** **

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

**Washington,D.C.  20549**

 

**FORM 10-QSB**

 

**ý****                    QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For quarterly period ended June 30, 2005**

 

**o****                    TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THEEXCHANGE ACT**

** **

**Commissionfile number   0-13343**

 

**Illini Corporation**

(Exact name ofsmall 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  West Iles Avenue, Springfield, Illinois 62711** |
|---------------------------------------------------------|
| (Address of  principal executive offices)               |

 

**(217)787-5111**

(Issuer’stelephone number)

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

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

 

As of August 9,2005, there were 541,029 shares of common stock, $0.01 par value outstanding.

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

 

 

----

 

**ILLINICORPORATION**

INDEX TO FORM 10-QSB

June 30, 2005

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

 

**InformationConcerning Forward-Looking Statements**

** **

*Statements contained in this Form 10-QSBwhich are not historical facts are “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These statements involve importantknown and unknown risks, uncertainties and other factors and can be identifiedby phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,”“predict,” “potential,” “future,” “may,” “should” and similar expressions orwords.  Such forward-looking statementsare subject to risk and uncertainties which could cause actual results todiffer materially from those projected. Such risks and uncertainties include potential change in interest rates,competitive factors in the financial services industry, general economicconditions, the effect of new legislation and other risks detailed in documentsfiled by Illini Corporation with the Securities and Exchange Commission fromtime to time.*

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

** **

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

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

**(Unaudited)**

** **
| ** **                                                                                                                                              | ** ** | **June 30,  2005**    | ** **  | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                              | ** ** | **(dollars in thousands)** | ** **  |
| **ASSETS**                                                                                                                                              |       |                       |        |                        |       |
| Cash and due  from banks                                                                                                                                | ** ** | **$**                      | **5,514**   |                        | $          | 8,136 |   |
| Interest-bearing  deposits in other banks                                                                                                               | ** ** | **66**                     |        | 66                          |       |
| Federal funds  sold                                                                                                                                     | ** ** | **2,310**                  |        | 3,359                       |       |
| Cash and cash  equivalents                                                                                                                              | ** ** | **7,890**                  |        | 11,561                      |       |
| Investment  securities available for sale, at fair value                                                                                                | ** ** | **80,855**                 |        | 56,161                      |       |
| Loans, net of  allowance for loan losses of $2,246 and $2,412                                                                                           | ** ** | **147,302**                |        | 156,160                     |       |
| Federal Home  Loan Bank stock                                                                                                                           | ** ** | **886**                    |        | 863                         |       |
| Premises and  equipment                                                                                                                                 | ** ** | **5,997**                  |        | 5,903                       |       |
| Accrued interest  receivable                                                                                                                            | ** ** | **1,612**                  |        | 1,649                       |       |
| Other real  estate owned                                                                                                                                | ** ** | **1,233**                  |        | 994                         |       |
| Goodwill                                                                                                                                                | ** ** | **1,856**                  |        | 1,856                       |       |
| Other assets                                                                                                                                            | ** ** | **5,832**                  |        | 2,369                       |       |
| Total Assets                                                                                                                                            | ** ** | **$**                      | **253,463** |                        | $          | 237,516 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                          | ** ** | ** **                 | ** **  | ** **                  | ** ** |
| Noninterest-bearing  demand deposits                                                                                                                    | ** ** | **$**                      | **33,149**  | ** **                  | $          | 37,569 | ** ** |
| Interest-bearing  deposits:                                                                                                                             |       |                       |        |                        |       |
|   NOW and money market accounts                                                                                                                    | ** ** | **55,209**                 |        | 57,797                      |       |
|   Savings deposits                                                                                                                                 | ** ** | **22,829**                 |        | 21,902                      |       |
|   Time deposits, $100,000 and over                                                                                                                 | ** ** | **22,761**                 |        | 13,209                      |       |
|   Other time deposits                                                                                                                              | ** ** | **77,539**                 |        | 68,242                      |       |
| Total Deposits                                                                                                                                          | ** ** | **211,487**                |        | 198,719                     |       |
| Federal funds  purchased and securities sold under agreements to repurchase                                                                             | ** ** | **1,450**                  |        | 1,392                       |       |
| Borrowings                                                                                                                                              | ** ** | **11,000**                 |        | 13,298                      |       |
| Subordinated  debentures                                                                                                                                | ** ** | **9,000**                  |        | 9,000                       |       |
| Accrued interest  payable                                                                                                                               | ** ** | **902**                    |        | 813                         |       |
| Other  liabilities                                                                                                                                      | ** ** | **1,666**                  |        | 869                         |       |
| Total  Liabilities                                                                                                                                      | ** ** | **235,505**                |        | 224,091                     |       |
|                                                                                                                                                    |       |                       |        |                        |       |
| Shareholders’  equity                                                                                                                              |       |                       |        |                        |       |
| Preferred stock,  $0.01 par value, authorized and unissued 10,000,000 shares                                                                            | ** ** | **—**                 |        | —                      |       |
| Common stock, $0.01  par value, authorized 45,000,000 shares; 698,289 shares issued at  June 30, 2005 and 571,789 shares at December 31, 2004 | ** ** | **7**                      |        | 6                           |       |
| Capital surplus                                                                                                                                         | ** ** | **13,059**                 |        | 9,038                       |       |
| Retained  earnings                                                                                                                                      | ** ** | **11,268**                 |        | 10,615                      |       |
| Accumulated  other comprehensive income                                                                                                                 | ** ** | **701**                    |        | 843                         |       |
| Less: Treasury  shares, at cost, 157,260 shares                                                                                                         | ** ** | **(7,077**                 | )           | (7,077                      | )          |
| Total  Shareholders’ Equity                                                                                                                        | ** ** | **17,958**                 |        | 13,425                      |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                        | ** ** | **$**                      | **253,463** |                        | $          | 237,516 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

3

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**ILLINI CORPORATION AND SUBSIDIARIES**

