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

**Washington,D.C.  20549**

 

**FORM 10-QSB**

 

| **ý**                                   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------|----------------------------------------------------------------------------------------|
|                                         |
| **For quarterly period ended June 30, 2002** |
|                                         |                                                                                   |
| **o**                                        | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE  ACT**                   |

 

**Commission file number   0-13343**

 

**Illini Corporation**

(Exact name of small business issuer as specified in its charter)

 

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

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes ý  No  o

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date:  411,701 shares of $0.01 par value common stock as of  July 31, 2002.

 

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

 

 

----

 

**ILLINICORPORATION**

INDEX TO FORM 10-QSB

June 30, 2002

 
| **PART I.**       | **FINANCIAL INFORMATION** |
|-------------------|---------------------------|
|              |                      |   |
|              | Item 1.                   | Financial Statements  (Unaudited) |
|              |                      |   |
|              |                      | Condensed Consolidated  Balance Sheets June 30, 2002 and December 31, 2001 |
|              |                      |   |
|              |                      | Condensed  Consolidated Statements of Income Three and Six Months Ended June 30, 2002  and 2001 |
|              |                      |   |
|              |                      | Condensed  Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 |
|              |                      |   |
|              |                      | Notes  to Condensed Consolidated Financial Statements |
|              |                      |   |
|              | Item  2.                  | Management’s  Discussion and Analysis of Operations |
|              |                      |   |
| **PART II.**      | **OTHER INFORMATION**     |
|              |                      |   |
| **SIGNATURES**    |
|              |                      |   |
| **EXHIBIT INDEX** |
|                   |                           |  |  |  |  |  |

 

 

**InformationConcerning Forward-Looking Statements**

 

*Statements contained in this Form10-QSB which are not historical facts are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements involve important known andunknown risks, uncertainties and other factors and can be identified by phrasesusing “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,”“predict,” “potential,” “future,” “may,” “should” and similar expressions 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

----

 

**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**June 30, 2002and December 31, 2001**

** **
|                                                                                                |   | **June 30,  2002**         |        | **December  31,  2001** |       |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------|-------------|-------------------------|------------|
|                                                                                                |   | **(Unaudited)**            |        |                    |       |
|                                                                                                |   | **(dollars in thousands)** |        |
| **ASSETS**                                                                                          |   |                       |        |                    |       |
| Cash and due  from banks                                                                            |   | **$**                      | **5,768**   |                    | $          | 8,146 |   |
| Interest-bearing  deposits in other banks                                                           |   | **31**                     |        | 29                      |       |
| Federal funds  sold                                                                                 |   | **9,035**                  |        | 7,410                   |       |
| Cash and cash  equivalents                                                                          |   | **14,834**                 |        | 15,585                  |       |
| Investment  securities available for sale, at fair value                                            |   | **45,476**                 |        | 49,156                  |       |
| Loans, net of  the allowance for loan losses                                                        |   | **214,230**                |        | 196,913                 |       |
| Premises and  equipment                                                                             |   | **6,912**                  |        | 6,946                   |       |
| Accrued interest  receivable                                                                        |   | **2,320**                  |        | 2,549                   |       |
| Other real  estate owned                                                                            |   | **816**                    |        | 370                     |       |
| Goodwill                                                                                            |   | **1,856**                  |        | 1,856                   |       |
| Intangible  assets                                                                                  |   | **345**                    |        | 392                     |       |
| Other assets                                                                                        |   | **585**                    |        | 745                     |       |
| Total  Assets                                                                                  |   | **$**                      | **287,374** |                    | $          | 274,512 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                      |   |                       | ** **  |                    | ** ** |
| Noninterest-bearing  demand deposits                                                                |   | **$**                      | **32,966**  | ** **              | **$**      | 34,140 | ** ** |
| Interest-bearing  deposits:                                                                         |   |                       |        |                    |       |
| NOW and money  market accounts                                                                      |   | **60,849**                 |        | 60,057                  |       |
| Savings deposits                                                                                    |   | **20,380**                 |        | 17,995                  |       |
| Time deposits,  $100,000 and over                                                                   |   | **25,077**                 |        | 31,842                  |       |
| Other time  deposits                                                                                |   | **112,747**                |        | 94,793                  |       |
| Total deposits                                                                                      |   | **252,019**                |        | 238,827                 |       |
| Short-term debt                                                                                     |   | **477**                    |        | 1,613                   |       |
| Long-term debt                                                                                      |   | **8,400**                  |        | 8,471                   |       |
| Preferred  securities of subsidiary trust                                                           |   | **9,000**                  |        | 9,000                   |       |
| Accrued interest  payable                                                                           |   | **1,410**                  |        | 1,414                   |       |
| Other  liabilities                                                                                  |   | **1,759**                  |        | 1,597                   |       |
| Total  liabilities                                                                                  |   | **273,065**                |        | 260,922                 |       |
|                                                                                                |   |                       |        |                    |       |
| **COMMITMENTS AND CONTINGENT  LIABILITIES**                                                         |   |                       | ** **  |                    | ** ** |
|                                                                                                |   |                       |        |                    |       |
| Shareholders’  equity                                                                          |   |                       |        |                    |       |
| Preferred stock,  $0.01 par value, authorized and unissued 10,000,000 shares                        |   | **—**                 |        | —                  |       |
| Common  stock-$0.01 par value, authorized 45,000,000 shares; 571,789 shares issued  and outstanding |   | **6**                      |        | 6                       |       |
| Capital surplus                                                                                     |   | **9,070**                  |        | 9,070                   |       |
| Retained  earnings                                                                                  |   | **11,224**                 |        | 10,775                  |       |
| Accumulated  other comprehensive income                                                             |   | **1,213**                  |        | 943                     |       |
| Less:  Treasury shares, at cost, 160,088 shares                                                |   | **(7,204**                 | )           | (7,204                  | )          |
| Total  shareholders’ equity                                                                    |   | **14,309**                 |        | 13,590                  |       |
| Total  Liabilities and Shareholders’ Equity                                                    |   | **$**                      | **287,374** |                    | $          | 274,512 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

3

----

 

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**Three Months and Six Months Ended June 30, 2002 and2001**

