** **

**U.S. Securities and ExchangeCommission**

**Washington,D.C.  20549**

 

 

**FORM 10-QSB**

 

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

 

**Forquarterly period ended September 30, 2004**

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

 

**Commissionfile number   0-13343**

 

**Illini Corporation**

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

 

 

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

 

 

**3200 WestIles Avenue, Springfield,  Illinois   62707**

(Address of principal executive offices)

 

**(217)787-5111**

(Issuer’stelephone number)

 

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

 

 

 

 

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

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

 

 

 

----

 

**ILLINICORPORATION**

INDEXTO FORM 10-QSB

September30, 2004

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

 

 

----

 

**Information Concerning Forward-Looking Statements**

*Statements contained in this Form10-QSB which are not historical facts are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements involve important known andunknown risks, uncertainties and other factors and can be identified by phrasesusing “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,”“potential,” “future,” “may,” “should” and similar expressions or words.  Such forward-looking statements are subjectto risk and uncertainties which could cause actual results to differ materiallyfrom those projected.  Such risks anduncertainties include potential change in interest rates, competitive factorsin the financial services industry, general economic conditions, the effect ofnew legislation and other risks detailed in documents filed by IlliniCorporation with the Securities and Exchange Commission from time to time.*

 

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

 

**ILLINI CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

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

**Unaudited**

** **
| ** **                                                                                                   | ** ** | **September 30,  2004**    | ** **  | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|------------------------|------------|
| ** **                                                                                                   | ** ** | **(dollars in thousands)** | ** **  |
| **ASSETS**                                                                                                   | ** ** | ** **                 | ** **  |
| Cash and due from banks                                                                                      | ** ** | **$**                      | **5,285**   |                   | $          | 8,623 |   |
| Interest-bearing deposits in other banks                                                                     | ** ** | **65**                     |        | 31                     |       |
| Federal funds sold                                                                                           | ** ** | **11,625**                 |        | 7,262                  |       |
| Cash and cash equivalents                                                                                    | ** ** | **16,975**                 |        | 15,916                 |       |
| Investment securities available for sale, at fair value                                                      | ** ** | **48,888**                 |        | 47,172                 |       |
| Loans held for sale                                                                                          | ** ** | **—**                 |        | 15,287                 |       |
| Loans, net of the allowance for loan losses of $2,737 and $2,359                                             | ** ** | **160,076**                |        | 170,846                |       |
| Federal Home Loan Bank stock                                                                                 | ** ** | **850**                    |        | 813                    |       |
| Premises and equipment                                                                                       | ** ** | **6,118**                  |        | 6,255                  |       |
| Accrued interest receivable                                                                                  | ** ** | **1,675**                  |        | 1,838                  |       |
| Other real estate owned                                                                                      | ** ** | **2,878**                  |        | 3,918                  |       |
| Goodwill                                                                                                     | ** ** | **1,856**                  |        | 1,856                  |       |
| Other assets                                                                                                 | ** ** | **2,063**                  |        | 858                    |       |
| Total Assets                                                                                                 | ** ** | **$**                      | **241,379** |                   | $          | 264,759 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                | ** ** | ** **                 | ** **  | ** **             | ** ** |
| Noninterest-bearing demand deposits                                                                          | ** ** | **$**                      | **34,078**  | ** **             | **$**      | 34,400 | ** ** |
| Interest-bearing deposits:                                                                                   |       |                       |        |                   |       |
| NOW and money market accounts                                                                                | ** ** | **59,884**                 |        | 59,490                 |       |
| Savings deposits                                                                                             | ** ** | **21,787**                 |        | 21,408                 |       |
| Time deposits, $100,000 and over                                                                             | ** ** | **13,837**                 |        | 18,319                 |       |
| Other time deposits                                                                                          | ** ** | **73,514**                 |        | 92,998                 |       |
| Total Deposits                                                                                               | ** ** | **203,100**                |        | 226,615                |       |
| Federal funds purchased and securities sold under agreements to  repurchase                                  | ** ** | **688**                    |        | 528                    |       |
| Borrowings                                                                                                   | ** ** | **13,309**                 |        | 11,347                 |       |
| Subordinated debentures                                                                                      | ** ** | **9,000**                  |        | 9,000                  |       |
| Accrued interest payable                                                                                     | ** ** | **592**                    |        | 1,082                  |       |
| Other liabilities                                                                                            | ** ** | **1,129**                  |        | 1,146                  |       |
| Total Liabilities                                                                                            | ** ** | **227,818**                |        | 249,718                |       |
|                                                                                                         |       |                       |        |                   |       |
| Shareholders’ equity                                                                                    |       |                       |        |                   |       |
| Preferred stock, $0.01 par value, authorized and unissued 10,000,000  shares                                 | ** ** | **—**                 |        | —                 |       |
| Common stock, $0.01 par value, authorized 45,000,000 shares;571,789  shares issued                           | ** ** | **6**                      |        | 6                      |       |
| Capital surplus                                                                                              | ** ** | **9,038**                  |        | 9,070                  |       |
| Retained earnings                                                                                            | ** ** | **10,569**                 |        | 12,068                 |       |
| Accumulated other comprehensive income                                                                       | ** ** | **1,025**                  |        | 1,101                  |       |
| Less: Cost of 157,260 and 160,088 treasury shares at September 30,  2004 and December 31, 2003, respectively | ** ** | **(7,077**                 | )           | (7,204                 | )          |
| Total Shareholders’ Equity                                                                              | ** ** | **13,561**                 |        | 15,041                 |       |
| Total Liabilities and Shareholders’ Equity                                                              | ** ** | **$**                      | **241,379** |                   | $          | 264,759 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

3

----

 