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

**Three Months and Six Months Ended June 30,2005 and 2004**

**(Unaudited)**

** **
| ** **                                                                  | ** ** | **Three Months Ended  June 30,**             | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                          | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest income:                                                            |       |                                              |       |                                |       |   |   |   |   |
| Loans, including  fees                                                      | ** ** | **$**                                             | **2,529**  |                                | $          | 2,976 | ** ** | **$** | **4,903** |   | $ | 5,898 |   |
| Investment  securities:                                                     | ** ** | ** **                                        | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Taxable                                                                     | ** ** | **624**                                           |       | 226                                 | ** ** | **1,024** |   | 516 |   |
| Exempt from  federal income taxes                                           | ** ** | **165**                                           |       | 179                                 | ** ** | **351** |   | 360 |   |
| Federal funds  sold and interest-bearing deposits                           | ** ** | **19**                                            |       | 24                                  | ** ** | **60** |   | 30 |   |
| Total interest  income                                                      | ** ** | **3,337**                                         |       | 3,405                               | ** ** | **6,338** |   | 6,804 |   |
| Interest  expense:                                                          |       |                                              |       |                                |       |   |   |   |   |
| Deposits:                                                                   |       |                                              |       |                                |       |   |   |   |   |
| NOW and money  market accounts                                              | ** ** | **200**                                           |       | 112                                 | ** ** | **375** |   | 220 |   |
| Savings deposits                                                            | ** ** | **48**                                            |       | 34                                  | ** ** | **93** |   | 67 |   |
| Time deposits,  $100,000 and over                                           | ** ** | **123**                                           |       | 111                                 | ** ** | **211** |   | 237 |   |
| Other time  deposits                                                        | ** ** | **529**                                           |       | 556                                 | ** ** | **984** |   | 1,217 |   |
| Federal funds  purchased and securities sold under agreements to repurchase | ** ** | **14**                                            |       | 3                                   | ** ** | **20** |   | 12 |   |
| Borrowings                                                                  | ** ** | **67**                                            |       | 96                                  | ** ** | **154** |   | 195 |   |
| Subordinated  debentures                                                    | ** ** | **229**                                           |       | 229                                 | ** ** | **473** |   | 473 |   |
| Total interest  expense                                                     | ** ** | **1,210**                                         |       | 1,141                               | ** ** | **2,310** |   | 2,421 |   |
| Net interest  income                                                        | ** ** | **2,127**                                         |       | 2,264                               | ** ** | **4,028** |   | 4,383 |   |
| Provision for  loan losses                                                  | ** ** | **—**                                        |       | —                              | ** ** | **—** |   | 1,390 |   |
| Net interest  income after provision for loan losses                        | ** ** | **2,127**                                         |       | 2,264                               | ** ** | **4,028** |   | 2,993 |   |
| Noninterest  income:                                                        |       |                                              |       |                                |       |   |   |   |   |
| Service charges  on deposit accounts                                        | ** ** | **384**                                           |       | 417                                 | ** ** | **719** |   | 767 |   |
| Other fee income                                                            | ** ** | **71**                                            |       | 77                                  | ** ** | **140** |   | 155 |   |
| Mortgage loan  servicing fees                                               | ** ** | **13**                                            |       | 69                                  | ** ** | **31** |   | 90 |   |
| Gains (losses)  on sales/transfers of mortgage loans                        | ** ** | **11**                                            |       | (226                                | )          | **28** |   | (212 | ) |
| Investment  securities gains                                                | ** ** | **63**                                            |       | 27                                  |       | **63** |   | 27 |   |
| Gains (losses)  on sale of other real estate owned                          | ** ** | **6**                                             |       | (55                                 | )          | **(11** | **)** | (35 | ) |
| Other                                                                       | ** ** | **116**                                           |       | 82                                  | ** ** | **147** |   | 102 |   |
| Total  noninterest income                                                   | ** ** | **664**                                           |       | 391                                 | ** ** | **1,117** |   | 894 |   |
| Noninterest  expense:                                                       |       |                                              |       |                                |       |   |   |   |   |
| Salaries and  employee benefits                                             | ** ** | **1,020**                                         |       | 1,419                               | ** ** | **2,024** |   | 2,684 |   |
| Net occupancy  expense                                                      | ** ** | **178**                                           |       | 183                                 | ** ** | **357** |   | 368 |   |
| Equipment  expense                                                          | ** ** | **43**                                            |       | 51                                  | ** ** | **83** |   | 99 |   |
| Data processing  fees                                                       | ** ** | **172**                                           |       | 179                                 | ** ** | **337** |   | 380 |   |
| Supplies expense                                                            | ** ** | **47**                                            |       | 34                                  | ** ** | **80** |   | 68 |   |
| Communication  and transportation expense                                   | ** ** | **126**                                           |       | 132                                 | ** ** | **258** |   | 250 |   |
| Marketing and  advertising expense                                          | ** ** | **67**                                            |       | 76                                  | ** ** | **120** |   | 129 |   |
| Correspondent  bank fees                                                    | ** ** | **67**                                            |       | 44                                  | ** ** | **127** |   | 98 |   |
| Loan foreclosure  and other real estate owned expense                       | ** ** | **64**                                            |       | 916                                 | ** ** | **116** |   | 1,440 |   |
| Professional  fees                                                          | ** ** | **166**                                           |       | 136                                 | ** ** | **313** |   | 302 |   |
| Regulatory fees                                                             | ** ** | **38**                                            |       | 24                                  | ** ** | **80** |   | 46 |   |
| Other                                                                       | ** ** | **156**                                           |       | 196                                 | ** ** | **278** |   | 349 |   |
| Total  noninterest expense                                                  | ** ** | **2,144**                                         |       | 3,390                               | ** ** | **4,173** |   | 6,213 |   |
| Income (loss)  before income tax expense-(benefit)                          | ** ** | **647**                                           |       | (735                                | )          | **972** |   | (2,326 | ) |
| Income tax  expense (benefit)                                               | ** ** | **164**                                           |       | (342                                | )          | **210** |   | (1,035 | ) |
| Net income  (loss)                                                          | ** ** | **$**                                             | **483**    |                                | $          | (393 | ) | **$** | **762** |   | $ | (1,291 | ) |
| Basic and  diluted earnings (loss) per share                                | ** ** | **$**                                             | **0.89**   |                                | $          | (0.95 | ) | **$** | **1.50** |   | $ | (3.12 | ) |

 

See accompanying notes tounaudited consolidated financial statements.

 

4

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

**Six Months Ended June 30, 2005 and 2004**

**(Unaudited)**

** **
| ** **                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands)**          | ** ** |
| Common Stock                               |       |                                |       |   |   |
| Beginning of  year balance                 | ** ** | **$**                               | **6**      | ** ** | $ | **6** | ** ** |
| Issuance of  shares from private placement | ** ** | **1**                               | ** ** | **—** | ** ** |
| End of period  balance                     | ** ** | **7**                               | ** ** | **6** | ** ** |
| ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Capital Surplus                            | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Beginning of  year balance                 | ** ** | **9,038**                           | ** ** | **9,070** | ** ** |
| Sale of treasury  stock                    | ** ** | **—**                          | ** ** | **(32** | **)** |
| Issuance of  shares from private placement | ** ** | **4,021**                           | ** ** | **—** | ** ** |
| End of period  balance                     | ** ** | **13,059**                          | ** ** | **9,038** | ** ** |
| ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Retained  Earnings                         | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Beginning of  year balance                 | ** ** | **10,615**                          | ** ** | **12,068** | ** ** |
| Net income  (loss)                         | ** ** | **762**                             | ** ** | **(1,291** | **)** |
| Dividends on  common stock                 | ** ** | **(109**                            | **)**      | **(103** | **)** |
| End of period  balance                     | ** ** | **11,268**                          | ** ** | **10,674** | ** ** |
| ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Treasury Stock                             | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Beginning of  year balance                 | ** ** | **(7,077**                          | **)**      | **(7,204** | **)** |
| Sale of treasury  stock                    | ** ** | **—**                          | ** ** | **127** | ** ** |
| End of period  balance                     | ** ** | **(7,077**                          | **)**      | **(7,077** | **)** |
| ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Accumulated  Other Comprehensive Income    | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Beginning of  year balance                 | ** ** | **843**                             | ** ** | **1,101** | ** ** |
| Unrealized loss  on securities, net of tax | ** ** | **(142**                            | **)**      | **(626** | **)** |
| End of period  balance                     | ** ** | **701**                             | ** ** | **475** | ** ** |
| ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Total  Shareholders’ Equity           | ** ** | **$**                               | **17,958** | ** ** | **$** | **13,116** | ** ** |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

**ILLINI CORPORATION AND SUBSIDIARIES**

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

**Three Months and Six Months Ended June 30,2005 and 2004**

**(Unaudited)**

** **
| ** **                                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                            | ** ** | **(dollars in thousands)**            | ** ** | **(dollars in thousands)**          | ** ** |
| Net Income  (loss)                                                                                                    | ** ** | **$**                                 | **483**    |                                | $          | (393 | ) | **$** | **762** |   | $ | (1,291 | ) |
| Other  comprehensive income, unrealized gains (losses) on securities, net of  reclassification adjustment, net of tax | ** ** | **492**                               |       | (835                                | )          | **(142** | **)** | (626 | ) |
| Comprehensive  income (loss)                                                                                          | ** ** | **$**                                 | **975**    |                                | $          | (1,228 | ) | **$** | **620** |   | $ | (1,917 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**SixMonths Ended June 30, 2005 and 2004**