**(Unaudited)**

** **
|                                                                                                                                                                                                                                |   | **Three  Months Ended June 30,**                   |       | **Six Months  Ended June 30,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|--------------------------------|------------|
|                                                                                                                                                                                                                                |   | **2002**                                           |       | **2001**                       |       | **2002** |   | **2001** |   |
|                                                                                                                                                                                                                                |   | **(dollars  in thousands, except per share data)** |       |
| Interest income:                                                                                                                                                                                                                    |   |                                               |       |                           |       |   |   |   |   |
| Interest and  fees on loans                                                                                                                                                                                                         |   | **$**                                              | **3,954**  |                           | $          | 3,847 | ** ** | **$** | **7,913** |   | $ | 7,548 |   |
| Interest on  investment securities:                                                                                                                                                                                                 |   |                                               | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Taxable                                                                                                                                                                                                                             |   | **419**                                            |       | 539                            | ** ** | **907** |   | 1,174 |   |
| Exempt from  federal income taxes                                                                                                                                                                                                   |   | **204**                                            |       | 180                            | ** ** | **399** |   | 361 |   |
| Interest on  short term investments                                                                                                                                                                                                 |   | **20**                                             |       | 127                            | ** ** | **41** |   | 198 |   |
| Total interest  income                                                                                                                                                                                                              |   | **4,597**                                          |       | 4,693                          | ** ** | **9,260** |   | 9,281 |   |
| Interest  expense:                                                                                                                                                                                                                  |   |                                               |       |                           |       |   |   |   |   |
| Interest on  deposits:                                                                                                                                                                                                              |   |                                               |       |                           |       |   |   |   |   |
| NOW and money  market accounts                                                                                                                                                                                                      |   | **288**                                            |       | 536                            | ** ** | **572** |   | 1,079 |   |
| Savings deposits                                                                                                                                                                                                                    |   | **72**                                             |       | 85                             | ** ** | **139** |   | 167 |   |
| Time deposits,  $100,000 and over                                                                                                                                                                                                   |   | **250**                                            |       | 353                            | ** ** | **582** |   | 754 |   |
| Other time  deposits                                                                                                                                                                                                                |   | **1,086**                                          |       | 1,248                          | ** ** | **2,196** |   | 2,435 |   |
| Interest on  short-term debt                                                                                                                                                                                                        |   | **16**                                             |       | 6                              | ** ** | **21** |   | 64 |   |
| Interest on  long-term debt                                                                                                                                                                                                         |   | **90**                                             |       | 202                            | ** ** | **234** |   | 302 |   |
| Interest on  preferred securities of subsidiary trust                                                                                                                                                                               |   | **229**                                            |       | 229                            | ** ** | **466** |   | 323 |   |
| Total interest  expense                                                                                                                                                                                                             |   | **2,031**                                          |       | 2,659                          | ** ** | **4,210** |   | 5,124 |   |
| Net interest  income                                                                                                                                                                                                                |   | **2,566**                                          |       | 2,034                          | ** ** | **5,050** |   | 4,157 |   |
| Provision for  loan losses                                                                                                                                                                                                          |   | **190**                                            |       | 90                             | ** ** | **400** |   | 190 |   |
| Net interest  income after provision for loan losses                                                                                                                                                                                |   | **2,376**                                          |       | 1,944                          | ** ** | **4,650** |   | 3,967 |   |
| Noninterest  income:                                                                                                                                                                                                                |   |                                               |       |                           |       |   |   |   |   |
| Service charges  on deposit accounts                                                                                                                                                                                                |   | **331**                                            |       | 366                            | ** ** | **609** |   | 699 |   |
| Other fee income                                                                                                                                                                                                                    |   | **84**                                             |       | 80                             | ** ** | **165** |   | 148 |   |
| Mortgage loan  servicing fees                                                                                                                                                                                                       |   | **25**                                             |       | 79                             | ** ** | **59** |   | 138 |   |
| Gains on sales  of mortgage loans                                                                                                                                                                                                   |   | **52**                                             |       | 213                            | ** ** | **70** |   | 256 |   |
| Gains (losses)  on sale of other real estate owned                                                                                                                                                                                  |   | **(24**                                            | )          | 4                              | ** ** | **(28** | ) | 10 |   |
| Other                                                                                                                                                                                                                               |   | **30**                                             |       | 46                             | ** ** | **61** |   | 76 |   |
| Total  noninterest income                                                                                                                                                                                                           |   | **498**                                            |       | 788                            | ** ** | **936** |   | 1,327 |   |
| Noninterest  expense:                                                                                                                                                                                                               |   |                                               |       |                           |       |   |   |   |   |
| Salaries and  employee benefits                                                                                                                                                                                                     |   | **1,283**                                          |       | 1,004                          | ** ** | **2,528** |   | 2,014 |   |
| Net occupancy  expense                                                                                                                                                                                                              |   | **189**                                            |       | 189                            | ** ** | **378** |   | 388 |   |
| Equipment  expense                                                                                                                                                                                                                  |   | **71**                                             |       | 90                             | ** ** | **152** |   | 194 |   |
| Data processing  fees                                                                                                                                                                                                               |   | **175**                                            |       | 191                            | ** ** | **325** |   | 374 |   |
| Supplies expense                                                                                                                                                                                                                    |   | **26**                                             |       | 50                             | ** ** | **80** |   | 93 |   |
| Communication  and transportation expense                                                                                                                                                                                           |   | **111**                                            |       | 112                            | ** ** | **220** |   | 216 |   |
| Marketing and  advertising expense                                                                                                                                                                                                  |   | **73**                                             |       | 67                             | ** ** | **133** |   | 124 |   |
| Correspondent  and processing fees                                                                                                                                                                                                  |   | **103**                                            |       | 76                             | ** ** | **189** |   | 147 |   |
| Loan and other  real estate owned expense                                                                                                                                                                                           |   | **43**                                             |       | 60                             | ** ** | **62** |   | 74 |   |
| Professional  fees                                                                                                                                                                                                                  |   | **218**                                            |       | 257                            | ** ** | **379** |   | 443 |   |
| Regulatory fees                                                                                                                                                                                                                     |   | **35**                                             |       | 44                             | ** ** | **58** |   | 77 |   |
| Other                                                                                                                                                                                                                               |   | **123**                                            |       | 145                            | ** ** | **247** |   | 284 |   |
| Total  noninterest expense                                                                                                                                                                                                          |   | **2,450**                                          |       | 2,285                          | ** ** | **4,751** |   | 4,428 |   |
|                                                                                                                                                                                                                                |   |                                               |       |                           |       |   |   |   |   |
| Income before  income tax expense                                                                                                                                                                                                   |   | **424**                                            |       | 447                            | ** ** | **835** |   | 866 |   |
| Income tax  expense                                                                                                                                                                                                                 |   | **92**                                             |       | 125                            | ** ** | **180** |   | 235 |   |
| Net income                                                                                                                                                                                                                          |   | **$**                                              | **332**    |                           | $          | 322 | ** ** | **$** | **655** |   | $ | 631 |   |
| Basic earnings  per share  (based on weighted average common shares outstanding of 411,701 for the three  and six  month period in 2002 and  539,772 for the three month period and 555,780 for the six month period in  2001) |   | **$**                                              | **0.81**   |                           | $          | 0.60 | ** ** | **$** | **1.59** |   | $ | 1.13 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