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFINCOME / (LOSS)**

**Three Months and Nine Months Ended September 30, 2004 and 2003**

**(Unaudited)**
| ** **                                                                  | ** ** | **Three Months Ended  September 30,**             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                          | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest income:                                                            | ** ** | ** **                                        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                                       | ** ** | **$**                                             | **2,613**  |                                 | $          | 3,131 | ** ** | **$** | **8,511** |   | $ | 9,965 |   |
| Investment securities:                                                      | ** ** | ** **                                        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Taxable                                                                     | ** ** | **256**                                           |       | 244                                  | ** ** | **772** |   | 698 |   |
| Exempt from federal income taxes                                            | ** ** | **195**                                           |       | 225                                  | ** ** | **555** |   | 686 |   |
| Federal funds sold and interest-bearing deposits                            | ** ** | **35**                                            |       | 25                                   | ** ** | **65** |   | 121 |   |
| Total interest income                                                       | ** ** | **3,099**                                         |       | 3,625                                | ** ** | **9,903** |   | 11,470 |   |
| Interest expense:                                                           |       |                                              |       |                                 |       |   |   |   |   |
| Deposits:                                                                   |       |                                              |       |                                 |       |   |   |   |   |
| NOW and money market accounts                                               | ** ** | **131**                                           |       | 121                                  | ** ** | **351** |   | 438 |   |
| Savings deposits                                                            | ** ** | **33**                                            |       | 34                                   | ** ** | **100** |   | 124 |   |
| Time deposits, $100,000 and over                                            | ** ** | **97**                                            |       | 176                                  | ** ** | **334** |   | 605 |   |
| Other time deposits                                                         | ** ** | **502**                                           |       | 865                                  | ** ** | **1,719** |   | 2,936 |   |
| Federal funds purchased and securities sold under agreements to  repurchase | ** ** | **4**                                             |       | 4                                    | ** ** | **16** |   | 14 |   |
| Borrowings                                                                  | ** ** | **100**                                           |       | 97                                   | ** ** | **295** |   | 292 |   |
| Subordinated debentures                                                     | ** ** | **244**                                           |       | 244                                  | ** ** | **717** |   | 717 |   |
| Total interest expense                                                      | ** ** | **1,111**                                         |       | 1,541                                | ** ** | **3,532** |   | 5,126 |   |
| Net interest income                                                         | ** ** | **1,988**                                         |       | 2,084                                | ** ** | **6,371** |   | 6,344 |   |
| Provision for loan losses                                                   | ** ** | **212**                                           |       | 200                                  | ** ** | **1,602** |   | 350 |   |
| Net interest income after provision for loan losses                         | ** ** | **1,776**                                         |       | 1,884                                | ** ** | **4,769** |   | 5,994 |   |
| Noninterest income:                                                         |       |                                              |       |                                 |       |   |   |   |   |
| Service charges on deposit accounts                                         | ** ** | **422**                                           |       | 357                                  | ** ** | **1,189** |   | 1,020 |   |
| Other fee income                                                            | ** ** | **72**                                            |       | 113                                  | ** ** | **227** |   | 376 |   |
| Mortgage loan servicing fees                                                | ** ** | **24**                                            |       | (10                                  | )          | **114** |   | (18 | ) |
| Gains (losses) on sales/transfers of mortgage loans                         | ** ** | **17**                                            |       | 47                                   | ** ** | **(195** | ) | 184 |   |
| Investment securities gains                                                 | ** ** | **—**                                        |       | —                               | ** ** | **27** |   | — |   |
| Gains (losses) on sale of other real estate owned                           | ** ** | **(29**                                           | )          | 7                                    | ** ** | **(64** | ) | 21 |   |
| Other                                                                       | ** ** | **45**                                            |       | 35                                   | ** ** | **147** |   | 102 |   |
| Total noninterest income                                                    | ** ** | **551**                                           |       | 549                                  | ** ** | **1,445** |   | 1,685 |   |
| Noninterest expense:                                                        |       |                                              |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                                              | ** ** | **1,263**                                         |       | 1,154                                | ** ** | **3,947** |   | 3,529 |   |
| Net occupancy expense                                                       | ** ** | **182**                                           |       | 188                                  | ** ** | **550** |   | 575 |   |
| Equipment expense                                                           | ** ** | **55**                                            |       | 58                                   | ** ** | **154** |   | 173 |   |
| Data processing fees                                                        | ** ** | **152**                                           |       | 203                                  | ** ** | **532** |   | 591 |   |
| Supplies expense                                                            | ** ** | **54**                                            |       | 36                                   | ** ** | **122** |   | 127 |   |
| Communication and transportation expense                                    | ** ** | **125**                                           |       | 115                                  | ** ** | **375** |   | 345 |   |
| Marketing and advertising expense                                           | ** ** | **82**                                            |       | 39                                   | ** ** | **211** |   | 124 |   |
| Correspondent bank fees                                                     | ** ** | **72**                                            |       | 82                                   | ** ** | **170** |   | 242 |   |
| Loan foreclosure and other real estate owned expense                        | ** ** | **338**                                           |       | 5                                    | ** ** | **1,778** |   | 241 |   |
| Professional fees                                                           | ** ** | **157**                                           |       | 179                                  | ** ** | **459** |   | 480 |   |
| Regulatory fees                                                             | ** ** | **36**                                            |       | 23                                   | ** ** | **82** |   | 81 |   |
| Other                                                                       | ** ** | **44**                                            |       | 125                                  | ** ** | **393** |   | 463 |   |
| Total noninterest expense                                                   | ** ** | **2,560**                                         |       | 2,207                                | ** ** | **8,773** |   | 6,971 |   |
| Income (loss) before income tax expense-(benefit)                           | ** ** | **(233**                                          | )          | 226                                  | ** ** | **(2,559** | ) | 708 |   |
| Income tax expense (benefit)                                                | ** ** | **(169**                                          | )          | 37                                   | ** ** | **(1,204** | ) | 123 |   |
| Net income (loss)                                                           | ** ** | **$**                                             | **(64**    | )                                    | $          | 189 | ** ** | **$** | **(1,355** | ) | $ | 585 |   |
| Basic and diluted earnings (loss) per share                                 | ** ** | **$**                                             | **(0.15**  | )                                    | $          | 0.46 | ** ** | **$** | **(3.27** | ) | $ | 1.42 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

4

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

**Nine Months Ended September 30, 2004 and 2003**

**(Unaudited)**
| ** **                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(dollars in thousands)**           | ** ** |
| Common Stock                                        |       |                                 |       |   |   |
| Beginning of year balance                           | ** ** | **$**                                | **6**      |   | $ | 6 |   |
| End of period balance                               | ** ** | **6**                                |       | 6 |   |
|                                                |       |                                 |       |   |   |
| Capital Surplus                                     |       |                                 |       |   |   |
| Beginning of year balance                           | ** ** | **9,070**                            |       | 9,070 |   |
| Sale of treasury stock                              | ** ** | **(32**                              | **)**      | — |   |
| End of period balance                               | ** ** | **9,038**                            |       | 9,070 |   |
|                                                |       |                                 |       |   |   |
| Retained Earnings                                   |       |                                 |       |   |   |
| Beginning of year balance                           | ** ** | **12,068**                           |       | 11,885 |   |
| Net income (loss)                                   | ** ** | **(1,355**                           | )          | 585 |   |
| Dividends on common stock                           | ** ** | **(144**                             | **)**      | (308 | ) |
| End of period balance                               | ** ** | **10,569**                           |       | 12,162 |   |
|                                                |       |                                 |       |   |   |
| Treasury Stock                                      |       |                                 |       |   |   |
| Beginning of year balance                           | ** ** | **(7,204**                           | **)**      | (7,204 | ) |
| Sale of treasury stock                              | ** ** | **127**                              |       | — |   |
| End of period balance                               | ** ** | **(7,077**                           | **)**      | (7,204 | ) |
|                                                |       |                                 |       |   |   |
| Accumulated Other Comprehensive Income              |       |                                 |       |   |   |
| Beginning of year balance                           | ** ** | **1,101**                            |       | 1,464 |   |
| Unrealized gains (losses) on securities, net of tax | ** ** | **(76**                              | **)**      | (76 | ) |
| End of period balance                               | ** ** | **1,025**                            |       | 1,388 |   |
|                                                |       |                                 |       |   |   |
| Total Shareholders’ Equity                     |       | **$**                                | **13,561** |   | $ | 15,422 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

 

**ILLINI CORPORATION AND SUBSIDIARIES**

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

**Three Months and Nine Months Ended September 30, 2004 and 2003**

**(Unaudited)**
| ** **                                                                                                           | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended**      | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                           | ** ** | **September 30,**          | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                           | ** ** | **2004**                   | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                           | ** ** | **(dollars in thousands)** | ** ** | **(dollars in thousands)** | ** ** |
| Net Income (loss)                                                                                                    | ** ** | **$**                      | **(64**    | **)**                      | $          | 189 | ** ** | **$** | **(1,355** | **)** | $ | 585 |   |
| Other comprehensive income, unrealized gains (losses) on securities,  net of reclassification adjustment, net of tax | ** ** | **550**                    |       | (445                       | )          | **(76** | **)** | (76 | ) |
| Comprehensive income (loss)                                                                                          | ** ** | **$**                      | **486**    |                       | $          | (256 | ) | **$** | **(1,431** | **)** | $ | 509 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**Nine Months Ended September 30, 2004 and 2003**