**(Unaudited)**

** **
| ** **                                                                                           | ** ** | **2005**                   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **(dollars in thousands)** | ** ** |
| Cash flows from  operating activities:                                                               |       |                       |       |       |       |
| Net income (loss)                                                                                    | ** ** | **$**                      | **762**    | ** ** | **$**      | (1,291 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                       | ** ** |       |       |
| Depreciation                                                                                         | ** ** | **284**                    | ** ** | 380        |       |
| Provision for  loan losses                                                                           | ** ** | **—**                 | ** ** | 1,390      |       |
| Investment  security amortization, net                                                               | ** ** | **40**                     | ** ** | 33         |       |
| Gains on sales  of investment securities, net                                                        | ** ** | **(63**                    | **)**      | (27        | )          |
| Federal Home  Loan Bank stock dividend                                                               | ** ** | **(23**                    | **)**      | (25        | )          |
| Gains on sales  of premises and equipment                                                            | ** ** | **(2**                     | **)**      | —     |       |
| (Gains) losses  on sales of mortgage loans, net                                                      | ** ** | **(28**                    | **)**      | 212        |       |
| Valuation  allowance established or direct write-down for other real estate owned                    | ** ** | **—**                 | ** ** | 1,003      |       |
| Losses on sales  of other real estate owned                                                          | ** ** | **11**                     | ** ** | 35         |       |
| Decrease in  accrued interest receivable                                                             | ** ** | **37**                     | ** ** | 470        |       |
| Increase  (decrease) in accrued interest payable                                                     | ** ** | **89**                     | ** ** | (276       | )          |
| Origination of  secondary market mortgage loans                                                      | ** ** | **(3,270**                 | **)**      | (2,442     | )          |
| Proceeds from  the sales of secondary market mortgage loans                                          | ** ** | **3,298**                  | ** ** | 12,060     |       |
| Other, net                                                                                           | ** ** | **(2,588**                 | **)**      | (1,173     | )          |
| Net cash  provided by (used in) operating activities                                                 | ** ** | **(1,453**                 | **)**      | 10,349     |       |
| Cash flows from  investing activities:                                                               |       |                       | ** ** |       |       |
| Proceeds from  sales of investment securities available for sale                                     | ** ** | **2,602**                  | ** ** | 1,545      |       |
| Proceeds from  maturities and paydowns of investment securities available for sale                   | ** ** | **5,780**                  | ** ** | 12,987     |       |
| Purchases of  investment securities available for sale                                               | ** ** | **(33,273**                | **)**      | (6,173     | )          |
| Net decrease in  loans                                                                               | ** ** | **8,537**                  | ** ** | 8,614      |       |
| Purchases of  premises and equipment                                                                 | ** ** | **(378**                   | **)**      | (290       | )          |
| Proceeds from  sale of premises and equipment                                                        | ** ** | **2**                      | ** ** | —     |       |
| Proceeds from  sales of other real estate owned                                                      | ** ** | **71**                     | ** ** | 343        |       |
| Net cash  provided by (used in) investing activities                                                 | ** ** | **(16,659**                | **)**      | 17,026     |       |
| Cash flows from  financing activities:                                                               |       |                       | ** ** |       |       |
| Net decrease in  noninterest-bearing deposit accounts                                                | ** ** | **(4,420**                 | **)**      | (2,099     | )          |
| Net increase  (decrease) in NOW, money market accounts and savings deposits                          | ** ** | **(1,661**                 | **)**      | 299        |       |
| Net increase  (decrease) in time deposits, $100,000 and over                                         | ** ** | **9,552**                  | ** ** | (4,494     | )          |
| Net increase  (decrease) in other time deposits                                                      | ** ** | **9,297**                  | ** ** | (18,151    | )          |
| Net increase in  securities sold under agreements to repurchase                                      | ** ** | **58**                     | ** ** | 6          |       |
| Proceeds from  sale of treasury shares                                                               | ** ** | **—**                 | ** ** | 95         |       |
| Proceeds from  issuance of shares from private placement, net of expenses                            | ** ** | **4,022**                  | ** ** | —     |       |
| Proceeds of  borrowings                                                                              | ** ** | **—**                 | ** ** | 6,000      |       |
| Repayment of  borrowings                                                                             | ** ** | **(2,298**                 | **)**      | (4,025     | )          |
| Cash dividends  paid                                                                                 | ** ** | **(109**                   | **)**      | (103       | )          |
| Net cash  provided by (used in) financing activities                                                 | ** ** | **14,441**                 | ** ** | (22,472    | )          |
|                                                                                                 |       |                       | ** ** |       |       |
| Net increase  (decrease) in cash and cash equivalents                                                | ** ** | **(3,671**                 | **)**      | 4,903      |       |
| Cash and cash  equivalents at beginning of period                                                    | ** ** | **11,561**                 | ** ** | 15,916     |       |
|                                                                                                 |       |                       | ** ** |       |       |
| Cash and cash  equivalents at end of period                                                          | ** ** | **$**                      | **7,890**  | ** ** | $          | 20,819 |   |
| Supplemental  Disclosures                                                                            |       |                       | ** ** |       |       |
| Transfer of  loans held for sale to loan portfolio                                                   | ** ** | **$**                      | **—** | ** ** | 5,457      |   |
| Transfer of  loans to other real estate owned                                                        | ** ** | **$**                      | **321**    | ** ** | 787        |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

6

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**ILLINICORPORATION AND SUBSIDIARIES**

**Notes toUnaudited Consolidated Financial Statements**

**June 30,2005**

** **

(1)                                  Basisof Presentation

 

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

 

Resultsfor the three and six months ended June 30, 2005 may not be indicative ofthe annual performance of the Corporation or the subsidiary banks, Illini Bankand Farmers State Bank of Camp Point (“the subsidiary banks”).  Management of the Corporation has madeestimates and assumptions relating to the reporting of assets and liabilitiesand the disclosure of contingent assets and liabilities to prepare theconsolidated financial statements (unaudited) in conformity with accountingprinciples generally accepted in the United States of America.  Actual results could differ from thoseestimates.

 

(2)                                  Earnings/ (Loss) per Common Share

 

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

 
| ** **                                  | ** ** | **Three Months Ended  June 30,**             | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                          | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net Income  (loss)                          | ** ** | **$**                                             | **483**    |                                | $          | (393 | ) | **$** | **762** |   | $ | (1,291 | ) |
| ** **                                  | ** ** | ** **                                        | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  common shares outstanding | ** ** | **541,029**                                       |       | 414,529                             | ** ** | **508,181** |   | 413,535 |   |
|                                             |            |                                                   |            |                                     |            |  |  |  |  |  |  |  |  |

 

(3)                      Use ofEstimates in the Preparation of Financial Statements

 

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

 

7

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(4)                      AllowanceFor Loan Losses

 

Inoriginating loans, the Corporation recognizes that loan losses will beexperienced and the risk of loss will vary with, among other things, currenteconomic conditions; the type of loan being made; the creditworthiness of theborrower over the term of the loan; and in the case of a collateralized loan,the quality of the collateral for such loan. The allowance for loan losses represents the Corporation’s estimate ofthe allowance necessary to provide for probable incurred losses in the loanportfolio.  In making this determination,the Corporation analyzes the ultimate collectibility of the loans in itsportfolio, incorporating feedback provided by internal loan staff, theindependent loan review function and information provided by examinationsperformed by regulatory agencies.  TheCorporation makes an ongoing evaluation as to the adequacy of the allowance forloan losses.  Transactions in theallowance for loan losses for the six months ended June 30, 2005 and 2004are summarized below:

 
| ** **                       | ** ** | **Six months ended  June 30,** | ** **  |
|----------------------------------|------------|-------------------------------------|-------------|
| ** **                       | ** ** | **2005**                            | ** **  | **2004** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**          | ** **  |
| **Allowance  for Loan Losses:**  |       |                                |        |   |   |
| Balance at  beginning of period  | ** ** | **$**                               | **2,412**   |   | $ | 2,359 |   |
|                             |       |                                |        |   |   |
| Charge-offs                      | ** ** | **(208**                            | **)**       | (1,149 | ) |
| Recoveries                       | ** ** | **42**                              | ** **  | 35 |   |
| Net charge-offs                  | ** ** | **(166**                            | **)**       | (1,114 | ) |
|                             |       |                                |        |   |   |
| Provision  charged to operations |       | **—**                          |        | 1,390 |   |
| Balance at end  of period        | ** ** | **$**                               | **2,246**   |   | $ | 2,635 |   |
| Average loans  outstanding       | ** ** | **$**                               | **150,657** |   | $ | 183,469 |   |

