructuring, or judicialcollection actions.

 

Other real estate owned increasedby $162,000, to $1.1 million, from the $1.0 million reported as of December 31,2004.  This increase represents thefollowing activity during the first nine months of 2005:  the addition during the first quarter of 2005of multiple properties totaling $278,000 associated with one creditor; theaddition during the second quarter of one property, totaling $42,000; the saleof three properties, with carrying values totaling $89,000; and paymentstotaling $120,000 received on properties.

 

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 the Corporation’s2004 Form 10-KSB and previous Form 10-QSB reports, management hasimplemented 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.

 

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OtherPotential Problem Loans

 

The Corporation has other potentialproblem loans that are currently performing, but where some concerns exist asto the ability of the borrower to comply with present loan repayment terms.Excluding nonperforming loans, these loans totaled $3,274,000 that managementhas classified as impaired at September 30, 2005, down $2,836,000 from$6,110,000 reported at December 31, 2004.  Management currently considers these loans tobe impaired due to declining financial performance. These classifications are adirect result of improved reporting systems (credit quality and production).  The classification of these loans, however,does not imply that management expects losses on each of these loans, butbelieves that a higher level of scrutiny and close monitoring is prudent underthe circumstances. Such classifications relate to specific concerns for eachindividual borrower and do not relate to any concentration risk common to allloans in this group.

 

**CAPITAL RESOURCES**

 

The current economic and regulatoryenvironment 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 Corporation hashistorically satisfied its capital requirements principally through theretention of earnings.

 

The tablebelow shows the various measures of regulatory capital and related quarterlyratios.

 
| ** **                                             | ** ** | **Regulatory requirements  to be:** | ** ** | **Actual Regulatory Capital Ratios** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **Adequately  Capitalized**         | ** ** | **Well-  Capitalized**               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Total  risk-based capital as % of risk-weighted assets |       | 8.0                                 | %          | 10.0                                 | %          | 15.7 | % | 12.4 | % |
| Tier 1  capital as % of risk-weighted assets           |       | 4.0                                 | %          | 6.0                                  | %          | 12.6 | % | 8.4 | % |
| Tier 1  capital as % quarterly average assets          |       | 4.0                                 | %          | 5.0                                  | %          | 8.6 | % | 6.2 | % |

 

Risk-based capital guidelinesrequire the classification of assets and some off-balance sheet items in termsof credit-risk exposure and the measuring of capital as a percentage of therisk-adjusted asset totals.  Managementbelieves, and data in the above table show that, as of September 30, 2005and December 31, 2004, the Corporation met all capital adequacyrequirements to which it is subject.  Asof those dates, the Corporation’s subsidiary banks were “well capitalized”under regulatory prompt corrective action provisions.

 

The capital of the Corporation wassupplemented in February 2005 by the proceeds from the sale of 126,500shares of common stock of the Corporation to a limited number of accreditedinvestors.  Gross proceeds of $4,174,500from the sale were used as follows:  $2.3million to retire the Marine Bank loan; $1.0 million sent to Illini Bank as acapital infusion; and the balance retained for general corporate purposes.

 

Earnings retention is affected bythe 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 nine months ended September 30,2005 was 12.47% and 13.02% as compared to (64.77)% and (10.69)% for the threeand nine months ended September 30, 2004.

 

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As discussed in the Corporation’s2004 Form 10-KSB, the Corporation has $9 million of trust preferredsecurities outstanding.  Twenty Five (25)percent of the Tier 1 capital ratio can be comprised of the trust preferredissue.  As of September 30, 2005,the portion eligible for inclusion in the Tier 1 computation amounted toapproximately $5.9 million.

 

**LIQUIDITY**

 

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

 

The asset portion of the balancesheet provides liquidity primarily through loan principal repayments, maturitiesof investment securities, and sales of investment securities available forsale.  The liability side of the balancesheet provides liquidity through various customers’ interest-bearing andnoninterest-bearing deposit accounts. Short-term borrowings are an additional source of liquidity andrepresent Illini Corporation’s incremental borrowing capacity.

 

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 liquiditymeasurement, called “Basic Surplus,” which redefines liquid assets as the totalavailable assets held by the Corporation which can be converted to cash inthirty days or less, reduced by short term liabilities, plus availableborrowings.  As of September 30,2005, Illini Corporation’s basic surplus was $43.2 million, or 17.4% of totalaverage assets.

 

Management believes the formulaprovides an accurate measurement of liquidity and provides management with acomprehensible and consistent tool to develop pricing and profitabilitystrategies.  Based on Illini’smeasurement and as compared to peer banks, management believes the liquidityposition of the subsidiary banks is strong.