----

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Six MonthsEnded June 30, 2002 and 2001**

**(Unaudited)**

 
|                                                                               |   | **2002**                    |       | **2001** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------|--------|
|                                                                               |   | **(dollars  in thousands)** |       |
| Cash flows from  operating activities:                                             |   |                        |       |     |   |
| Net income                                                                         |   | **$**                       | **655**    |     | $      | 631 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                        |       |     |   |
| Depreciation and  amortization                                                     |   | **418**                     |       | 411      |   |
| Amortization of  goodwill and other intangibles                                    |   | **47**                      |       | 87       |   |
| Provision for  loan losses                                                         |   | **400**                     |       | 190      |   |
| Investment  security amortization (accretion), net                                 |   | **(1**                      | )          | (44      | )      |
| Federal Home  Loan Bank stock dividend                                             |   | **(19**                     | )          | (25      | )      |
| Gains on sales  of mortgage loans                                                  |   | **(70**                     | )          | (256     | )      |
| (Gains) loss on  sale of other real estate owned                                   |   | **28**                      |       | (10      | )      |
| Decrease in  accrued interest receivable                                           |   | **229**                     |       | 70       |   |
| Increase  (decrease) in accrued interest payable                                   |   | **(4**                      | )          | 578      |   |
| Origination of  secondary market mortgage loans                                    |   | **(3,854**                  | )          | (14,684  | )      |
| Proceeds from  the sales of secondary market mortgage loans                        |   | **3,815**                   |       | 14,463   |   |
| Other, net                                                                         |   | **187**                     |       | (577     | )      |
| Net cash  provided by operating activities                                         |   | **1,831**                   |       | 834      |   |
|                                                                               |   |                        |       |     |   |
| Cash flows from  investing activities:                                             |   |                        |       |     |   |
| Proceeds from  maturities and paydowns of investment securities available for sale |   | **10,342**                  |       | 11,332   |   |
| Purchases of  investment securities available for sale                             |   | **(6,237**                  | )          | (2,982   | )      |
| Net increase in  loans                                                             |   | **(18,126**                 | )          | (16,659  | )      |
| Purchases of  premises and equipment                                               |   | **(384**                    | )          | (1,111   | )      |
| Proceeds from  sales of other real estate owned                                    |   | **44**                      |       | —   |   |
| Net cash used in  investing activities                                             |   | **(14,361**                 | )          | (9,420   | )      |
|                                                                               |   |                        |       |     |   |
| Cash flows from  financing activities:                                             |   |                        |       |     |   |
| Net decrease in  noninterest-bearing demand deposits                               |   | **(1,174**                  | )          | (6,427   | )      |
| Net increase in  NOW, money market accounts and savings deposits                   |   | **3,177**                   |       | 9,340    |   |
| Net  increase  (decrease) in time deposits,  $100,000 and over                |   | **(6,765**                  | )          | 159      |   |
| Net increase in  other time deposits                                               |   | **17,954**                  |       | 11,894   |   |
| Net decrease in  short-term debt                                                   |   | **(1,136**                  | )          | (7,976   | )      |
| Proceeds from  issuance of preferred securities of subsidiary trust                |   | **—**                  |       | 9,000    |   |
| Proceeds of  long-term debt                                                   |   | **2,400**                   |       | —   |   |
| Repayment of  long-term Debt                                                       |   | **(2,471**                  | )          | —   |   |
| Purchase of  treasury shares                                                       |   | **—**                  |       | (2,494   | )      |
| Cash dividends  paid                                                               |   | **(206**                    | )          | (246     | )      |
| Net cash  provided by financing activities                                         |   | **11,779**                  |       | 13,250   |   |
|                                                                               |   |                        |       |     |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | **(751**                    | )          | 4,664    |   |
|                                                                               |   |                        |       |     |   |
| Cash and cash  equivalents at beginning of period                                  |   | **15,585**                  |       | 7,023    |   |
|                                                                               |   |                        |       |     |   |
| Cash and cash  equivalents at end of period                                        |   | **$**                       | **14,834** |     | $      | 11,687 |   |
| Supplemental  Information:                                                         |   |                        |       |     |   |
| Income taxes  paid                                                                 |   | **$**                       | **415**    |     | $      | 866 |   |
| Interest paid                                                                      |   | **$**                       | **4,214**  |     | $      | 4,546 |   |
| Other non-cash  investing activities:                                              |   |                        |       |     |   |
| Transfer of  loans to other real estate owned                                      |   | **$**                       | **850**    |     | $      | 153 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

5

----

 

**ILLINICORPORATION AND SUBSIDIARIES**

**Notes toCondensed Consolidated Financial Statements (Unaudited)**

**June 30, 2002**

 

(1)                                  Basis of Presentation

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with the instructions to Form 10-QSB and, therefore, donot include all of the information and notes required by accounting principlesgenerally accepted in the United States of America for complete consolidated financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  For further information, refer to theconsolidated financial statements and footnotes included in the IlliniCorporation (“Corporation”) Annual Report on Form 10-KSB for the year endedDecember 31, 2001.  The common stock andcapital surplus have been reclassified from the Annual Report on Form 10-KSBfor the year ended December 31, 2001 due to the amendments approved by theshareholders described in recent developments. The condensed consolidated balance sheet of the Corporation as ofDecember 31, 2001 has been derived from the audited consolidated balance sheetof the Corporation as of that date.

 

Basicearnings per share is computed by dividing income available to commonshareholders by the weighted-average number of common shares outstanding forthe period.  Illini Corporation has nopotential common shares which are dilutive.