 

(5)                      RegulatoryExamination 

 

TheCorporation operates in a regulated industry and is subject to variousregulatory constraints, including some which limit the amount of dividends thatmay be paid by a subsidiary bank or which require prior regulatoryapproval.  At June 30, 2005, Illini Bank had retained earnings ofapproximately $3,750,000 available to be paid to the Corporation and still beconsidered well capitalized and Farmers State Bank of Camp Point had retainedearnings of approximately $710,000 available to be paid to the Corporation andstill be considered well capitalized.

 

In May 2004,Illini Bank entered into a memorandum of understanding with the F.D.I.C. andthe Illinois Department of Financial and Professional Regulation, Division ofBanks and Real Estate, which includes prior regulatory approval for payment ofdividends by Illini Bank.  This memorandum of understanding was terminatedin April 2005, the result of a joint examination conducted by these tworegulatory bodies in March 2005. The examination results indicated an improvement in the overallcondition of Illini Bank and further reflected that management hadsatisfactorily addressed all provisions of the memorandum ofunderstanding.  In July 2004, IlliniCorporation approved a resolution requested by the Federal Reserve Bank ofChicago that includes restrictions similar to the above memorandum ofunderstanding.  Cost associated with compliance to this agreement will beminimal, primarily related to additional reporting requirements while theagreement is in effect.  Management believes that this agreement shouldhave no material adverse effects on the operations or financial performance ofthe Corporation.

 

8

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

** **

**THREEAND SIX MONTHS ENDED JUNE 30, 2005**

** **

**SELECTEDFINANCIAL RESULTS**

** **

The following table shows selected financial resultsand measures for the three and six months ended June 30, 2005 comparedwith the same period in 2004.

 
| ** **                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
|                            | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **Change** | ** ** | **Change-  %** |   | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Change-  %** |   |
|                            | ** ** | **(dollars  in thousands)**          |       |
| Net income                      | ** ** | **$**                                | **483**    |                               | $          | (393 | ) | $ | 876 |   | 222.9 | % | **$** | **762** | ** ** | $ | (1,291 | ) | $ | 2,053 |   | 159.0 | % |
| Average assets                  | ** ** | **252,802**                          |       | 245,395                            |       | 7,407 |   | 3.0 | % | **247,026** | ** ** | 250,773 |   | (3,747 | ) | (1.5 | )% |
| Average equity                  | ** ** | **17,620**                           |       | 13,947                             |       | 3,673 |   | 26.3 | % | **16,775** | ** ** | 14,270 |   | 2,505 |   | 17.6 | % |
| Return on assets                | ** ** | **0.77**                             | **%**      | (0.64                              | )%         | 1.41 | % | 220.3 | % | **0.62** | **%** | (1.03 | )% | 1.65 | % | 160.2 | % |
| Return on equity                | ** ** | **10.99**                            | **%**      | (11.30                             | )%         | 22.29 | % | 197.0 | % | **9.16** | **%** | (18.14 | )% | 27.30 | % | 150.1 | % |
| Efficiency ratio                | ** ** | **74.57**                            | **%**      | 129.58                             | %          | (55.01 | )% | (42.5 | )% | **78.40** | **%** | 115.57 | % | (37.17 | )% | (32.2 | )% |
| Dividend payout  ratio          | ** ** | **11.20**                            | **%**      | (26.37                             | )%         | 37.57 | % | 142.5 | % | **13.34** | **%** | (8.01 | )% | 21.35 | % | 266.5 | % |
| Equity to assets  ratio         | ** ** | **6.97**                             | **%**      | 5.68                               | %          | 1.29 | % | 22.7 | % | **6.79** | **%** | 5.69 | % | 1.10 | % | 19.3 | % |
| Tier 1 leverage  ratio          | ** ** | **8.36**                             | **%**      | 6.06                               | %          | 2.30 | % | 38.0 | % |   | ** ** |   |   |   |   |   |   |
| Total risk-based  capital ratio | ** ** | **12.05**                            | **%**      | 11.80                              | %          | .25 | % | 2.1 | % |   | ** ** |   |   |   |   |   |   |
|                                 |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Definitions of ratios:

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

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

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

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

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

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

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

 

The Corporation recordednet income of $483,000 for the three months ended June 30, 2005, up $876,000from the net operating loss of $393,000 for the same period in 2004, and netincome of $762,000 for the six months ended June 30, 2005, up $2,053,000from the net operating loss of $1,291,000 for the same period in 2004.  The return on average equity for the threemonths ended June 30, 2005 was 10.99% as compared to a negative 11.3% forthe same period in 2004.  The return onaverage equity for the six months ended June 30, 2005 was 9.16% ascompared to a negative 18.14% for the same period in 2004.  Similarly, basic and diluted earnings (loss)per share for the three months ended June 30, 2005 were $0.89 per shareversus $(0.95) for the same period in 2004, representing an increase of193.7%.  Basic and diluted earnings(loss) per share for the six months ended June 30, 2005 were $1.50 pershare versus $(3.12) for the same period in 2004, representing an increase of148.1%.  The first six months of 2005reflected more normalized earnings for the Corporation.  The operating loss in the first half of 2004was primarily the result of four main activities: the large provision for loanlosses; the reduction in the carrying values on two properties in other realestate owned; the loss on sales of mortgage loans; and an increase in salariesand employee benefits expense. These items are discussed in more detail in theResults of Operations section of this document.

 

9

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**FINANCIAL CONDITION**

** **

Average earning assets ofthe Corporation for the first six months of 2005 decreased by $5.5 million(2.4%) to $223.2 million, compared to $228.7 million for the same period in2004.

 

Average loans decreased$29.8 million (16.8%) to $147.4 million for the three months ended June 30,2005, compared to $177.2 million for the same period in 2004.  Declines in average balances were seen in allmajor categories of the loan portfolio, ranging from decreases of $7.6 millionin commercial real estate loans, to $7.1 million in commercial loans, $6.2million in agricultural loans, $6.0 million in residential real estate loans,$1.6 million in consumer and credit card loans, and $1.3 million inagricultural real estate loans.

 

Average loans decreased$32.8 million (17.9%) to $150.7 million for the six months ended June 30,2005, compared to $183.5 million for the same period in 2004.  Residential real estate loans experienced adecline in average balances of $10.4 million from year ago averages, as IlliniBank sold $15.2 million in residential real estate loans that were classifiedas held for sale during the second quarter of 2004.  Declines in average balances were seen in theother major categories of the loan portfolio, ranging from a $9.9 milliondecrease in commercial loans, to $5.8 million in commercial real estate loans,$4.1 million in agricultural loans, $1.7 million in consumer and credit cardloans, and $0.9 million in agricultural real estate loans.  These decreases are reflective of management’sefforts during the course of 2004 and continuing into 2005 to eliminate certainloan relationships and reduce concentrations of credit in the main categoriesof loans.