**(Unaudited)**
| ** **                                                                               | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                               | ** ** | **(dollars in thousands)** | ** ** |
| Cash flows from operating activities:                                                    |       |                       | ** ** |       |       |
| Net income (loss)                                                                        | ** ** | **$**                      | **(1,355** | **)**      | $          | 585 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operatingactivities: |       |                       | ** ** |       |       |
| Depreciation                                                                             | ** ** | **533**                    | ** ** | 628        |       |
| Provision for loan losses                                                                | ** ** | **1,602**                  | ** ** | 350        |       |
| Investment security amortization, net                                                    | ** ** | **55**                     | ** ** | 131        |       |
| Gains on sales of investment securities, net                                             | ** ** | **(27**                    | **)**      | —     |       |
| Federal Home Loan Bank stock dividend                                                    | ** ** | **(37**                    | **)**      | (46        | )          |
| Loss on sale of premises and equipment                                                   | ** ** | **1**                      | ** ** | —     |       |
| (Gains) losses on sales/transfers of mortgage loans                                      | ** ** | **195**                    | ** ** | (184       | )          |
| Valuation allowance established for other real estate owned                              | ** ** | **1,203**                  | ** ** | —     |       |
| (Gains) losses on sales of other real estate owned                                       | ** ** | **64**                     | ** ** | (21        | )          |
| Decrease in accrued interest receivable                                                  | ** ** | **163**                    | ** ** | 279        |       |
| Decrease in accrued interest payable                                                     | ** ** | **(490**                   | **)**      | (479       | )          |
| Origination of secondary market mortgage loans                                           | ** ** | **(3,993**                 | **)**      | (14,974    | )          |
| Proceeds from the sales of secondary market mortgage loans                               | ** ** | **13,628**                 | ** ** | 16,650     |       |
| Other, net                                                                               | ** ** | **(1,184**                 | **)**      | (2,231     | )          |
| Net cash provided by operating activities                                                | ** ** | **10,358**                 | ** ** | 688        |       |
| Cash flows from investing activities:                                                    |       |                       | ** ** |       |       |
| Proceeds from sales of investment securities available for sale                          | ** ** | **1,545**                  | ** ** | —     |       |
| Proceeds from maturities and paydowns of investment securities  available for sale       | ** ** | **14,246**                 | ** ** | 17,561     |       |
| Purchases of investment securities available for sale                                    | ** ** | **(17,649**                | **)**      | (19,306    | )          |
| Net decrease in loans                                                                    | ** ** | **13,806**                 | ** ** | 9,756      |       |
| Purchases of premises and equipment                                                      | ** ** | **(418**                   | **)**      | (273       | )          |
| Proceeds from sale of premises and equipment                                             | ** ** | **21**                     | ** ** | —     |       |
| Proceeds from sales of other real estate owned                                           | ** ** | **592**                    | ** ** | 422        |       |
| Net cash provided by investing activities                                                | ** ** | **12,143**                 | ** ** | 8,160      |       |
| Cash flows from financing activities:                                                    |       |                       | ** ** |       |       |
| Net decrease in noninterest-bearing demand deposits                                      | ** ** | **(322**                   | **)**      | (2,334     | )          |
| Net increase in NOW, money market accounts and savings deposits                          | ** ** | **773**                    | ** ** | 3,077      |       |
| Net decrease in time deposits, $100,000 and over                                         | ** ** | **(4,482**                 | **)**      | (4,758     | )          |
| Net decrease in other time deposits                                                      | ** ** | **(19,484**                | **)**      | (14,788    | )          |
| Net increase (decrease) in securities sold under agreements to  repurchase               | ** ** | **160**                    | ** ** | (57        | )          |
| Proceeds from sale of treasury shares                                                    | ** ** | **95**                     | ** ** | —     |       |
| Proceeds of borrowings                                                                   | ** ** | **6,000**                  | ** ** | 3,000      |       |
| Repayment of borrowings                                                                  | ** ** | **(4,038**                 | **)**      | (35        | )          |
| Cash dividends paid                                                                      | ** ** | **(144**                   | **)**      | (308       | )          |
| Net cash used in financing activities                                                    | ** ** | **(21,442**                | **)**      | (16,203    | )          |
|                                                                                     |       |                       | ** ** |       |       |
| Net increase (decrease) in cash and cash equivalents                                     | ** ** | **1,059**                  | ** ** | (7,355     | )          |
|                                                                                     |       |                       | ** ** |       |       |
| Cash and cash equivalents at beginning of period                                         | ** ** | **15,916**                 | ** ** | 19,853     |       |
|                                                                                     |       |                       | ** ** |       |       |
| Cash and cash equivalents at end of period                                               | ** ** | **$**                      | **16,975** | ** ** | $          | 12,498 |   |
|                                                                                     |       |                       | ** ** |       |       |
| Supplemental Disclosures                                                                 |       |                       | ** ** |       |       |
| Transfer of loans held for sale to loan portfolio                                        | ** ** | **$**                      | **5,457**  | ** ** | $          | — |   |
| Transfer of loans to other real estate owned                                             | ** ** | **$**                      | **819**    |       | 3,561      |   |

 

See accompanying notes to unaudited consolidatedfinancial statements.

 

6

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**ILLINICORPORATION AND SUBSIDIARIES**

**Notesto Unaudited Consolidated Financial Statements**

**September30, 2004**

 

(1)                                  Basis of Presentation

 

        Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions to Form 10-QSB and, therefore, do not includeall of the information and notes required by U.S. generally accepted accountingprinciples for complete consolidated financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.  Forfurther information, refer to the consolidated financial statements andfootnotes included in the Illini Corporation (“Corporation”) Annual Report onForm 10-KSB for the year ended December 31, 2003.  Certain amounts in the 2003 consolidatedfinancial statements have been reclassified to conform to the 2004presentation.  Such reclassifications haveno effect on previously reported consolidated net income or shareholders’ equity.  The consolidated balance sheet of theCorporation as of December 31, 2003 has been derived from the auditedconsolidated balance sheet of the Corporation as of that date.

 

        Resultsfor the three and nine months ended September 30, 2004 may not be indicative ofthe annual performance of Illini Corporation or the subsidiary banks, IlliniBank and Farmers State Bank of Camp Point (“the subsidiary banks”).  Management of the Corporation has madeestimates and assumptions relating to the reporting of assets and liabilitiesand the disclosure of contingent assets and liabilities to prepare theconsolidated financial statements (unaudited) in conformity with accountingprinciples generally accepted in the United States of America.  Actual results could differ from thoseestimates.

 

(2)                                  Earnings /(Loss) per Common Share

 

        Earnings (loss) per share representsincome (loss) available to common shareholders divided by the weighted averagenumber of shares outstanding during the period. The Corporation has no common equivalent shares that could causedilution.  The following information wasused in the computation of basic and diluted earnings per share.

 
| ** **                                 | ** ** | **Three Months Ended  September 30,**             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                          |       | **2003**                             | ** ** | **2004** |   | **2003** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net Income                                 | ** ** | **$**                                             | **(64**    | **)**                                | $          | 189 | ** ** | **$** | **(1,355** | **)** | $ | 585 |   |
| ** **                                 | ** ** | ** **                                        |       | ** **                           | ** ** | ** ** |   | ** ** | ** ** |
| Weighted average common shares outstanding | ** ** | **414,529**                                       |       | 411,701                              | ** ** | **413,868** |   | 411,701 |   |
|                                            |            |                                                   |            |                                      |            |  |  |  |  |  |  |  |  |

 

(3)                      Use ofEstimates in the Preparation of Financial Statements

 

        Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported period.  Actual results could differ from thoseestimates.  Significant estimates thatare particularly sensitive to change are the allowance for loan losses and thevalue of other real estate owned.

 

7

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(4)                      Allowance ForLoan Losses

 

        In originating loans, theCorporation recognizes that credit losses will be experienced and the risk ofloss will vary with, among other things, current economic conditions; the typeof loan being made; the creditworthiness of the borrower over the term of theloan; and in the case of a collateralized loan, the quality of the collateralfor such loan.  The allowance for loanlosses represents the Corporation’s estimate of the allowance necessary toprovide for probable incurred losses in the loan portfolio.  In making this determination, the Corporationanalyzes the ultimate collectibility of the loans in its portfolio,incorporating feedback provided by internal loan staff, the independent loanreview function and information provided by examinations performed byregulatory agencies.  The Corporationmakes an ongoing evaluation as to the adequacy of the allowance for loanlosses.  Transactions in the allowancefor loan losses for the nine months ended September 30, 2004 and 2003 are summarizedbelow:

 
| ** **                      | ** ** | **Nine months ended**      | ** **  |
|---------------------------------|------------|----------------------------|-------------|
| ** **                      | ** ** | **September 30,**          | ** **  |
| ** **                      | ** ** | **2004**                   | ** **  | **2003** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)** | ** **  |
| **Allowance  for Loan Losses:** | ** ** | ** **                 | ** **  | ** ** | ** ** |
| Balance at beginning of period  | ** ** | **$**                      | **2,359**   | ** ** | $ | 2,468 |   |
|                            |       |                       | ** **  |   |   |
| Charge-offs                     | ** ** | **(1,353**                 | **)**       | (794 | ) |
| Recoveries                      |       | **129**                    | ** **  | 72 |   |
| Net charge-offs                 | ** ** | **(1,224**                 | **)**       | (722 | ) |
|                            |       |                       | ** **  |   |   |
| Provision charged to operations |       | **1,602**                  | ** **  | 350 |   |
| Balance at end of period        | ** ** | **$**                      | **2,737**   | ** ** | $ | 2,096 |   |
| Average loans outstanding       | ** ** | **$**                      | **177,870** | ** ** | $ | 200,539 |   |

 

(5)                      RegulatoryExamination 

 

        The Corporation operatesin a regulated industry and is subject to various regulatory constraints,including some which limit the amount of dividends that may be paid by asubsidiary bank or which require prior regulatory approval.  At September 30, 2004 Illini Bank hadretained earnings of approximately $3,000,000 available to be paid to theCorporation and still be considered well capitalized and Farmers State Bank ofCamp Point had retained earnings of approximately $700,000 to be paid to theCorporation and still be considered well capitalized.  The memorandum of understanding discussedbelow requires prior regulatory approval before the payment of any dividends byIllini Bank.