 

Resultsfor the three and six months ended June 30, 2002 may not be indicative of theannual performance of Illini 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 the interimcondensed consolidated financial statements (unaudited) in conformity withaccounting principles generally accepted in the United States of America.  Actual results could differ from thoseestimates.

 

(2)                                  RecentDevelopments

 

Illini Corporation has executed a definitive agreementand plan of merger to acquire all of the outstanding stock of IllinoisCommunity Bancorp, Inc (“ICBI”) through the merger of ICBI with a wholly ownedsubsidiary of Illini Corporation.  Underthe terms of the merger agreement, ICBI’s shareholders will receive .2126shares of common stock of the Illini Corporation in exchange for each share ofICBI common stock.  In the event thatcertain loan contingencies are resolved prior to closing, the exchange ratiomay be increased to up to .2472 shares of Illini Corporation in exchange foreach share of ICBI stock.  As ofDecember 31, 2001, ICBI had total assets of $57,040,000, total liabilities of$53,629,000 and total equity of $3,401,000. For the year ended December 31, 2001, ICBI had a net loss of $1,763,000.  The original merger agreement provided thateither party could terminate the agreement any time after May 31, 2002 ifcertain prior approvals were not obtained. Additionally the original merger agreement provided either party anopportunity to terminate the agreement any time after August 31, 2002 if themerger were not completed.  As a resultof ongoing discussions with one of the federal regulatory agencies, the partiesagreed to modify the agreement and change the respective dates to May 31, 2003and August 31, 2003.  The document isfiled herewith as Exhibit 10.1.  The shareholdersof ICBI approved the transaction on June 13, 2002.

 

In conjunction with the proposed transaction betweenthe Corporation and ICBI, certain regulatory agencies have expressed a desirefor the Corporation to consider increasing capital levels on a

 

6

----

 

consolidated basis. Management is currently exploring the various possibilities of raisingadditional capital including the feasibility of a private offering of commonstock.

 

The shareholders of the Corporation, at a specialmeeting on March 21, 2002, approved certain amendments to the Articles ofIncorporation of Illini Corporation. The approved amendments include: the elimination of preemptive rights ofshareholders; elimination of cumulative voting for the election of directors;increase of the number of authorized shares of common stock to 45,000,000shares and the reduction of the par value of common shares from $10 per shareto $.01 per share; authorization of 10,000,000 shares of preferred stock, parvalue $.01 per share; reduction of the vote required, pursuant to Sections11.20 (b) and 11.60(e) of The Business Corporation Act of 1983, to approve amerger or sale transaction from approval by two-thirds of the issued andoutstanding shares of common stock to approval by a majority of the issued andoutstanding shares of common stock; the adoption of a qualified incentive stockoption plan (60,000 shares) for executive employees of the Corporation and anon-qualified incentive stock option plan (7,500 shares) for directors of theCorporation.  As of June 30, 2002, no stock options have been granted to employees ordirectors of the Corporation.

 

(3)                                  Allowancefor Loan Losses and Impaired Loans

 

The allowance for loan losses is increased byprovisions charged to operations and is available to absorb loan losses.  Illini Corporation utilizes a systematic,documented approach in determining the appropriate level of the allowance forloan losses of its subsidiary banks. Management’s approach, which provides forgeneral and specific allowances, is based on current economic conditions, pastloan losses, collection experience, risk characteristics of the portfolio,assessing collateral values by obtaining independent appraisals for significantproperties, and such other factors which, in management’s judgment, deservecurrent recognition in estimating potential loan losses.  The determination of the allowance for loanlosses is one of the estimates made by management in the preparation of theconsolidated financial statements.

 
|                            |   |   |   | **June 30,**                |   |
|---------------------------------|--------|--------|--------|-----------------------------|--------|
|                            |   |   |   | **2002**                    |   |   |   | **2001** |   |
|                            |   |   |   | **(dollars  in thousands)** |   |
| Balance at  beginning of period |   |   |   | $                           | 2,103  |   |   |   | $ | 2,188 |   |
| Provision  charged to expense   |   |   |   | 400                         |   |   |   | 190 |   |
|                            |   |   |   |                        |   |   |   |   |   |
| Charge-offs                     |   | (285   | )      |                        |   | (87 | ) |   |   |
| Less:  recoveries          |   | 63     |   |                        |   | 27 |   |   |   |
| Net charge-offs                 |   |   |   | (222                        | )      |   |   | (60 | ) |
| Balance at end  of period       |   |   |   | $                           | 2,281  |   |   |   | $ | 2,318 |   |

 

 

Loans, except largegroups of smaller-balance homogeneous loans, for which the full collection ofprincipal and interest according to the contractual terms of the loan agreementis not probable, are evaluated for impairment. Information regarding impaired loans at June 30, 2002 and December 31,2001 is as follows:

 

7

----

 
|                                                               |   | **June 30,  2002,**         |   | **December  31,  2001** |   |
|--------------------------------------------------------------------|--------|-----------------------------|--------|-------------------------|--------|
|                                                               |   | **(dollars  in thousands)** |   |
| Nonaccrual loans                                                   |   | $                           | 4,017  |                    | $      | 4,920 |   |
| Impaired loans  continuing to accrue interest                      |   | 322                         |   | 212                     |   |
| Total impaired  loans                                              |   | $                           | 4,339  |                    | $      | 5,132 |   |
|                                                               |   |                        |   |                    |   |
| Allowance for  losses on specific impaired loans                   |   | $                           | 425    |                    | $      | 354 |   |
| Impaired loans  with no specific related allowance for loan losses |   | 3,914                       |   | 4,669                   |   |
| Average balance  of impaired loans during the period               |   | 4,539                       |   | 3,882                   |   |

 

(4)                                  New Accounting Pronouncements

 

In July 2001, SFAS No.  142,  “Goodwill and OtherIntangible Assets” was issued.  SFASNo.  142 requires that an intangibleasset that is acquired shall be initially recognized and measured based on itsfair value.  This statement alsoprovides that goodwill should not be amortized, but shall be tested forimpairment annually, or more frequently if circumstances indicate potentialimpairment, through a comparison of fair value to its carrying amount. SFAS No.142 is effective for fiscal periods beginning after December 15, 2001.  Illini Corporation has goodwill of$1,856,000 as of June 30, 2002 primarily relating to the $1,600,000 associatedwith the Farmers State Bank of Camp Point acquisition.  The Corporation continued to amortize theexisting goodwill through the remainder of fiscal 2001.  As of January 1, 2002, the amortization ofgoodwill has ceased.  Goodwill wastested for impairment as of January 1, 2002 and determined not to beimpaired.  Goodwill amortization expensefor the six months ended June 30, 2001 was $81,000.  Identifiable intangible assets of $345,000 have continued to beamortized and consist of non-compete agreements and stock issuance costs as ofJune 30, 2002.