 

Average balances of thesecurities portfolio increased by $43.0 million for the three months and $29.2million for the six months ended June 30, 2005, as compared to the sameperiods in 2004.  Illini Bank purchasedshort-term U.S. Treasury Notes and U.S. Agencies primarily from the proceedsfrom loan payoffs, and a successful certificate of deposit promotion offeredduring the first quarter of 2005.

 

The impact of management’sdecision in the latter part of 2003 to reduce its exposure to out of the areacertificates of deposit as a funding source for loan and investment activitycontinued to be seen in the Corporation’s deposit portfolio.  Average balances for time deposits less than$100,000 decreased $8.2 million, and time deposits $100,000 and over decreased$0.5 million, respectively, during the first six months of 2005, compared tothe same period in 2004.  These declineswere partially offset by the overall reductions in the loan portfolios.  The net effect of these actions was anincrease in the Corporation’s funding costs of 2 basis points, to 2.45% for thefirst six months of 2005, as compared to 2.43% for the same period in2004.  The increase in funding costs,combined with a shift in the composition of earning assets from loans tosecurities and the lower yield associated with the securities portfolio,resulted in a compression of the Corporation’s net interest margin of 20 basispoints, from 4.00% as of June 30, 2004, to 3.80% as of June 30, 2005.

 

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

 

**RESULTS OF OPERATIONS**

** **

This discussion should beread in conjunction with the consolidated financial statements, notes, andtables included elsewhere in this report and in the 2004 Illini CorporationAnnual Report on Form 10-KSB (2004 Form 10-KSB).

 

Net Interest Income

 

The following tables showaverage balances and related interest income or interest expense, with theresulting

 

10

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average yield or rate by categoryof average earning assets or interest bearing liabilities.  Interest income and the resulting netinterest income are shown on a tax equivalent basis.

 

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

 
| ** **                                       | ** ** | **Three months ended June 30,** | ** **  |
|--------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                       | ** ** | **2005**                             | ** **  | **2004** | ** ** |
| ** **                                       | ** ** | ** **                           | ** **  | **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                          | ** ** | **$**                                | **2,523**   | ** ** | **$** | **19** | ** ** | **2.95** | **%** | $ | 10,527 |   | $ | 24 |   | 0.90 | % |
| Investment  securities (3)                       |       |                                 |        |   |   |   | ** ** |   |   |   |   |   |   |
| Taxable                                          | ** ** | **69,472**                           | ** **  | **624** | ** ** | **3.59** | ** ** | 24,682 |   | 226 |   | 3.67 |   |
| Tax-exempt (1)                                   | ** ** | **11,840**                           | ** **  | **238** | ** ** | **8.04** | ** ** | 13,607 |   | 260 |   | 7.65 |   |
| Total securities                                 | ** ** | **81,312**                           | ** **  | **862** | ** ** | **4.24** | ** ** | 38,289 |   | 486 |   | 5.08 |   |
| Loans                                            |       |                                 |        |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial (1)                                   | ** ** | **26,448**                           | ** **  | **493** | ** ** | **7.48** | ** ** | 33,558 |   | 518 |   | 6.19 |   |
| Agriculture                                      | ** ** | **6,067**                            | ** **  | **110** | ** ** | **7.29** | ** ** | 12,300 |   | 145 |   | 4.74 |   |
| Real estate                                      |       |                                 |        |   |   |   | ** ** |   |   |   |   |   |   |
| Commercial                                       | ** ** | **83,501**                           | ** **  | **1,406** | ** ** | **6.75** | ** ** | 91,122 |   | 1,651 |   | 7.27 |   |
| Agriculture                                      | ** ** | **4,598**                            | ** **  | **78** | ** ** | **6.77** | ** ** | 5,854 |   | 104 |   | 7.12 |   |
| Residential                                      | ** ** | **23,095**                           | ** **  | **376** | ** ** | **6.54** | ** ** | 29,139 |   | 439 |   | 6.04 |   |
| Consumer, net                                    | ** ** | **3,415**                            | ** **  | **70** | ** ** | **8.21** | ** ** | 4,595 |   | 96 |   | 8.40 |   |
| Credit card                                      | ** ** | **276**                              | ** **  | **7** | ** ** | **9.95** | ** ** | 664 |   | 29 |   | 17.27 |   |
| Total loans                                      | ** ** | **147,400**                          | ** **  | **2,540** | ** ** | **6.91** | ** ** | 177,232 |   | 2,982 |   | 6.75 |   |
| Allowance for  loan losses                       | ** ** | **(2,230**                           | )           | ** ** | ** ** | ** ** | ** ** | (2,664 | ) | ** ** | ** ** | ** ** | ** ** |
| Net loans  (1) (2)                          | ** ** | **145,170**                          | ** **  | **2,540** | ** ** | **7.02** | ** ** | 174,568 |   | 2,982 |   | 6.85 |   |
| Total interest-earning  assets                   | ** ** | **229,005**                          | ** **  | **3,421** | ** ** | **5.99** | ** ** | 223,384 |   | 3,492 |   | 6.27 |   |
| Other assets                                     | ** ** | **23,797**                           |        |   |   |   | ** ** | 22,011 |   |   |   |   |   |
| Total assets                                     | ** ** | **$**                                | **252,802** |   |   |   |   | ** ** | $ | 245,395 |   |   |   |   |   |
| **LIABILITIES**                                  |       |                                 |        |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                                 |        |   |   |   | ** ** |   |   |   |   |   |   |
| Deposits:                                        |       |                                 |        |   |   |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  demand                         | ** ** | **$**                                | **55,850**  | ** ** | **$** | **200** | ** ** | **1.43** | **%** | $ | 55,981 |   | $ | 112 |   | 0.80 | % |
| Savings                                          | ** ** | **23,250**                           | ** **  | **48** | ** ** | **0.82** | ** ** | 22,623 |   | 34 |   | 0.60 |   |
| Time deposits  less than $100,000                | ** ** | **78,348**                           | ** **  | **529** | ** ** | **2.71** | ** ** | 78,941 |   | 556 |   | 2.83 |   |
| Time deposits  $100,000 and over                 | ** ** | **16,273**                           | ** **  | **123** | ** ** | **3.04** | ** ** | 14,828 |   | 111 |   | 3.00 |   |
| Total interest-bearing  deposits                 | ** ** | **173,721**                          | ** **  | **900** | ** ** | **2.08** | ** ** | 172,373 |   | 813 |   | 1.89 |   |
| Short-term  borrowings                           | ** ** | **1,946**                            | ** **  | **14** | ** ** | **2.96** | ** ** | 552 |   | 3 |   | 2.48 |   |
| Long-term  borrowings                            | ** ** | **11,000**                           | ** **  | **67** | ** ** | **2.44** | ** ** | 13,322 |   | 96 |   | 2.90 |   |
| Subordinated  debentures (4)                     | ** ** | **9,000**                            | ** **  | **229** | ** ** | **10.21** | ** ** | 9,000 |   | 229 |   | 10.21 |   |
| Total interest-bearing  liabilities              | ** ** | **195,667**                          | ** **  | **1,210** | ** ** | **2.48** | ** ** | 195,247 |   | 1,141 |   | 2.34 |   |
| Other  liabilities                               | ** ** | **39,515**                           |        |   |   |   | ** ** | 36,201 |   |   |   |   |   |
| Shareholders’  equity                       | ** ** | **17,620**                           |        |   |   |   | ** ** | 13,947 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                                | **252,802** |   |   |   |   | ** ** | $ | 245,395 |   |   |   |   |   |
| **Net  interest margin**                         | ** ** | ** **                           | ** **  | **$** | **2,211** |   | **3.87** | **%** |   |   | $ | 2,351 |   | 4.22 | % |

 

----

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

 

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $151,000 in 2005 and$84,000 in 2004.

 

11

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

 

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

 

Net interest margin is a measure of the net returnon interest-earning assets and is computed by dividing annualized net interestincome by the average of total interest-earning assets for the period.