 

        During March of 2004 asafety and soundness examination was commenced by the primary regulators ofIllini Bank (“Illini”).

 

        In May of 2004 Illini Bankentered into a memorandum of understanding with the F.D.I.C. and the IllinoisDepartment of Financial and Professional Regulation, Division of Banks and RealEstate, which includes prior regulatory approval for payment of dividends byIllini Bank.  In July of 2004 IlliniCorporation approved a resolution requested by the Federal Reserve Bank of Chicagothat includes restrictions similar to the above memorandum ofunderstanding.  Cost associated withcompliance to these agreements will be minimal, primarily related to additionalreporting requirements while the agreements are in effect.  Management believes that these agreementsshould have no material adverse affects on the operations or financialperformance of the Corporation.

 

8

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**PART I - Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2004**

 

**SELECTED FINANCIAL RESULTS**

 

        The following table shows selectedfinancial results and measures for the three and nine months ended September30, 2004 compared with the same period in 2003.

 
| ** **                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **Change** | ** ** | **Change  %** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Change  %** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**           | ** ** |
| Net income                    | ** ** | **$**                                | **(64**    | **)**                               | $          | 189 |   | $ | (253 | ) | (133.9 | )% | **$** | **(1,355** | **)** | $ | 585 |   | $ | (1,940 | ) | (331.7 | )% |
| Average assets.               | ** ** | **240,448**                          |       | 267,896                             |       | (27,448 | ) | (10.3 | )% | **247,435** | ** ** | 276,177 |   | (28,742 | ) | (10.4 | )% |
| Average equity.               | ** ** | **13,392**                           | ** ** | 15,551                              |       | (2,159 | ) | (13.9 | )% | **13,967** | ** ** | 15,599 |   | (1,632 | ) | (10.5 | )% |
| Return on assets              | ** ** | **(0.11**                            | **)%**     | 0.28                                | %          | (0.39 | )% | (139.3 | )% | **(0.73** | **)%** | 0.28 | % | (1.01 | )% | (360.8 | )% |
| Return on equity..            | ** ** | **(1.90**                            | **)%**     | 4.82                                | %          | (6.72 | )% | (139.5 | )% | **(12.92** | **)%** | 5.01 | % | (17.93 | )% | (357.9 | )% |
| Efficiency ratio.             | ** ** | **97.26**                            | **%**      | 80.48                               | %          | 16.78 | % | 20.9 | % | **108.56** | **%** | 83.40 | % | 25.16 | % | 30.2 | % |
| Dividend payout ratio.        | ** ** | **(64.77**                           | **)%**     | 54.46                               | %          | (119.23 | )% | (219.0 | )% | **(10.69** | **)%** | 52.78 | % | (63.47 | )% | (120.3 | )% |
| Equity to assets ratio        | ** ** | **5.57**                             | **%**      | 5.80                                | %          | (0.23 | )% | (4.0 | )% | **5.64** | **%** | 5.65 | % | (0.01 | )% | (0.2 | )% |
| Tier 1 leverage ratio         | ** ** | **6.14**                             | **%**      | 6.23                                | %          | (0.09 | )% | (1.5 | )% |   |   |   |   |   |   |   |   |
| Total risk-basedcapital ratio | ** ** | **12.03**                            | **%**      | 11.37                               | %          | 0.66 | % | 5.8 | % |   |   |   |   |   |   |   |   |
|                               |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Definitions of ratios:

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

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

Efficiency ratio - noninterest expense divided bynoninterest income plus taxable equivalent net interest income.

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

Equity to assets ratio - average equity dividedby average assets.

Tier 1 leverage ratio - Tier 1 capital divided byaverage assets.

Total risk-based capital ratio - Total risk basedcapital divided by total risk weighted assets.

 

TheCorporation recorded a net operating loss of $64,000 for the three months endedSeptember 30, 2004, down $253,000 from the net income of $189,000 for the sameperiod in 2003, and a net operating loss of $1,355,000 for the nine monthsended September 30, 2004, down $1,940,000 from the net income of $585,000 forthe first nine months of 2003.  The returnon average equity for the three months ended September 30, 2004 was a negative1.90% as compared to positive 4.82% for the same period ended September 30,2003.  Return on average equity for thenine-month period ended September 30, 2004 was a negative 12.92% as compared toa positive 5.01% for the same period in 2003. Similarly, basic and diluted earnings (loss) per share for the threemonths ended September 30, 2004 was $(0.15) per share versus $0.46 for the samequarter in 2003, representing a decrease of 132.6%.  Basic and diluted earnings (loss) per sharefor the nine months ended September 30, 2004 was $(3.27) per share versus $1.42for the same period in 2003, representing a decrease of 330.3%.  Several factors had animpact on earnings performance during the third quarter of 2004.  An increase in service charges on deposits andin mortgage loan servicing fees had a positive effect on earnings.  An increase in salaries and employee benefitsand a reduction in the carrying value of one property in other real estateowned, charged through loan foreclosure and other real estate owned expense,had a negative effect on earnings.  Theseitems are discussed in more detail in the Results of Operations section of thisdocument.

 

9

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**FINANCIAL CONDITION**

 

        Average earning assets of the Corporation for the first ninemonths of 2004 decreased by $28.6 million (11.3%) to $225.3 million, comparedto $253.9 million for the same period in 2003.

 

        Average loans decreased $28.2 million (14.4%) to $166.8 millionfor the three months ended September 30, 2004, compared to $194.9 million forthe same period in 2003.  Declines inaverage balances were seen in major categories of the loan portfolio, rangingfrom decreases of $10.4 million in residential real estate loans, to $7.1million in commercial loans, $5.7 million in commercial real estate loans, $2.7million in consumer and credit card loans, and $2.2 million in agriculturalloans.

 

        Average loans decreased $22.6 million (11.3%) to $177.9million for the nine months ended September 30, 2004, compared to $200.5million for the same period in 2003. Declines in average balances were seen in major categories of the loanportfolio, ranging from decreases of $7.5 million in commercial real estateloans, to $4.8 million in commercial loans, $4.2 million in residential realestate loans, $3.1 million in consumer and credit card loans, and $2.5 millionin agricultural loans.  During the courseof 2004 the management of Illini Bank (“Illini”) continued their efforts toreduce marginal credits from the books of Illini and to strengthen theremaining loan relationships, a process management began in 2003.  These declines have also been the result of aslowdown in new loan activity, as customer loan requests during the first ninemonths of 2004 have decreased, compared to the same period in 2003.

 

        Duringthe second quarter of 2004, Illini sold all loans that were classified as heldfor sale, except for $5.5 million that was transferred into Illini’s loanportfolio at lower of cost or market.  As of March 31, 2004 theamount of these loans totaled $15.2 million.

 

        Average balances of the securities portfolio increased by$2.5 million for the three months and $1.5 million for the nine months endedSeptember 30, 2004, as compared to the same periods in 2003.  This increase was more than offset by adecrease of $7.1 million in short-term investments from September 30, 2003 toSeptember 30, 2004 in the nine-month period-to-period comparison.