 

In July 2001, SFAS No. 143, “Accounting for AssetRetirement Obligations” was issued. SFAS No. 143 establishes standards for accounting and reporting ofobligations associated with the retirement of tangible long-lived assets andassociated asset retirement costs.  SFASNo. 143 is effective for fiscal years beginning after June 15, 2002.  The adoption of this statement will not havean impact on Illini Corporation.

 

In October 2001, SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” was issued.  Under SFAS No. 144, long-lived assets to besold within one year must be separately identified and carried at the lower ofcarrying value or fair value less costs to sell.  Long-lived assets expected to be held longer than one year aresubject to depreciation and must be written down to fair value upon impairment.  Long-lived assets no longer expected to besold within one year, such as some foreclosed real estate, must be written downto the lower of current fair value or fair value at the date of foreclosureadjusted to reflect depreciation since acquisition.  SFAS No. 144 must be implemented by January 1, 2002.  The adoption of this statement did not havean impact on Illini Corporation.

 

 

8

----

 

(5)                                  Other Comprehensive Income

 

For the three and six-monthperiods ended June 30, 2002 and 2001, unrealized gains (losses) on debt andmarketable equity securities available for sale, net of tax, is theCorporation’s only other comprehensive income component.  Other comprehensive income for the three andsix-month periods ended June 30, 2002 and 2001 is summarized as follows:

 
|                                                                      |   | **Three  Months Ended June 30, 2002** |   |
|---------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                      |   | **Before-Tax  Amount**                |   | **Tax  Expense** |   | **Net-of-Tax  Amount** |   |
| Net realized and  unrealized gains on securities available for sale       |   | $                                     | 396    |   | $ | (134 | ) | $ | 262 |   |
| Less adjustment  for net securities gains (losses) realized in net income |   | —                                |   | — |   | — |   |
| Other  comprehensive income                                               |   | $                                     | 396    |   | $ | (134 | ) | $ | 262 |   |

 
|                                                                      |   | **Three Months Ended June 30, 2001** | ** ** |
|---------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                      |   | **Before-Tax  Amount**               |       | **Tax  Expense** |   | **Net-of-Tax  Amount** |   |
| Net realized and  unrealized losses on securities available for sale      |   | $                                    | (51        | ) | $ | 17 |   | $ | (34 | ) |
| Less adjustment  for net securities gains (losses) realized in net income |   | —                               |       | — |   | — |   |
| Other  comprehensive loss                                                 |   | $                                    | (51        | ) | $ | 17 |   | $ | (34 | ) |

 
|                                                                      |   | **Six Months Ended June 30, 2002** | ** ** |
|---------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                      |   | **Before-Tax  Amount**             |       | **Tax  Expense** |   | **Net-of-Tax  Amount** |   |
| Net realized and  unrealized gains on securities available for sale       |   | $                                  | 405        |   | $ | (135 | ) | $ | 270 |   |
| Less adjustment  for net securities gains (losses) realized in net income |   | —                             |       | — |   | — |   |
| Other  comprehensive income                                               |   | $                                  | 405        |   | $ | (135 | ) | $ | 270 |   |

 
|                                                                      |   | **Six Months Ended June 30, 2001** | ** ** |
|---------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                      |   | **Before-Tax  Amount**             |       | **Tax  Expense** |   | **Net-of-Tax  Amount** |   |
| Net realized and  unrealized gains on securities available for sale       |   | $                                  | 825        |   | $ | (302 | ) | $ | 523 |   |
| Less adjustment  for net securities gains (losses) realized in net income |   | —                             |       | — |   | — |   |
| Other  comprehensive income                                               |   | $                                  | 825        |   | $ | (302 | ) | $ | 523 |   |

 

9

----

 

**Item 2. Management’s Discussion and Analysis of Operations**

 

Thisdiscussion should be read in conjunction with the consolidated financialstatements, notes, and tables included elsewhere in this report and in the 2001Illini Corporation Annual Report on Form 10-KSB (2001 Form 10-KSB).

 

**SUMMARY**

 
|                      |   | **Quarter  ended  June 30,**                       |     | **Percent  Change** |   | **Six months  ended  June 30,** |     | **Percent  Change** |     |
|---------------------------|--------|----------------------------------------------------|----------|---------------------|--------|---------------------------------|----------|---------------------|----------|
| **Earnings**              |   | **2002**                                           |     | **2001**            |   |                            | **2002** |                | **2001** |   |   |
|                      |   | **(dollars  in thousands, except per share data)** |     |
| Total revenue             |   | **5,095**                                          |     | $                   | 5,481  |                            | (7.04    | )%                  | **$**    | **10,196** |   | $ | 10,608 |   | (3.88 | )% |
| Net income                |   | **332**                                            |     | 322                 |   | 3.11                            | %        | **655**             |     | 631 |   | 3.80 | % |
| Basic earnings  per share |   | **$**                                              | **0.81** |                | $      | 0.60                            |     | 35.00               | %        | **$** | **1.59** |   | $ | 1.13 |   | 40.71 | % |
|                           |        |                                                    |          |                     |        |                                 |          |                     |          |  |  |  |  |  |  |  |  |  |