 

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

 
| ** **                                       | ** ** | **Six months ended June 30,** | ** **  |
|--------------------------------------------------|------------|------------------------------------|-------------|
| ** **                                       | ** ** | **2005**                           | ** **  | **2004** | ** ** |
| ** **                                       | ** ** | ** **                         | ** **  | **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                          | ** ** | **$**                              | **4,691**   | ** ** | **$** | **60** | ** ** | **2.58** | **%** | $ | 6,764 |   | $ | 30 |   | 0.88 | % |
| Investment  securities (3)                       |       | ** **                         | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Taxable                                          | ** ** | **57,342**                         | ** **  | **1,024** | ** ** | **3.57** | ** ** | 27,258 |   | 516 |   | 3.78 |   |
| Tax-exempt (1)                                   | ** ** | **12,807**                         | ** **  | **508** | ** ** | **7.93** | ** ** | 13,648 |   | 522 |   | 7.66 |   |
| Total securities                                 | ** ** | **70,149**                         | ** **  | **1,532** | ** ** | **4.37** | ** ** | 40,906 |   | 1,038 |   | 5.08 |   |
| Loans                                            |       | ** **                         | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Commercial (1)                                   | ** ** | **25,458**                         | ** **  | **892** | ** ** | **7.06** | ** ** | 35,339 |   | 1,061 |   | 6.02 |   |
| Agriculture                                      | ** ** | **8,682**                          | ** **  | **276** | ** ** | **6.40** | ** ** | 12,815 |   | 314 |   | 4.91 |   |
| Real estate                                      |       | ** **                         | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Commercial                                       | ** ** | **84,682**                         | ** **  | **2,769** | ** ** | **6.60** | ** ** | 90,525 |   | 3,065 |   | 6.79 |   |
| Agriculture                                      | ** ** | **4,887**                          | ** **  | **118** | ** ** | **4.87** | ** ** | 5,748 |   | 209 |   | 7.29 |   |
| Residential                                      | ** ** | **22,950**                         | ** **  | **702** | ** ** | **6.16** | ** ** | 33,380 |   | 993 |   | 5.97 |   |
| Consumer, net                                    | ** ** | **3,537**                          | ** **  | **139** | ** ** | **7.95** | ** ** | 4,987 |   | 209 |   | 8.40 |   |
| Credit card                                      | ** ** | **461**                            | ** **  | **27** | ** ** | **11.86** | ** ** | 675 |   | 58 |   | 17.20 |   |
| Total loans                                      | ** ** | **150,657**                        | ** **  | **4,923** | ** ** | **6.59** | ** ** | 183,469 |   | 5,909 |   | 6.46 |   |
| Allowance for  loan losses                       | ** ** | **(2,314**                         | **)**       | ** ** | ** ** | ** ** | ** ** | (2,453 | ) | ** ** | ** ** | ** ** | ** ** |
| Net loans  (1) (2)                          | ** ** | **148,343**                        | ** **  | **4,923** | ** ** | **6.69** | ** ** | 181,016 |   | 5,909 |   | 6.55 |   |
| Total interest-earning  assets                   | ** ** | **223,183**                        | ** **  | **6,515** | ** ** | **5.89** | ** ** | 228,686 |   | 6,977 |   | 6.12 |   |
| Other assets                                     | ** ** | **23,843**                         | ** **  | ** ** | ** ** | ** ** | ** ** | 22,087 |   |   |   |   |   |
| Total assets                                     | ** ** | **$**                              | **247,026** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 250,773 |   |   |   |   |   |
| **LIABILITIES**                                  |       | ** **                         | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       | ** **                         | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Deposits:                                        |       | ** **                         | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Interest-bearing  demand                         | ** ** | **$**                              | **55,519**  | ** ** | **$** | **375** | ** ** | **1.36** | **%** | $ | 56,146 |   | $ | 220 |   | 0.78 | % |
| Savings                                          | ** ** | **22,897**                         | ** **  | **93** | ** ** | **0.82** | ** ** | 22,207 |   | 67 |   | 0.60 |   |
| Time deposits  less than $100,000                | ** ** | **74,756**                         | ** **  | **984** | ** ** | **2.65** | ** ** | 82,929 |   | 1,217 |   | 2.94 |   |
| Time deposits  $100,000 and over                 | ** ** | **14,848**                         | ** **  | **211** | ** ** | **2.87** | ** ** | 15,382 |   | 237 |   | 3.09 |   |
| Total interest-bearing  deposits                 | ** ** | **168,020**                        | ** **  | **1,663** | ** ** | **2.00** | ** ** | 176,664 |   | 1,741 |   | 1.98 |   |
| Short-term  borrowings                           | ** ** | **1,437**                          | ** **  | **20** | ** ** | **2.84** | ** ** | 1,404 |   | 12 |   | 1.77 |   |
| Long-term  borrowings                            | ** ** | **11,382**                         | ** **  | **154** | ** ** | **2.72** | ** ** | 12,669 |   | 195 |   | 3.09 |   |
| Subordinated  debentures (4)                     | ** ** | **9,000**                          | ** **  | **473** | ** ** | **10.60** | ** ** | 9,000 |   | 473 |   | 10.55 |   |
| Total interest-bearing  liabilities              | ** ** | **189,839**                        | ** **  | **2,310** | ** ** | **2.45** | ** ** | 199,737 |   | 2,421 |   | 2.43 |   |
| Other  liabilities                               | ** ** | **40,412**                         | ** **  | ** ** | ** ** | ** ** | ** ** | 36,766 |   |   |   |   |   |
| Shareholders’  equity                       | ** ** | **16,775**                         | ** **  | ** ** | ** ** | ** ** | ** ** | 14,270 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                              | **247,026** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 250,773 |   |   |   |   |   |
| **Net  interest margin**                         | ** ** | ** **                         | ** **  | **$** | **4,205** | ** ** | **3.80** | **%** |   |   | $ | 4,556 |   | 4.00 | % |

 

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

 

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $271,000 in 2005 and$193,000 in 2004.

 

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

 

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

 

Net interest margin is a measure of the net returnon interest-earning assets and is computed by dividing annualized net interestincome by the average of total interest-earning assets for the period.

 

Net interest income on a tax equivalent basis forthe first half of 2005 was $4.2 million, down $351,000 (7.7%) from the $4.6million reported for the same period in 2004. This decrease resulted from changes in the volume of assets andliabilities, as well as changes in interest rates.

 

Provision for Loan Losses

 

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

 

Nonperformingloans were $3,206,000 at June 30, 2005, up $495,000 from December 31,2004 and $42,000 from June 30, 2004. The increase from year-end 2004 was the result of three loans identifiedon Illini Bank’s watch list as of December 31, 2004 being moved tononaccrual status during the first quarter of 2005.  These three loans had been previouslyreviewed by management and any loss exposure determined as of December 31,2004.

 

Consequently, based onmanagement’s analysis, no provision for loan losses was deemed necessary duringthe first six months of 2005, as compared to a provision of $1,390,000 made inthe first half of 2004.  The 2004provision was made as a result of the analysis, which took into account thefact that there were charge-offs of $909,000 in impaired loans and an increasein impaired loans and classified assets.

 

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 require aprovision for loan losses.  Managementcontinues to monitor the loan portfolio.

 

Noninterest Income

 

Non-interestincome for the six months ended June 30, 2005 totaled $1,117,000, up$223,000 (24.9%) from the $894,000 reported for the same period in 2004.  Modest gains of $28,000 on thesales/transfers of mortgage loans during the six months ended June 30,2005 compares favorably to net losses of $212,000 during the first half of2004.  The subsidiary banks soldsecurities during the second quarter of 2005, realizing net gains of $63,000,compared to $27,000 in gains realized during the first half of 2004.  Also during the second quarter of

 

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2005, Illini Bank soldits credit card portfolio, realizing a pre-tax gain on the sale of$69,000.  This gain is reported in theOther category on the income statement. These increases were partially offset by a reduction of $59,000 inmortgage loan servicing fees, and a decline of $48,000 in service charges ondeposit accounts.