 

        During the latter part of 2003, management made the consciousdecision to reduce its exposure to out of the area certificates of deposit as afunding source for loan and investment activity.  The impact of this decision continues to beseen in the Corporation’s deposit portfolio, as average balance of timedeposits less than $100,000 decreased $25.9 million and average balance of timedeposits $100,000 and over decreased $8.4 million, respectively, for the firstnine months of 2004 as compared to the same period in 2003.  These declines were partially offset byreductions in the loan portfolio and in short-term investments, along with anincrease in borrowings from the Federal Home Loan Bank of Chicago, a lower costalternative funding source.  The net effectof these actions was a reduction in the Corporation’s funding costs of 64 basispoints, to 2.38% for the first nine months of 2004, as compared to 3.02% forthe same period in 2003.  As a result,the Corporation was able to increase its net interest margin for the ninemonths ended September 30, 2004 to 3.92%, an increase of 41 basis points fromthe 3.51% reported for the first nine months of 2003.

 

        Thesubsidiary banks maintain an overnight federal funds line of credit with anunaffiliated financial institution and a collateralized borrowing capacity withthe Federal Home Loan Bank 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 2003 Illini Corporation Annual Reporton Form 10-KSB (2003 Form10-KSB).

 

 

10

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Net Interest Income

 

        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,Interest Income/Expense and Yield/Rates**

 
| ** **                                      | ** ** | **Three months ended September 30,** | ** **  |
|-------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                      | ** ** | **2004**                             | ** **  | **2003** | ** ** |
| ** **                                      | ** ** | **Interest**                         | ** **  | **Average** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Average**                          | ** **  | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                      | ** ** | **Balance**                          | ** **  | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| ** **                                      | ** ** | **(dollars in thousands)**           | ** **  |
| **ASSETS**                                      |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Interest-earning assets:                        |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Short-term investments                          | ** ** | **$**                                | **11,654**  | ** ** | **$** | **35** | ** ** | **1.19** | **%** | $ | 11,365 |   | $ | 25 |   | 0.89 | % |
| Investment securities (3)                       |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Taxable                                         | ** ** | **28,282**                           | ** **  | **256** | ** ** | **3.63** | ** ** | 24,854 |   | 244 |   | 3.92 |   |
| Tax-exempt (1)                                  | ** ** | **14,510**                           | ** **  | **283** | ** ** | **7.79** | ** ** | 15,493 |   | 326 |   | 8.42 |   |
| Total securities                                | ** ** | **42,792**                           | ** **  | **539** | ** ** | **5.04** | ** ** | 40,347 |   | 570 |   | 5.65 |   |
| Loans                                           |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Commercial (1)                                  | ** ** | **28,971**                           | ** **  | **436** | ** ** | **5.97** | ** ** | 36,018 |   | 572 |   | 6.30 |   |
| Agriculture                                     | ** ** | **12,389**                           | ** **  | **161** | ** ** | **5.15** | ** ** | 14,471 |   | 199 |   | 5.46 |   |
| Real estate                                     |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Commercial                                      | ** ** | **89,785**                           | ** **  | **1,410** | ** ** | **6.23** | ** ** | 95,516 |   | 1,490 |   | 6.19 |   |
| Agriculture                                     | ** ** | **5,512**                            | ** **  | **93** | ** ** | **6.71** | ** ** | 5,673 |   | 104 |   | 7.24 |   |
| Residential                                     | ** ** | **25,194**                           | ** **  | **401** | ** ** | **6.31** | ** ** | 35,622 |   | 587 |   | 6.54 |   |
| Consumer, net                                   | ** ** | **4,279**                            | ** **  | **91** | ** ** | **8.40** | ** ** | 6,891 |   | 155 |   | 8.93 |   |
| Credit card                                     | ** ** | **640**                              | ** **  | **26** | ** ** | **16.05** | ** ** | 745 |   | 33 |   | 17.54 |   |
| Total loans                                     | ** ** | **166,770**                          | ** **  | **2,618** | ** ** | **6.23** | ** ** | 194,936 |   | 3,140 |   | 6.39 |   |
| Allowance for loan losses                       | ** ** | **(2,640**                           | **)**       |   |   | ** ** | ** ** | (1,925 | ) | ** ** | ** ** | ** ** | ** ** |
| Net loans (1) (2)                               | ** ** | **164,130**                          | ** **  | **2,618** | ** ** | **6.33** | ** ** | 193,011 |   | 3,140 |   | 6.45 |   |
| Total interest-earning assets                   | ** ** | **218,576**                          | ** **  | **3,192** | ** ** | **5.79** | ** ** | 244,723 |   | 3,735 |   | 6.05 |   |
| Other assets                                    | ** ** | **21,872**                           | ** **  | ** ** | ** ** | ** ** | ** ** | 23,173 |   |   |   |   |   |
| Total assets                                    | ** ** | **$**                                | **240,448** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 267,896 |   |   |   |   |   |
| **LIABILITIES**                                 |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Deposits:                                       |       | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Interest-bearing demand                         | ** ** | **$**                                | **59,911**  | ** ** | **$** | **131** | ** ** | **0.87** | **%** | $ | 58,860 |   | $ | 121 |   | 0.82 | % |
| Savings                                         | ** ** | **21,971**                           | ** **  | **33** | ** ** | **0.60** | ** ** | 21,650 |   | 34 |   | 0.61 |   |
| Time deposits less than $100,000                | ** ** | **74,010**                           | ** **  | **502** | ** ** | **2.69** | ** ** | 98,290 |   | 865 |   | 3.49 |   |
| Time deposits $100,000 and over                 | ** ** | **13,694**                           | ** **  | **97** | ** ** | **2.81** | ** ** | 20,927 |   | 176 |   | 3.35 |   |
| Total interest-bearing deposits                 | ** ** | **169,586**                          | ** **  | **763** | ** ** | **1.79** | ** ** | 199,727 |   | 1,196 |   | 2.38 |   |
| Short-term borrowings                           | ** ** | **567**                              | ** **  | **4** | ** ** | **2.49** | ** ** | 821 |   | 4 |   | 2.17 |   |
| Long-term borrowings                            | ** ** | **13,308**                           | ** **  | **100** | ** ** | **2.97** | ** ** | 9,088 |   | 97 |   | 4.21 |   |
| Subordinated debentures (4)                     | ** ** | **9,000**                            | ** **  | **244** | ** ** | **10.74** | ** ** | 9,000 |   | 244 |   | 10.74 |   |
| Total interest-bearing liabilities              | ** ** | **192,461**                          | ** **  | **1,111** | ** ** | **2.29** | ** ** | 218,636 |   | 1,541 |   | 2.80 |   |
| Other liabilities                               | ** ** | **34,595**                           | ** **  | ** ** | ** ** | ** ** | ** ** | 33,709 |   |   |   |   |   |
| Shareholders’ equity                       | ** ** | **13,392**                           | ** **  | ** ** | ** ** | ** ** | ** ** | 15,551 |   |   |   |   |   |
| Total liabilities and shareholders’ equity | ** ** | **$**                                | **240,448** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 267,896 |   |   |   |   |   |
| **Net interest margin**                         | ** ** | ** **                           | ** **  | **$** | **2,081** | ** ** | **3.78** | **%** |   |   | $ | 2,194 |   | 3.56 | % |

 

11

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(1)                      Income amounts are presentedon a taxable equivalent basis (TE), which is defined as income on earningassets that is subject to either a reduced rate or zero rate of income tax,adjusted to give effect to the appropriate incremental federal income tax rateand adjusted for non-deductible carrying costs, where applicable.  Where appropriate, yield calculations includethese adjustments.  The federal statutoryrate was 34% for all periods presented.

(2)                      Nonaccrual loans areincluded in the loan balances.  Interestincome includes related fee income of $77,000 in 2004 and $115,000 in 2003.

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

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

 

        Netinterest margin is a measure of the net return on interest-earning assets andis computed by dividing annualized net interest income by the average of totalinterest-earning assets for the period.