 
|                             |   | **Quarter  ended  June 30,** |   | **Basis  Point  Change** |   | **Six months  ended  June 30,** |     | **Basis  Point  Change** |       |
|----------------------------------|--------|------------------------------|--------|--------------------------|--------|---------------------------------|----------|--------------------------|------------|
| **Key Ratios**                   |   | **2002**                     |   | **2001**                 |   |                            | **2002** |                     | **2001**   |   |   |
| Return on  average assets (1)    |   | **0.48**                     | **%**  | 0.51                     | %      | (3                              | )        | **0.47**                 | **%**      | 0.51 | % | (4 | ) |
| Return on  average equity (1)    |   | **9.85**                     | **%**  | 7.30                     | %      | 255                             |     | **9.78**                 | **%**      | 6.96 | % | 282 |   |
| Average equity  to assets        |   | **4.84**                     | **%**  | 6.96                     | %      | (212                            | )        | **4.84**                 | **%**      | 7.32 | % | (248 | ) |
| Tier 1 leverage  ratio           |   | **5.50**                     | **%**  | 5.21                     | %      | 29                              |     |                     | ** ** |   |   |   |   |
| Tier 1  risk-based capital ratio |   | **6.79**                     | **%**  | 6.47                     | %      | 32                              |     |                     | ** ** |   |   |   |   |
| Total risk-based  capital ratio  |   | **9.87**                     | **%**  | 10.43                    | %      | (56                             | )        |                     | ** ** |   |   |   |   |
| Dividend payout  ratio           |   | **30.96**                    | **%**  | 41.92                    | %      | (1,096                          | )        | **31.42**                | **%**      | 44.05 | % | (1,263 | ) |
| Net interest  margin             |   | **4.14**                     | **%**  | 3.64                     | %      | 50                              |     | **4.11**                 | **%**      | 3.80 | % | 31 |   |
| Efficiency ratio                 |   | **77.05**                    | **%**  | 78.53                    | %      | (148                            | )        | **76.50**                | **%**      | 78.21 | % | (171 | ) |

 

----

(1)  Reported on an annualized basis.

 

10

----

 

**RESULTS OF OPERATIONS**

 

Netincome

 

TheCorporation recorded net income of $332,000 for the quarter ended June 30, 2002and $655,000 for the six month period ended June 30, 2002.  This compares favorably to $322,000 and$631,000 recorded in the respective periods ended June 30, 2001.  The return on average equity increased to9.8% for the quarter ended June 30, 2002 as compared to 7.3% for the sameperiod ended June 30, 2001.  Return onaverage equity for the six month period ended June 30, 2002 was 9.8% ascompared to 7.0% for the same period in 2001. Similarly, basic earnings per share for the quarter ended June 30, 2002was $0.81 per share versus$0.60 for the same quarter in 2001.  This represents an increase of 35%.  Basic earnings per share for the six monthsended June 30, 2002 was $1.59 compared to $1.13 for the first half of2001.  This represents a 40.7% increasein comparing the two periods.  Theseincreases in performance measurements are primarily attributable to the stockredemption that occurred in June 2001.

 

Earning Assets

 

Average earning assets ofthe Corporation for the first six months of 2002 increased 12.51% or $28.8million to $259.1 million from $230.3 million at June 30, 2001.  Earning assets increased primarily due toplanned loan growth.

 

As discussed in thecredit quality section of this Form 10-QSB, management has actively pursued theimprovement of the asset quality of all earning assets, loans, and investmentsecurities.

 

Averagenet loans increased to $209.8 million for the three months ended June 30, 2002compared to $178.2 million for the same period in 2001.  The increase of $31.6 million for the threemonths ended June 30, 2002 as compared to the same period for 2001 was primarilydue to an increase of $31.0 million in commercial loans, including commercialreal estate loans.  The average yield onthe loan portfolio, net of the allowance for loan losses, decreased 108 basispoints to 7.60% for the three months ended June 30, 2002, compared to 8.68% forthe three months ended June 30, 2001.

 

Averagenet loans increased to $207.7 million for the six months ended June 30, 2002compared to $174.1 million for the same period in 2001.  The increase of $33.6 million for the sixmonths ended June 30, 2002 as compared to the same period in 2001 was primarilydue to an increase of $33.0 million in commercial loans, including commercialreal estate loans.  The average yield onthe loan portfolio, net of the allowance for loan losses, decreased 103 basispoints to 7.73% for the six months ended June 30, 2002, compared to 8.76% forthe six months ended June 30, 2001.  Thedecrease in average yield is due to lower interest rates and adjustable rateloans repricing.

 

Averageinvestment securities decreased $2.8 million and $3.7 million for the three andsix months ended June 30, 2002, respectively, as compared to the same periodsin 2001.  The average yield of theinvestment securities portfolio was 6.36% and 6.42% for the three and sixmonths ended June 30, 2002, respectively, a decrease of 35 and 37 basis pointsas compared to the same periods in 2001. The decrease in investments from December 31, 2001 to June 30, 2002 is aresult of the increase in loan growth, and is consistent with management’sintent to maintain a balance in the investment portfolio to support basicsurplus, which is used as a measurement of liquidity.

 

11

----

 

Funding

 

The most important and stable source of funding is core deposits,considered by management to include non-interest bearing demand deposits, NOWand money market accounts, savings deposits and time deposits under$100,000.  Average core deposits for thesix months ended June 30, 2002 increased 16.9% or $31.2 million to $215.7million from $184.5 million for the six months ended June 30, 2001.  The average rate paid on total interestbearing liabilities for the six months ended June 30, 2002 decreased 146 basispoints to 3.69% when compared to 5.15% for the six months ended June 30, 2001.

 

The increase in average core deposits for the six months ended June 30,2002 as compared to the same period in 2001 has provided a low cost fundingsource for the growth in the loan portfolio.

 

In addition to federal funds purchased, Illini Bank and Farmers StateBank of Camp Point maintain an overnight federal funds line of credit with anunaffiliated financial institution and collateralized borrowing capacity withthe Federal Home Loan Bank of Chicago.

 

Net Interest Income/Net Interest Margin

 

The operating results of the Corporation are highly dependent on netinterest income, which is the difference between interest income oninterest-earning assets and interest expense on interest-bearing liabilities,consisting primarily of deposits. Net interest margin is determined by thedifference between yields earned on assets and rates paid on liabilities andthe relative amounts of interest-earning assets and interest-bearingliabilities.

 

Interest income, on a fully taxable equivalent basis, was $4.7 millionand $9.5 million for the three and six months ended June 30, 2002,respectively, compared to $4.8 million and $9.5 million for same periods in2001, respectively.  Interest expensewas $2.0 million and $4.2 million for the three and six months ended June 30,2002, respectively, compared to $2.7 million and $5.1 million for the sameperiods in 2001, respectively.  Adecrease in interest expense resulted in a $914,000 increase in net interestincome for the six months ended June 30, 2002, as compared to the six monthsended June 30, 2001.