 

Noninterest Expense

 

Non-interestexpense for the six months ended June 30, 2005 totaled $4,173,000, down$2,040,000 (32.8%) from the comparable period in 2004.  This decrease was focused in two primaryareas, loan foreclosure and other real estate owned expense (down $1,324,000),and salaries and employee benefits (down $660,000).

 

Duringthe first half of 2004, Illini Bank reduced the carrying value of three piecesof other real estate owned by a total of $1,003,000, based upon the values ofsigned contracts on these properties.  Atotal of $171,000 was expensed to complete one piece of other real estate ownedto make it suitable for leasing.  Theremaining expenses are related to the maintenance of several other real estateowned properties.  Expenses incurred duringthe first half of 2005 represent normal costs associated with loan collectionsand normal loan related expenses.

 

Thereduction in salaries and benefits reflects the continuing positive effects ofthe corporate restructuring that occurred during the course of 2004.

 

**CREDIT QUALITY**

 

Allowance for Loan Losses

 

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

 

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

 

At June 30,2005, the allowance for loan losses was $2.2 million, or 1.51% of totalloans.  This compares to the $2.4 million(1.52%) and $2.6 million (1.57%) reported at December 31, 2004 and June 30,2004, respectively.  The change from December 31,2004, represents the partial charge-off of one nonaccrual loan during the firstquarter of 2005 in the amount of $174,000. Collateral securing the balance of this loan appears adequate at thepresent time to protect Illini Bank’s interests.  This charge-off was partially offset byrecoveries of $42,000 on previously charged-off loans.

 

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

 

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| **Credit  Quality**                 | ** ** | **June 30,  2005**    | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)** | ** ** |
| **Nonperforming  assets:**          |       |                       |       |                        |       |                    |       |
| Accruing loans  past due 90 days    | ** ** | **$**                      | **—** | ** **                  | $          | 19                      |       | $ | 10 |   |
| Nonaccrual                          | ** ** | **3,206**                  | ** ** | 2,711                       |       | 3,164                   |       |
| Renegotiated                        | ** ** | **—**                 | ** ** | —                      |       | —                  |       |
| Other real  estate owned            | ** ** | **1,233**                  | ** ** | 994                         |       | 3,324                   |       |
| Total  nonperforming assets         | ** ** | **$**                      | **4,439**  | ** **                  | $          | 3,724                   |       | $ | 6,498 |   |
| **Key  ratios:**                    | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Nonperforming  loans to loans       | ** ** | **2.14**                   | **%**      | 1.72                        | %          | 1.89                    | %          |
| 90 days  delinquent to ending loans | ** ** | **0.00**                   | ** ** | 0.01                        |       | 0.01                    |       |
| Allowance to  total loans           | ** ** | **1.51**                   | ** ** | 1.52                        |       | 1.57                    |       |
| Allowance to  nonperforming loans   | ** ** | **70.06**                  | ** ** | 88.34                       |       | 83.02                   |       |

 

Nonperforming Assets

 

Nonperformingand renegotiated loans at June 30, 2005 totaled $3.2 million, up $0.5million (or 18.5%) from December 31, 2004, and up $42,000 (1.4%) from June 30,2004.  Nonaccrual loans comprised all ofthe nonperforming loans at June 30, 2005, and the majority of thenonperforming loans for the other two reporting periods.  The classification of a loan as nonaccrualdoes not necessarily indicate that the principal is uncollectible, in whole orin part.  The Banks make a determinationas to the collectibility on a case-by-case basis.  The Banks consider the adequacy of thecollateral and the other resources of the borrower in determining the steps tobe taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon thespecific facts of each situation. Alternatives that are typically considered to collect nonaccrual loansare foreclosure, collection under guarantees, loan restructuring, or judicialcollection actions.

 

Other real estate owned increased by $239,000, to$1.2 million, from the $1.0 million reported as of December 31, 2004.  This increase represents the followingactivity during the first six months of 2005: the addition during the first quarter of 2005 of multiple propertiestotaling $278,000 associated with one creditor; the addition during the secondquarter of one property, totaling $42,000; the sale of two properties, withcarrying values totaling $47,000; and payments totaling $34,000 received onproperties.

 

Illini Corporation’s loan underwriting guidelinesand credit review procedures and policies are designed to protect theCorporation from credit losses.  IlliniCorporation’s process for monitoring loan quality includes detailed monthlytrend analysis of delinquencies and nonperforming assets.  Management extensively monitors significantcredit relationships through appraisals, assessment of the financial conditionof borrowers, restrictions on out-of-area lending, and avoidance of loanconcentrations.

 

As discussed in the Corporation’s 2004 Form 10-KSBand previous Form 10-QSB reports, management has implemented severalinitiatives to improve credit quality. These steps included a new loan policy and improved reporting systems(credit quality and production).  Managementis committed to continuing these initiatives.

 

OtherPotential Problem Loans

 

The Corporation has other potential problem loans thatare currently performing, but where some concerns exist as to the ability ofthe borrower to comply with present loan repayment terms. Excludingnonperforming loans, these loans totaled $3,461,000 that management hasclassified as impaired at June 30, 2005, down $2,649,000 from $6,110,000reported at December 31, 2004. Management currently considers these loans to be

 

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impaired due to decliningfinancial performance. These classifications are a direct result of improvedreporting systems (credit quality and production).  The classification of these loans, however,does not imply that management expects losses on each of these loans, butbelieves that a higher level of scrutiny and close monitoring is prudent underthe circumstances. Such classifications relate to specific concerns for eachindividual borrower and do not relate to any concentration risk common to allloans in this group.

 

**CAPITAL RESOURCES**

 

The current economic and regulatory environmentplaces increased emphasis on capital strength. A strong capital position, which is vital to the continued profitabilityof Illini Corporation, also promotes depositor and investor confidence andprovides a solid foundation for the future growth of the organization.  Illini Corporation has historically satisfiedits capital requirements principally through the retention of earnings.

 

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

 
| ** **                                             | ** ** | **Regulatory requirements  to be:** | ** ** | **Actual Regulatory Capital Ratios** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **Adequately  Capitalized**         | ** ** | **Well-  Capitalized**               | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Total risk-based  capital as % of risk-weighted assets |       | 8.0                                 | %          | 10.0                                 | %          | 15.2 | % | 12.4 | % |
| Tier 1 capital  as % of risk-weighted assets           |       | 4.0                                 | %          | 6.0                                  | %          | 12.1 | % | 8.4 | % |
| Tier 1 capital  as % quarterly average assets          |       | 4.0                                 | %          | 5.0                                  | %          | 8.4 | % | 6.2 | % |

 

Risk-basedcapital guidelines require the classification of assets and some off-balancesheet items 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 of June 30,2005 and December 31, 2004, the Corporation met all capital adequacyrequirements to which it is subject.  Asof those dates, the Corporation’s subsidiary banks were “well capitalized”under regulatory prompt corrective action provisions.

 

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

 

Earnings retention is affected by the Board ofDirectors’ declaration of cash dividends. The dividend payout ratio is an indicator of the level of earningsretained.  The Board of Directors of theCorporation considers the capital strength of the Corporation and the Banks indetermining the appropriate level of cash dividends to be paid toshareholders.  The dividend payout ratiofor the three and six months ended June 30, 2005 was 11.20% and 13.34% ascompared to (26.37)% and (8.01)% for the three and six months ended June 30,2004.