 

        

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

 
| ** **                    | ** ** | **Nine months ended September 30,** | ** **  |
|-------------------------------|------------|-------------------------------------|-------------|
| ** **                    | ** ** | **2004**                            | ** **  | **2003** | ** ** |
| ** **                    | ** ** | **Interest**                        | ** **  | **Average** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Average**                         | ** **  | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                    | ** ** | **Balance**                         | ** **  | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**          | ** **  |
| **ASSETS**                    |       |                                |        |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:      |       |                                |        |   |   |   |   |   |   |   |   |   |   |
| Short-term investments        | ** ** | **$**                               | **8,427**   | ** ** | **$** | **65** | ** ** | **1.02** | **%** | $ | 15,484 |   | $ | 121 |   | 1.05 | % |
| Investment securities (3)     |       |                                |        |   |   |   |   |   |   |   |   |   |   |
| Taxable                       | ** ** | **27,602**                          | ** **  | **772** | ** ** | **3.73** |   | 24,292 |   | 698 |   | 3.83 |   |
| Tax-exempt (1)                | ** ** | **13,938**                          | ** **  | **805** | ** ** | **7.70** |   | 15,725 |   | 994 |   | 8.43 |   |
| Total securities              | ** ** | **41,540**                          | ** **  | **1,577** | ** ** | **5.06** |   | 40,017 |   | 1,692 |   | 5.64 |   |
| Loans                         |       |                                |        |   |   |   |   |   |   |   |   |   |   |
| Commercial (1)                | ** ** | **33,204**                          | ** **  | **1,498** | ** ** | **6.01** |   | 38,016 |   | 1,863 |   | 6.55 |   |
| Agriculture                   | ** ** | **12,672**                          | ** **  | **474** | ** ** | **4.99** |   | 15,149 |   | 620 |   | 5.48 |   |
| Real estate                   |       |                                |        |   |   |   |   |   |   |   |   |   |   |
| Commercial                    | ** ** | **90,276**                          | ** **  | **4,476** | ** ** | **6.60** |   | 97,821 |   | 4,748 |   | 6.49 |   |
| Agriculture                   | ** ** | **5,669**                           | ** **  | **302** | ** ** | **7.10** |   | 6,134 |   | 350 |   | 7.63 |   |
| Residential                   | ** ** | **30,635**                          | ** **  | **1,394** | ** ** | **6.06** |   | 34,875 |   | 1,783 |   | 6.84 |   |
| Consumer, net                 | ** ** | **4,750**                           | ** **  | **299** | ** ** | **8.40** |   | 7,770 |   | 522 |   | 8.98 |   |
| Credit card                   | ** ** | **664**                             | ** **  | **84** | ** ** | **16.83** |   | 774 |   | 101 |   | 17.38 |   |
| Total loans                   | ** ** | **177,870**                         | ** **  | **8,527** | ** ** | **6.39** |   | 200,539 |   | 9,987 |   | 6.66 |   |
| Allowance for loan losses     | ** ** | **(2,516**                          | **)**       | ** ** | ** ** | ** ** |   | (2,183 | ) | ** ** | ** ** | ** ** | ** ** |
| Net loans (1) (2)             | ** ** | **175,354**                         | ** **  | **8,527** | ** ** | **6.48** |   | 198,356 |   | 9,987 |   | 6.73 |   |
| Total interest-earning assets | ** ** | **225,321**                         | ** **  | **10,169** | ** ** | **6.01** |   | 253,857 |   | 11,800 |   | 6.21 |   |
| Other assets                  | ** ** | **22,114**                          | ** **  | ** ** | ** ** | ** ** |   | 22,320 |   |   |   |   |   |
| Total assets                  | ** ** | **$**                               | **247,435** | ** ** | ** ** | ** ** | ** ** |   | $ | 276,177 |   |   |   |   |   |
|                          |       |                                |        |   |   |   |   |   |   |   |   |   |   |
|                               |            |                                     |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| **LIABILITIES**                                 |       |        |        |       |       |       |       |       |   |    |   |   |   |
|-------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|------------|--------|---------|--------|--------|--------|
| Interest-bearing liabilities:                   |       |        |        |       |       |       |       |       |   |    |   |   |   |
| Deposits:                                       |       |        |        |       |       |       |       |       |   |    |   |   |   |
| Interest-bearing demand                         | ** ** | **$**       | **57,410**  | ** ** | **$**      | **351**    | ** ** | **0.81**   | **%**  | $       | 58,017 |   | $      | 438 |   | 1.01 | % |
| Savings                                         | ** ** | **22,128**  | ** **  | **100**    | ** ** | **0.60**   | ** ** | 21,362     |   | 124     |   | 0.77   |   |
| Time deposits less than $100,000                | ** ** | **79,934**  | ** **  | **1,719**  | ** ** | **2.86**   | ** ** | 105,799    |   | 2,936   |   | 3.71   |   |
| Time deposits $100,000 and over                 | ** ** | **14,815**  | ** **  | **334**    | ** ** | **3.01**   | ** ** | 23,235     |   | 605     |   | 3.48   |   |
| Total interest-bearing deposits                 | ** ** | **174,287** | ** **  | **2,504**  | ** ** | **1.91**   | ** ** | 208,413    |   | 4,103   |   | 2.63   |   |
| Short-term borrowings                           | ** ** | **1,123**   | ** **  | **16**     | ** ** | **1.89**   | ** ** | 705        |   | 14      |   | 2.75   |   |
| Long-term borrowings                            | ** ** | **12,884**  | ** **  | **295**    | ** ** | **3.05**   | ** ** | 8,616      |   | 292     |   | 4.53   |   |
| Subordinated debentures (4)                     | ** ** | **9,000**   | ** **  | **717**    | ** ** | **10.61**  | ** ** | 9,000      |   | 717     |   | 10.65  |   |
| Total interest-bearing liabilities              | ** ** | **197,294** | ** **  | **3,532**  | ** ** | **2.38**   | ** ** | 226,734    |   | 5,126   |   | 3.02   |   |
| Other liabilities                               | ** ** | **36,174**  | ** **  | ** ** | ** ** | ** ** | ** ** | 33,844     |   |    |   |   |   |
| Shareholders’ equity                       | ** ** | **13,967**  | ** **  | ** ** | ** ** | ** ** | ** ** | 15,599     |   |    |   |   |   |
| Total liabilities and shareholders’ equity | ** ** | **$**       | **247,435** | ** ** | ** ** | ** ** | ** ** | ** ** | $      | 276,177 |   |   |   |   |   |
| **Net interest margin**                         | ** ** | ** **  | ** **  | **$**      | **6,637**  | ** ** | **3.92**   | **%**      |   |    | $      | 6,674  |   | 3.51 | % |
|                                                 |            |             |             |            |            |            |            |            |        |         |        |        |        |  |  |  |  |  |

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(1)                      Income amounts are presentedon a taxable equivalent basis (TE), which is defined as income on earningassets that is subject to either a reduced rate or zero rate of income tax,adjusted to give effect to the appropriate incremental federal income tax rateand adjusted for non-deductible carrying costs, where applicable.  Where appropriate, yield calculations includethese adjustments.  The federal statutoryrate was 34% for all periods presented.

(2)                      Nonaccrual loans are includedin the loan balances.  Interest incomeincludes related fee income of $270,000 in 2004 and $333,000 in 2003.

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

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

 

        Netinterest margin is a measure of the net return on interest-earning assets andis computed by dividing annualized net interest income by the average of totalinterest-earning assets for the period.

 

        Netinterest income on a tax equivalent basis for the first nine months of 2004 was$6.6 million, only $37,000 less than the amount reported for the same period in2003.

 

Provisionfor Loan 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. During these evaluations, consideration is also given to such factors asmanagement’s evaluation of specific loans, the level and composition ofimpaired loans, other nonperforming loans, other identified potential problemloans, historical loss experience, results of examinations by regulatoryagencies, results of any independent asset quality review process, the marketvalue of collateral, the estimate of discounted cash flows, the strength andavailability of guarantees, concentrations of credits, and various otherfactors, including concentration of credit risk in various industries andcurrent economic conditions.