 

**OTHER EVENTS**

 

On August 19, 2005, the boardof directors of the Corporation approved a going private merger transaction inwhich holders of less than 200 shares of the Corporation’s common stock willreceive $40.50 in cash for each share of common stock they held prior to themerger.  Shareholders owning 200 sharesor more will continue to hold their shares.

 

The proposed transaction is subjectto shareholder and regulatory approvals and is intended to reduce the number ofCorporation shareholders of record to under 300, the level at which theCorporation is required to continue to file periodic reports with theSecurities and Exchange Commission (SEC). If the transaction is completed, the Corporation intends to terminatethe registration of its stock with the SEC and cause the stock to cease to betraded on the OTC Bulletin Board.  Theboard of directors believes the increasing cost of being a “public” company isnot justified by the benefits, given the Corporation’s limited tradingactivity.  The Corporation intends tohold a special shareholders’ meeting, at which the matter will be considered,in early 2006.

 

Details of the transaction may befound in the Corporation’s Preliminary Proxy Statement that was filed with theSEC (www.sec.gov) on September 26, 2005.

 

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

 

An evaluation was performed underthe supervision and with the participation of the Corporation’s management,including the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Corporation’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of September 30,2005. Based on that evaluation, the Corporation’s management, including theChief Executive Officer and Chief Financial Officer, concluded that theCorporation’s disclosure controls and procedures were effective. There havebeen no significant changes in the Corporation’s internal controls or in otherfactors during the first nine months of 2005 that could significantly affectinternal controls.  Management hasconcluded the disclosure controls and procedures are adequate in all materialrespects for SEC reporting purposes.

 

**PART II.  OTHER INFORMATION**

 

Item 1 LegalProceedings 

 

Various legal claims have arisen against the Corporation in the normalcourse of business, which, in the opinion of management, will not result in anymaterial liability, other than what is disclosed below, to theCorporation.  Two (2) cases remain pending at September 30,2005.

 

The first case was filed in 1998 bya shareholder of the Corporation against Illinois Stock Transfer Company, asRights Agent for the Corporation under the Corporation’s Shareholder RightsAgreement (“Rights Agreement”), for specific performance of the RightsAgreement, on behalf of the plaintiff individually and on behalf of a class ofshareholders.  The complaint alleged thatthe Rights Agreement was triggered in April of 1998, and that the RightsAgent had a duty under the Rights Agreement to distribute Rights Certificatesto the Corporation’s shareholders.  TheCorporation was named as a defendant in 1999 and the class was certified.  Plaintiff was seeking to recover attorney’sfees from the Corporation in addition to other relief.  In January of 2000, the trial courtentered summary judgment in favor of the Corporation and the Rights Agent.  Plaintiff appealed this ruling to theIllinois Appellate Court.  The AppellateCourt reversed the order granting summary judgment for defendants and remandedthe case for trial on the issue of whether the Corporation’s Board of Directorsacted in good faith in determining that a shareholder’s acceptance of a gift ofthe Corporation’s Stock did not trigger the Rights Agreement, and in theCorporation’s later amendment of the Rights Agreement.  The Appellate Court further ruled thatplaintiff’s attorney’s fees were recoverable under the Rights Agreement.  After a series of unsuccessful motions filedby the Plaintiff’s counsel, the Corporation filed a motion to remove thePlaintiff’s attorney.  The court removedthe attorney for the Plaintiff class and appointed new counsel to represent theclass.  The removed counsel filed 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 courtappointed a successor class representative. The Corporation has negotiated asettlement of the suit with the new class representative and classcounsel.  The terms of that settlementhave been agreed upon and approved by the court following a fairnesshearing.  That agreement provides for acomplete resolution of the shareholder claims and a portion of the claims forattorney fees for the class representative. As of December 31, 2004 and 2003 the Corporation has an accrual of$200,000 for this settlement and believes it will have no further adverseimpact on the Corporation. This accrual is included in other liabilities in theConsolidated Balance Sheet.

 

The removed attorney, representingthe removed class representative, appealed various rulings of the trial court,including the order approving the settlement as fair to the class.  That appeal was argued before the AppellateCourt of Illinois, Fourth District on April 13, 2005, and the AppellateCourt subsequently affirmed 

 

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the settlement as fair to the class and also affirmed thetrial court’s disqualification of the removed attorney.  The removed attorney has sought review of theAppellate Court’s decisions with the Illinois Supreme Court by filing apetition for leave to appeal.  Whether ornot the Illinois Supreme Court grants review is a matter for that Court’sdiscretion.  The Illinois Supreme Courtmay rule on the petition for leave to appeal as soon as its November 2005term.

 

The removed attorney is alsopetitioning the trial court for fees. The court will also be asked to deny the fee request filed by theattorney for the original class representative. The court has scheduled the fee petition for hearing on November 8,2005 at 9:30 a.m.