 

Asdiscussed in the Corporation’s 2004 Form 10-KSB, the Corporation has $9million of trust preferred securities outstanding.  Twenty Five (25) percent of the Tier 1capital ratio can be comprised of the trust preferred issue.  As of June 30, 2005, the portioneligible for inclusion in the Tier 1 computation amounted to approximately $5.8million.

 

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**LIQUIDITY**

 

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

 

The asset portion of the balance sheet providesliquidity primarily through loan principal repayments, maturities of investmentsecurities, and sales of investment securities available for sale.  The liability side of the balance sheetprovides liquidity through various customers’ interest-bearing andnoninterest-bearing deposit accounts. Short-term borrowings are an additional source of liquidity andrepresent Illini Corporation’s incremental borrowing capacity.

 

Illini Corporation uses a comprehensive analysis ofits asset/liability function, including a review of its funds management policyand its principal measure of liquidity. The Corporation utilizes a liquidity measurement, called “Basic Surplus,”which redefines liquid assets as the total available assets held by theCorporation which can be converted to cash in thirty days or less, reduced byshort term liabilities, plus available borrowings.  As of June 30, 2005, Illini Corporation’sbasic surplus was $55.9 million, or 22.6% of total average assets.

 

Management believes the formula provides an accuratemeasurement of liquidity and provides management with a comprehensible and consistenttool to develop pricing and profitability strategies.  Based on Illini’s measurement and as comparedto peer banks, management believes the liquidity position of the subsidiarybanks is strong.

 

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

 

An evaluation was performed under the supervisionand with the participation of the Corporation’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Corporation’s disclosure controls and procedures(as defined in Rule 13a-15(e) promulgated under the Securities andExchange Act of 1934, as amended) as of June 30, 2005. Based on thatevaluation, the Corporation’s management, including the Chief Executive Officerand Chief Financial Officer, concluded that the Corporation’s disclosurecontrols and procedures were effective. There have been no significant changesin the Corporation’s internal controls or in other factors during the first sixmonths of 2005 that could significantly affect internal controls.  Management has concluded the disclosurecontrols and procedures are adequate in all material respects for SEC reportingpurposes.

 

**PART II. OTHER INFORMATION**

 

Item 1 LegalProceedings 

 

Variouslegal claims have arisen against the Corporation in the normal course ofbusiness, which, in the opinion of management, will not result in any materialliability, to the Corporation other than what is disclosed below.  Two (2) casesremain pending at June 30, 2005.

 

The first case wasfiled in 1998 by a shareholder of the Corporation against Illinois StockTransfer Company, as Rights Agent for the Corporation under the Corporation’sShareholder Rights Agreement (“Rights Agreement”), for specific performance ofthe Rights Agreement, on behalf of the plaintiff individually and on

 

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behalf of a class ofshareholders.  The complaint alleged thatthe Rights Agreement was triggered in April of 1998, and that the RightsAgent had a duty under the Rights Agreement to distribute Rights Certificatesto the Corporation’s shareholders.  TheCorporation was named as a defendant in 1999 and the class was certified.  Plaintiff was seeking to recover attorney’sfees from the Corporation in addition to other relief.  In January of 2000, the trial courtentered summary judgment in favor of the Corporation and the Rights Agent.  Plaintiff appealed this ruling to theIllinois Appellate Court.  The AppellateCourt reversed the order granting summary judgment for defendants and remandedthe case for trial on the issue of whether the Corporation’s Board of Directorsacted in good faith in determining that a shareholder’s acceptance of a gift ofthe Corporation’s Stock did not trigger the Rights Agreement, and in theCorporation’s later amendment of the Rights Agreement.  The Appellate Court further ruled thatplaintiff’s attorney’s fees were recoverable under the Rights Agreement.  After a series of unsuccessful motions filedby the Plaintiff’s counsel, the Corporation filed a motion to remove thePlaintiff’s attorney.  The court removedthe attorney for the Plaintiff class and appointed new counsel to represent theclass.  The removed counsel filed amotion for reconsideration, which was denied. The new counsel filed a motion for direction to remove the classrepresentative, which was granted on January 15, 2003.  On March 7, 2003 the trial courtappointed a successor class representative. The Corporation has negotiated asettlement of the suit with the new class representative and classcounsel.  The terms of that settlementhave been agreed upon and approved by the court following a fairnesshearing.  That agreement provides for acomplete resolution of the shareholder claims and a portion of the claims forattorney fees for the class representative. As of June 30, 2005 and December 31, 2004 the Corporation hasan accrual of $200,000 for this settlement and believes it will have no furtheradverse impact on the Corporation. This accrual is included in otherliabilities in the Consolidated Balance Sheet.

 

The removedattorney, representing the removed class representative, appealed variousrulings of the trial court, including the order approving the settlement asfair to the class.  That appeal wasargued before the Appellate Court of Illinois, Fourth District on April 13,2005, and the Appellate Court subsequently affirmed the settlement as fair tothe class and also affirmed the trial court’s disqualification of the removedattorney.  The removed attorney hasindicated that he intends to seek review of the Appellate Court’s decision withthe Illinois Supreme Court.  Whether ornot the Illinois Supreme Court grants review is a matter for that Court’sdiscretion.

 

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

 

The second casewas filed in April 2003.  The Corporation,its directors, and one of its officers were named as defendants in ashareholder’s derivative complaint filed in the Circuit Court of SangamonCounty, Illinois.  Plaintiffs seek torescind the Stock Purchase Agreement entered into by the Corporation in 2001 topurchase approximately 30% of its common shares from a minority shareholdergroup as well as recover from the individual defendants damages allegedlyaccruing to the Corporation as a result of certain actions related to defendingthe class action suit, avoiding a triggering of the Rights Agreement andentering into the Stock Purchase Agreement. Management believes that the Stock Purchase Agreement was a routinebusiness transaction beneficial to the Corporation’s shareholders and wasentered into after appropriate due diligence and consultation with theCorporation’s outside financial advisors and that none of the directors orofficers have breached their fiduciary duties to the Corporation.  The Corporation completed its independentdirectors’ review of the claims asserted in the derivative suit.  The independent directors concluded thatthere was no merit to those claims, that they should not be pursued and thatthe derivative action should be dismissed. The Corporation filed a motion to realign the parties, asserting thatthe Corporation should be substituted as the party plaintiff, and permitted todismiss the action.  That motion washeard on April 22, 2005, and the Corporation is awaiting thedecision.  Management is contesting theclaim vigorously.  The Plaintiffs havenot

 

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quantified the amount ofdamages they seek to recover on behalf of the Corporation if the court permitsthem to pursue the derivative claims. Plaintiffs also seek to recover their attorney’s fees from theCorporation pursuant to the attorney’s fee provision of the RightsAgreement.  Management will contestvigorously any effort by Plaintiffs to recover attorney’s fees from theCorporation.

 

Item 2 UnregisteredSales of Equity Securities and Use of Proceeds - none

 

Item 3 Defaults UponSenior Securities – none

 

Item 4 Submission ofMatters to a Vote of Security Holders – none

 

Item 5 OtherInformation - none

 

Item 6Exhibits 

 

(a)          Exhibits:

31.1         Certificationof CEO pursuant to rule 13a-14(a)/15d-14(a).

31.2         Certificationof CFO pursuant to rule 13a-14(a)/15d-14(a).

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

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

 

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**SIGNATURES**

 

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

 

 
| Illini Corporation      |                 |
|-------------------------|----------------------|
| (Registrant)            |                 |
|                    |                 |
|                    |                 |
| By:                     | /s/Gaylon E. Martin  |   | August 11, 2005 |   |
| Gaylon E. Martin        | Date signed          |
| President               |                 |
|                    |                 |
|                    |                 |
| By:                     | /s/Dennis B. Guthrie |   | August 11, 2005 |   |
| Dennis B. Guthrie       | Date signed          |
| Chief Financial Officer |                 |

 

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