 

The provision for loan losses charged tooperating expense for the nine months ended September 30, 2004 was $1,602,000,up significantly from the $350,000 reported during the first nine months of2003.  Duringthe first quarter of 2004, Illini charged-off impaired loans totaling$909,000. As a consequence of these charge-offs, as wellas an increase in impaired loans and an increase in classified assets as aresult of improved reporting systems (credit quality and production),management determined to record a provision of $1,350,000 to Illini’s allowancefor loan losses during the first quarter of 2004.  During the third quarter of 2004, loansin the amount of $180,000 were charged off. There was also an increase in impaired loans from $9.2 million as ofJune 30, 2004 to $10.4 million as of September 30, 2004.  Based on these factors management determinedit appropriate to record a provision of $212,000 to Illini’s allowance for loanlosses.  Management believes the 

 

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resultantbalance in the allowance for loan losses is at a level estimated to be adequateto cover probable incurred losses in its loan portfolio.

 

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

 

Noninterest Income

 

        Non-interest income for the three month and nine monthperiods ending September 30, 2004 was $551,000 and $1,445,000, respectively,unchanged and down 14.2% from the comparable periods in 2003.  Service charges on deposit accounts continuedto display strong growth, up $65,000 for the three-month, and $169,000 for thenine-month periods ended September 30, 2004, compared to the same periods in2003.  Year-to-date total non-interestincome was negatively affected by the net losses from the sale/transfer ofmortgage loans discussed in the Form 10-QSB for the first quarter and thesecond quarter of 2004.

 

Noninterest Expense

 

        Non-interest expense for the first nine months of 2004totaled $8,773,000, an increase of $1,802,000 (25.8%) over the same period in2003.  This increase continues to befocused in two primary categories, salaries and employee benefits, up $418,000(11.8%) from 2003, and loan foreclosure and other real estate owned expense, up$1,537,000 (637.8%).

 

        Theincrease in salaries and employee benefits for the first nine months of 2004reflects the expense associated with the lump sum payments under the terms ofthe employment contracts of two individuals, as discussed in the Form 10-QSBfor thesecond quarter of 2004.

 

        The increase in loan foreclosure and other real estate ownedexpense was primarily related to the other real estate loan category.  As previously mentioned in the March 2004Form 10-QSB, Illini reduced the carrying value of two properties by anaggregate $455,000 during the first quarter. During the second quarter Illini reduced the carrying value of twoproperties by an aggregate amount of $548,000, based upon the values of signedcontracts for purchase of those two properties, which were received during thelatter part of the second quarter.  Oneof these properties called for settlement to take place in the month ofAugust.  At that time, the buyers wereunable to complete the purchase and the property remains in Illini’spossession.  Upon re-evaluating the costsassociated to remarket this property, as well as current market conditions forthis type of property, management determined it was appropriate to reduce thecarrying value of this property by an additional $200,000; this amount wascharged to loan foreclosure and other real estate expense in the third quarter.

 

 

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**CREDIT QUALITY**

 

Allowancefor Loan Losses

 

        When the subsidiary banks (Banks) originate loans, theyrecognize that credit losses will be experienced, and that all these loanscarry varying degrees of risk, such as: economic conditions; the creditworthiness of the borrower; the type ofloan being made; and, with loans secured by collateral, the quality of thecollateral for the loan.  The allowancefor loan losses represents the Banks’ estimate of the level of allowancenecessary to provide for probable incurred losses in the loan portfolio.  The Banks analyze the collectibility of theloans in their respective portfolios, using information provided by internalloan staff, the loan review function, and information provided by examinationsperformed by regulatory agencies.  TheBanks perform an ongoing evaluation as to the adequacy of the allowance forloan losses.

 

        The allowance for loan losses is based on estimates, andultimate 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, 2004, the allowance for loan losses was $2.7million, or 1.68% of total loans.  Thiscompares to the $2.4 million (1.25%) and $2.1 million (1.08%) reported atDecember 31, 2003 and September 30, 2003, respectively.  The change from December 31, 2003 is due tothe continued level of impaired loans, the downgrading of some of those loans,as well as charge-offs of some of those loans during the first nine months of2004.

 

                IlliniCorporation’s primary business of making commercial, real estate, and consumerloans entails potential losses, the magnitude of which depends on a variety ofeconomic factors affecting borrowers, which are beyond the control of theCorporation.  Accordingly, a significantfactor in the Corporation’s past and future operating results is the level ofthe provision for loan losses.

 
| **Credit Quality**                 | ** ** | **September 30,  2004**    | ** ** | **December 31,  2003** | ** ** | **September 30,  2003** | ** ** |
|------------------------------------|------------|----------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **(dollars in thousands)** | ** ** |
| **Nonperforming assets:**          |       |                       | ** ** |                   |       |                    |       |
| Accruing loans past due 90 days    | ** ** | **$**                      | **9**      | ** **             | $          | 9                       |       | $ | 4 |   |
| Nonaccrual                         | ** ** | **2,956**                  | ** ** | 5,505                  |       | 4,338                   |       |
| Renegotiated                       | ** ** | **—**                 | ** ** | —                 |       | 616                     |       |
| Other real estate owned            | ** ** | **2,878**                  | ** ** | 3,918                  |       | 3,741                   |       |
| Total nonperforming assets         | ** ** | **$**                      | **5,843**  | ** **             | $          | 9,432                   |       | $ | 8,699 |   |
| ** **                         | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **              | ** ** |
| **Key ratios:**                    | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **              | ** ** |
| Nonperforming loans to loans       | ** ** | **1.82**                   | **%**      | 2.93                   | %          | 2.55                    | %          |
| 90 days delinquent to ending loans | ** ** | **0.01**                   | ** ** | 0.00                   |       | 0.00                    |       |
| Allowance to total loans           | ** ** | **1.68**                   |       | 1.25                   |       | 1.08                    |       |
| Allowance to nonperforming loans   | ** ** | **92.31**                  |       | 42.79                  |       | 42.28                   |       |

 

 

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Nonperforming Assets

 

        Nonperforming andrenegotiated loans at September 30, 2004 totaled $3.0 million, down $2.5 million(or 45.5%) from December 31, 2003, and down $1.3 million (30.2%) from September30, 2003.  Nonaccrual loans comprise themajority of the nonperforming loans. Nonaccrual loans decreased primarily due to the transfer of loans toother real estate owned and the payoff of loans outstanding.  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.  Alternativesthat are typically considered to collect nonaccrual loans are foreclosure,collection under guarantees, loan restructuring, or judicial collectionactions.

 

        Otherreal estate owned decreased by $1,040,000, to $2.9 million, from the $3.9 millionreported as of December 31, 2003.  Thedecrease from December 31, 2003 was based primarily on the writedown of threeproperties ($1.2 million), the sale of seven properties during the first ninemonths of 2004 ($499,000) and the addition of two properties during the secondquarter of 2004 ($700,000).

 

        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.

 

        Asdiscussed in the Corporation’s 2003 Form 10-KSB and previous 2004 Form 10-QSBreports, management has implemented several initiatives to improve creditquality.  These steps included a new loanpolicy and improved reporting systems (credit quality and production).  Management is committed to continuing theseinitiatives.

 

Other Potential Problem Loans

        The Corporation has otherpotential problem loans that are currently performing, but where some concernsexist as to the ability of the borrower to comply with present loan repaymentterms. Excluding nonperforming loans, these loans totaled $7,478,000 thatmanagement has classified as impaired at September 30, 2004, an increase of$1.4 million from June 30, 2004. Management currently considers these loans to be impaired due todeclining financial performance of the borrowers. 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**

 

        Thecurrent economic and regulatory environment places increased emphasis oncapital strength.  A strong capitalposition, which is vital to the continued profitability of Illini Corporation,also promotes depositor and investor confidence and provides a solid foundationfor the future growth of the organization. Illini Corporation has historically satisfied its capital requirementsprincipally through the retention of earnings.