 

Net interest margin for the six months ended June 30, 2002 of 4.11% upfrom 3.80% reported for the same period in 2001.  The increase in the net interest margin is primarily due todecreases on rates of core time deposits.

 

Net interest income isaffected by the growth, pricing, mix, and maturity of interest earning-assetsand interest- bearing liabilities, as well as other factors, includingnonaccrual status of loans.  Also, theCorporation’s interest-rate spread is affected by regulatory, economic, andcompetitive factors that influence interest rates, loan demand, and depositflow.  Individual components of netinterest income and net interest margin are presented in the consolidatedaverage balances, interest income/expense and yield/rates table locatedelsewhere in this report under the headings; Consolidated Average Balances,Interest Income/Expense and Yield/Rates, and Net Interest Income-Rate/VolumeVariance Analysis.

 

12

----

 

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

 
|                                                 |   | **Quarter  ended June 30,** |        |
|------------------------------------------------------|--------|-----------------------------|-------------|
|                                                 |   | **2002**                    |        | **2001** |   |
|                                                 |   | **Average  Balance**        |        | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   | **Average  Balance** |   | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                                 |   | **(dollars  in thousands)** |        |
| **ASSETS**                                           |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                             |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term investments                               |   | **$**                       | **4,929**   | ** ** | **1.8** | **%** | **$** | **20** |   | **1.67** | **%** | $ | 8,138 |   | 3.2 | % | $ | 127 |   | 6.26 | % |
| Investment securities (3)  Taxable                   |   | **30,616**                  | ** **  | **11.0** | ** ** | **419** |   | **5.47** |   | 35,106 |   | 13.8 |   | 539 |   | 6.14 |   |
| Tax-exempt (1)                                       |   | **14,298**                  | ** **  | **5.1** | ** ** | **295** |   | **8.27** |   | 12,656 |   | 5.0 |   | 262 |   | 8.29 |   |
| Total securities                                     |   | **44,914**                  | ** **  | **16.1** | ** ** | **714** |   | **6.36** |   | 47,762 |   | 18.8 |   | 801 |   | 6.71 |   |
| Loans                                                |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial (1)                                       |   | **45,913**                  | ** **  | **16.4** | ** ** | **856** |   | **7.48** |   | 31,917 |   | 12.6 |   | 683 |   | 8.58 |   |
| Agriculture                                          |   | **16,596**                  | ** **  | **5.9** | ** ** | **333** |   | **8.05** |   | 13,445 |   | 5.3 |   | 253 |   | 7.56 |   |
| Real estate                                          |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           |   | **98,241**                  | ** **  | **35.1** | ** ** | **1,746** |   | **7.13** |   | 81,190 |   | 31.9 |   | 1,755 |   | 8.67 |   |
| Agriculture                                          |   | **6,306**                   | ** **  | **2.3** | ** ** | **123** |   | **7.83** |   | 7,515 |   | 3.0 |   | 160 |   | 8.56 |   |
| Residential                                          |   | **31,860**                  | ** **  | **11.4** | ** ** | **613** |   | **7.71** |   | 32,555 |   | 12.8 |   | 683 |   | 8.41 |   |
| Consumer, net                                        |   | **12,333**                  | ** **  | **4.4** | ** ** | **271** |   | **8.82** |   | 13,015 |   | 5.1 |   | 287 |   | 8.85 |   |
| Credit card                                          |   | **818**                     | ** **  | **0.3** | ** ** | **35** |   | **17.25** |   | 783 |   | 0.3 |   | 33 |   | 17.14 |   |
| Total loans                                          |   | **212,067**                 | ** **  | **75.8** | ** ** | **3,977** |   | **7.52** |   | 180,420 |   | 71.0 |   | 3,854 |   | 8.57 |   |
| Allowance for loan losses                            |   | **(2,245**                  | **)**       | **(0.8** | **)** |   |   |   |   | (2,236 | ) | (0.9 | ) |   |   |   |   |
| Net loans (1) (2)                                    |   | **209,822**                 | ** **  | **75.0** | ** ** | **3,977** |   | **7.60** |   | 178,184 |   | 70.1 |   | 3,854 |   | 8.68 |   |
| Total interest-earning assets                        |   | **259,665**                 | ** **  | **92.9** | ** ** | **4,711** |   | **7.28** |   | 234,084 |   | 92.1 |   | 4,782 |   | 8.19 |   |
| Cash and due from banks                              |   | **5,431**                   | ** **  | **1.9** | ** ** |   |   |   |   | 6,642 |   | 2.6 |   |   |   |   |   |
| Premises and equipment                               |   | **7,015**                   | ** **  | **2.5** | ** ** |   |   |   |   | 6,840 |   | 2.7 |   |   |   |   |   |
| Other real estate owned                              |   | **807**                     | ** **  | **0.3** | ** ** |   |   |   |   | 475 |   | 0.2 |   |   |   |   |   |
| Other assets (3)                                     |   | **6,738**                   | ** **  | **2.4** | ** ** |   |   |   |   | 6,214 |   | 2.4 |   |   |   |   |   |
| **Total  assets**                                    |   | **$**                       | **279,656** | ** ** | **100.0** | **%** |   |   |   |   | $ | 254,255 |   | 100.0 | % |   |   |   |   |
|                                                 |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                      |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |   |                        |        |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                         |   | **$**                       | **32,311**  | ** ** | **11.6** | **%** |   |   |   |   | $ | 26,723 |   | 10.5 | % |   |   |   |   |
| Interest-bearing demand                              |   | **59,919**                  | ** **  | **21.4** | ** ** | **$** | **288** |   | **1.93** | **%** | 59,082 |   | 23.3 |   | $ | 536 |   | 3.64 | % |
| Savings                                              |   | **19,924**                  | ** **  | **7.1** | ** ** | **72** |   | **1.46** | ** ** | 17,186 |   | 6.8 |   | 85 |   | 1.98 |   |
| Time deposits  less than  $100,000              |   | **107,877**                 | ** **  | **38.6** | ** ** | **1,086** |   | **4.04** | ** ** | 86,779 |   | 34.1 |   | 1,248 |   | 5.77 |   |
| Total core deposits                                  |   | **220,031**                 | ** **  | **78.7** | ** ** | **1,446** |   | **2.64** | ** ** | 189,770 |   | 74.7 |   | 1,869 |   | 3.95 |   |
| Time deposits  $100,000 and  over               |   | **23,458**                  | ** **  | **8.4** | ** ** | **250** |   | **4.27** | ** ** | 26,499 |   | 10.4 |   | 353 |   | 5.35 |   |
| Total deposits                                       |   | **243,489**                 | ** **  | **87.1** | ** ** | **1,696** |   | **2.79** | ** ** | 216,269 |   | 85.1 |   | 2,222 |   | 4.12 |   |
| Short-term borrowings                                |   | **2,800**                   | ** **  | **1.0** | ** ** | **16** |   | **2.31** | ** ** | 544 |   | 0.2 |   | 6 |   | 4.78 |   |
| Long-term borrowings                                 |   | **8,400**                   | ** **  | **3.0** | ** ** | **90** |   | **4.27** | ** ** | 7,570 |   | 3.0 |   | 202 |   | 10.69 |   |
| Preferred securities of trust subsidiary (4)         |   | **9,000**                   | ** **  | **3.2** | ** ** | **229** |   | **10.23** | ** ** | 9,000 |   | 3.5 |   | 229 |   | 10.20 |   |
| Total interest-bearing liabilities                   |   | **231,378**                 | ** **  | **82.7** | ** ** | **2,031** |   | **3.52** | ** ** | 206,660 |   | 81.3 |   | 2,659 |   | 5.16 |   |
| Other liabilities                                    |   | **2,424**                   | ** **  | **0.09** | ** ** |   |   |   |   | 3,176 |   | 1.2 |   |   |   |   |   |
| Total liabilities                                    |   | **266,113**                 | ** **  | **95.2** | ** ** |   |   |   |   | 236,559 |   | 93.0 |   |   |   |   |   |
| Stockholders’ Equity                            |   | **13,543**                  | ** **  | **4.8** | ** ** |   |   |   |   | 17,696 |   | 7.0 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |   | **$**                       | **279,656** | ** ** | **100.0** | **%** |   |   |   |   | $ | 254,255 |   | 100.0 | % |   |   |   |   |
| **Net  interest margin**                             |   |                        |        |   |   | **$** | **2,680** |   | **4.14** | **%** |   |   |   |   | $ | 2,123 |   | 3.64 | % |