 

In April 2003, theCorporation, its directors, and one of its officers were named as defendants ina shareholder’s derivative complaint filed in the Circuit Court of SangamonCounty, Illinois.  Plaintiffs seek torescind the Stock Purchase Agreement entered into by the Corporation in 2001 topurchase approximately 30% of its common shares from a minority shareholdergroup as well as recover from the individual defendants damages allegedlyaccruing to the Company as a result of certain actions related to defending theclass action suit, avoiding a triggering of the Rights Agreement and entering intothe Stock Purchase Agreement.  Managementbelieves that the Stock Purchase Agreement was a routine business transactionbeneficial to the Corporation’s shareholders and was entered into afterappropriate due diligence and consultation with the Corporation’s outsidefinancial advisors and that none of the directors or officers have breachedtheir fiduciary duties to the Corporation. The Corporation completed its independent directors’ review of theclaims asserted in the derivative suit. The independent directors concluded that there was no merit to thoseclaims, that they should not be pursued and that the derivative action shouldbe dismissed.  The Corporation filed amotion to realign the parties, asserting that the Corporation should besubstituted as the party plaintiff, and permitted to dismiss the action.  That motion was heard on April 22, 2005,and granted by the court.

 

The Plaintiffs subsequently soughtreconsideration of the ruling granting the motion to realign.  In the alternative they asked for leave toamend their complaint.  The court deniedthis motion, and then allowed the Corporation, as plaintiff followingrealignment, to dismiss the case with prejudice.  Plaintiffs subsequently filed a notice ofappeal.  Briefing of this appeal will notbe complete until 2006.  Plaintiffs alsoseek to recover their attorney’s fees from the Corporation pursuant to theattorney’s fee provision of the Rights Agreement.  Management will contest vigorously any effortby Plaintiffs to recover attorney’s fees from the Corporation and willvigorously defend the appeal.

 

Item 2     Unregistered Sales of EquitySecurities and Use of Proceeds - none

 

Item 3     Defaults Upon SeniorSecurities – none

 

Item 4     Submission of Matters to aVote of Security Holders

The Annual Meetingof Shareholders of the Corporation was held on July 21, 2005, for thepurpose of electing four directors each to serve a term of three years andratifying the appointment of Clifton Gunderson LLP as the Corporation’sindependent auditors for fiscal year ending December 31, 2005. Proxies forthe meeting were solicited by management pursuant to Regulation 14A underSecurities Exchange Act of 1934, and there was no solicitation in opposition tomanagement’s solicitation.

 

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All four ofManagement’s nominees for director listed in the proxy statement wereelected.  The results of the vote were asfollows:

 
| ** **             | ** ** | **Shares  Voted  “For”** | ** ** | **Shares  “Withheld”** | ** ** | **Broker  Non  Votes** | ** ** |
|------------------------|------------|------------------------------------|------------|----------------------------------|------------|------------------------|------------|
| William N.  Etherton   |       | 407,877                            |       | 30,453                           |       | 0                      |       |
| Jesse Werner, Jr. |       | 431,117                            |       | 7,213                            |       | 0                      |       |
| Gaylon E.  Martin      |       | 431,900                            |       | 6,430                            |       | 0                      |       |
| R. Neil  Richardson    |       | 431,603                            |       | 6,727                            |       | 0                      |       |

 

ContinuingDirectors for the term ending in 2006 are Thomas A. Black, Lawrence B. Curtinand Dr. Anthony F. Liberatore. Continuing Directors for the term ending in 2007 are William B.McCubbin, N. Ronald Thunman and Dr. Jane Schachtsiek.

 

Theappointment of Clifton Gunderson LLP as the Corporation’s auditors for thefiscal year ending December 31, 2005, was ratified.  The results of the vote were as follows:

 
| ** **                             | ** ** | **“For”** | ** ** | **“Against”** | ** ** | **“Abstain”** | ** ** |
|----------------------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|
| Ratification  of Clifton Gunderson LLP |       | 434,682             |       | 1,459                   |       | 2,189                   |       |

 

 

Item 5     Other Information - none

 

Item 6     Exhibits 

 

(a)   Exhibits:

31.1         Certificationof 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         CEOCertification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906of the Sarbanes-Oxley Act of 2002.

32.2         CFOCertification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906of the Sarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

In accordancewith the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Illini  Corporation       |   |
|---------------------------|--------|
| (Registrant)              |   |
|                      |   |
|                      |   |
| By:  /s/Gaylon E. Martin  |   | November 10,  2005 |   |
| Gaylon E.  Martin         |   | Date signed |   |
| President                 |   |   |   |
|                      |   |   |   |
|                      |   |   |   |
| By:  /s/Dennis B. Guthrie |   | November 10,  2005 |   |
| Dennis B.  Guthrie        |   | Date signed |   |
| Chief  Financial Officer  |   |   |   |

 

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