 

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The table below shows the various measures ofregulatory capital and related quarterly ratios.

 
| ** **                                            | ** ** | **Regulatory requirements  to be:** | ** ** | **Actual Regulatory Capital Ratios** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **Adequately  Capitalized**         | ** ** | **Well-  Capitalized**               | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Total risk-based capital as % of risk-weighted assets |       | 8.0                                 | %          | 10.0                                 | %          | 12.0 | % | 11.7 | % |
| Tier 1 capital as % of risk-weighted assets           |       | 4.0                                 | %          | 6.0                                  | %          | 8.1 | % | 8.3 | % |
| Tier 1 capital as % quarterly average assets          |       | 4.0                                 | %          | 5.0                                  | %          | 6.1 | % | 6.3 | % |

 

        Risk-basedcapital guidelines require the classification of assets and some off-balanceitems in terms of credit-risk exposure and the measuring of capital as apercentage of the risk adjusted asset totals. Management believes, and data in the above table show that, as ofSeptember 30, 2004 and December 31, 2003 the Corporation met all capitaladequacy requirements to which it is subject. As of those dates, the Corporation’s subsidiary banks were “well capitalized”under regulatory prompt corrective action provisions.

 

        Earnings retention is affected by the Board of Directors’declaration of cash dividends.  Thedividend payout ratio is an indicator of the level of earnings retained.  The Board of Directors of the Corporationconsiders the capital strength of the Corporation and the subsidiary banks indetermining the appropriate level of cash dividends to be paid toshareholders.  The dividend payout ratiofor the three and nine months ended September 30, 2004 was (64.77)% and(10.69)% as compared to 54.46% and 52.78% for the three and nine months endedSeptember 30, 2003.  At its regularquarterly meeting on October 14, 2004, with the approval of the Federal ReserveBank of Chicago, the Corporation’s Board approved a dividend payment of $.10per share.

 

        In May of 2004, Illini Bank entered into a memorandum ofunderstanding with the F.D.I.C. and the Illinois Department of Financial andProfessional Regulation, Division of Banks and Real Estate, which includes priorregulatory approval for payment of dividends by Illini Bank.  In July of 2004, Illini Corporation approveda resolution requested by the Federal Reserve Bank of Chicago that includesrestrictions similar to the above memorandum of understanding.

 

        As discussedin the Corporation’s 2003 Form 10-KSB, the Corporation has $9 million of trustpreferred securities outstanding.  TwentyFive (25) percent of the Tier 1 capital ratio can be comprised of the trustpreferred issue.  As of September 30,2004, the portion eligible for inclusion in the Tier 1 computation amounted toapproximately $4.2 million.

 

 

**LIQUIDITY**

 

        Illini Corporation’s policy is to manage interest rate riskto a level which places limits on the sensitivity of its earnings to changes inmarket interest rates.  An explanation ofthe asset/liability management process is found in the Corporation’s 2003 Form10-KSB, beginning on page 16.

 

        Theasset portion of the balance sheet provides liquidity primarily through loanprincipal repayments, maturities of investment securities, and sales ofinvestment securities available for sale. The liability side of the balance sheet provides liquidity throughvarious customers’ interest-bearing and noninterest-bearing depositaccounts.  Short-term borrowings are anadditional source of liquidity and represent Illini Corporation’s incrementalborrowing capacity.

 

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        IlliniCorporation uses a comprehensive analysis of its asset/liability function,including a review of its funds management policy and its principal measure ofliquidity.  The Corporation utilizes aliquidity measurement, called “Basic Surplus,” which redefines liquid assets asthe total available assets held by the Corporation which can be converted tocash in thirty days or less, reduced by short term liabilities, plus availableborrowings.  As of September 30, 2004,the most recent calculation, Illini Corporation’s basic surplus was $33.5million, or 13.52% of total average assets.

 

        Managementbelieves the formula provides an accurate measurement of liquidity and providesmanagement with a comprehensible and consistent tool to develop pricing andprofitability strategies.  Based on thismeasurement and as compared to peer banks, management believes the liquidityposition of the subsidiary banks is strong.

 

 

**PART I - Item 3.  Controls andProcedures**

 

        An evaluation wasperformed under the supervision and with the participation of the Corporation’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Corporation’sdisclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of September 30,2004. 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 2004 that could significantly affectinternal controls.  While managementconcluded the disclosure controls and procedures are adequate in all materialrespects for SEC reporting purposes, the Corporation is currently reviewing itspolicies and procedures regarding identification and classification of impairedloans, its asset review process, and its process for valuing other real estateowned.

 

 

**PARTII.  OTHER INFORMATION**

 

Item 1Legal Proceedings 

 

        Various legal claims have arisen against Illini Corporationin the normal course of business, which, in the opinion of Illini Corporationmanagement, will not result in any material liability to IlliniCorporation.  Of the cases previouslyreported, two cases remain pending.

 

        The first case was filed in 1998 by a shareholder of IlliniCorporation against Illinois Stock Transfer Company, as Rights Agent for IlliniCorporation under Illini Corporation’s Shareholder Rights Agreement (“RightsAgreement”), for specific performance of the Rights Agreement, on behalf of theplaintiff individually and on behalf of a class of Illini Corporationshareholders.  The complaint alleged thatthe Rights Agreement was triggered in April of 1998, and the Rights Agent had aduty under the Rights Agreement to distribute Rights Certificates to theshareholders of Illini Corporation. Illini Corporation was added as a Defendant in 1999 and the classcertified.  Plaintiff was seeking torecover attorney’s fees from Illini Corporation in addition to other relief.The Corporation negotiated a settlement of the suit with the new classrepresentative and class counsel appointed after the Court removed the originalclass representative and her attorney. The terms of that settlement have been agreed upon and approved by thecourt.  The agreement provides for acomplete resolution of the shareholder claims and a portion of the claims forattorney fees for the new class representative, excluding fees for the attorneyrepresenting the original class representative. Illini has accrued for theexpense 

 

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that is part of the approvedsettlement and it will have no adverse impact on the Corporation.  The court will also be asked to deny the feerequest filed by the attorney for the original class representative. Thatproceeding should be concluded as soon as it is scheduled for hearing by theCourt.  Removed counsel has filed an appealof certain decisions made by the trial court, and that appeal is pending in theFourth Appellate Court of Illinois.

 

         In April 2003, Illini Corporation, its directors, andone of its officers were named as defendants in a complaint filed in theCircuit Court of Sangamon County. Plaintiffs seek to rescind the Stock Purchase Agreement entered into bythe Corporation in 2001 to purchase approximately 30% of its common shares froma minority shareholder group.  The StockPurchase Agreement was a normal business transaction beneficial to the Corporation’sshareholders and was entered into after appropriate due diligence andconsultation with the Corporation’s outside financial advisors.  The Corporation has filed motions to dismisson the basis of a prior pending action and a motion for a stay of proceedingsuntil review of the case by its independent directors.  That review has been completed, with adetermination by the independent directors that the Stock Purchase Agreementwas in the best interests of the Corporation and its shareholders and that thedirectors acted in good faith in entering into the Stock PurchaseAgreement.  Those motions are stillpending.  The Corporation will vigorouslydefend the lawsuit.

 

 

Item 2    Changes in Securities — none

 

Item 3    Defaults Upon Senior Securities — none

 

Item 4    Submission of Matters to a Vote ofSecurity Holders — none

 

Item 5    Other Information — none

 

Item 6             Exhibitsand Reports on Form 8-K

 

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

 

(b)           Reportson Form 8-K :

There were no reports on Form 8-K filed for thequarter ended September 30, 2004.

 

 

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**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

 
| Illini Corporation        |   |              |
|---------------------------|--------|-------------------|
| (Registrant)              |   |              |
|                      |   |              |
|                      |   |              |
|                      |   |              |
| By: /s/ Burnard K. McHone |   | November 10, 2004 |
| Burnard K. McHone         |   | Date signed       |
| President                 |   |              |
|                      |   |              |
|                      |   |              |
|                      |   |              |
| By: /s/ Dennis B. Guthrie |   | November 10, 2004 |
| Dennis B. Guthrie         |   | Date signed       |
| Chief Financial Officer   |   |              |

 

 

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