 

----

(1)                                  Incomeamounts are presented on a fully taxable equivalent basis (FTE), which isdefined as income on earning assets that is subject to either a reduced rate orzero rate of income tax, adjusted to give effect to the appropriate incrementalfederal income 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 $108,000 in 2002 and$93,000 in 2001.

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

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

 

13

----

 
|                                                 |   | **Six months  ended June 30,** |        |
|------------------------------------------------------|--------|--------------------------------|-------------|
|                                                 |   | **2002**                       |        | **2001** |   |
|                                                 |   | **Average  Balance**           |        | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   | **Average  Balance** |   | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                                 |   | **(dollars  in thousands)**    |        |
| **ASSETS**                                           |   |                           |        |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                             |   |                           |        |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Short-term investments                               |   | **$**                          | **5,101**   | ** ** | **1.8** | **%** | **$** | **41** | ** ** | **1.64** | **%** | $ | 6,162 |   | 2.5 | % | $ | 198 |   | 6.47 | % |
| Investment securities (3)  Taxable                   |   | **32,408**                     | ** **  | **11.6** | ** ** | **907** | ** ** | **5.60** | ** ** | 37,274 |   | 14.9 |   | 1,174 |   | 6.30 |   |
| Tax-exempt (1)                                       |   | **13,877**                     | ** **  | **5.0** | ** ** | **579** | ** ** | **8.34** | ** ** | 12,725 |   | 5.1 |   | 524 |   | 8.24 |   |
| Total securities                                     |   | **46,285**                     | ** **  | **16.6** | ** ** | **1,486** | ** ** | **6.42** | ** ** | 49,999 |   | 20.0 |   | 1,698 |   | 6.79 |   |
| Loans                                                |   |                           |        |   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| Commercial (1)                                       |   | **45,962**                     | ** **  | **16.4** | ** ** | **1,711** | ** ** | **7.51** | ** ** | 30,365 |   | 12.2 |   | 1,334 |   | 8.86 |   |
| Agriculture                                          |   | **16,154**                     | ** **  | **5.8** | ** ** | **564** | ** ** | **7.04** | ** ** | 13,622 |   | 5.5 |   | 536 |   | 7.93 |   |
| Real estate                                          |   |                           |        |   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| Commercial                                           |   | **95,333**                     | ** **  | **34.1** | ** ** | **3,536** | ** ** | **7.48** | ** ** | 77,966 |   | 31.2 |   | 3,363 |   | 8.70 |   |
| Agriculture                                          |   | **6,578**                      | ** **  | **2.4** | ** ** | **259** | ** ** | **7.93** | ** ** | 7,380 |   | 3.0 |   | 319 |   | 8.73 |   |
| Residential                                          |   | **32,572**                     | ** **  | **11.7** | ** ** | **1,278** | ** ** | **7.91** | ** ** | 33,682 |   | 13.5 |   | 1,393 |   | 8.34 |   |
| Consumer, net                                        |   | **12,463**                     | ** **  | **4.5** | ** ** | **541** | ** ** | **8.75** | ** ** | 12,574 |   | 5.0 |   | 552 |   | 8.85 |   |
| Credit card                                          |   | **833**                        | ** **  | **0.3** | ** ** | **68** | ** ** | **16.58** | ** ** | 783 |   | 0.3 |   | 67 |   | 17.16 |   |
| Total loans                                          |   | **209,895**                    | ** **  | **75.2** | ** ** | **7,957** | ** ** | **7.64** | ** ** | 176,372 |   | 70.7 |   | 7,564 |   | 8.65 |   |
| Allowance for loan losses                            |   | **(2,224**                     | **)**       | **(0.8** | **)** |   |   |   |   | (2,225 | ) | (0.9 | ) |   |   |   |   |
| Net loans (1) (2)                                    |   | **207,671**                    | ** **  | **74.4** | ** ** | **7,957** | ** ** | **7.73** | ** ** | 174,147 |   | 69.8 |   | 7,564 |   | 8.76 |   |
| Total interest-earning assets                        |   | **259,057**                    | ** **  | **92.8** | ** ** | **9,484** | ** ** | **7.38** | ** ** | 230,308 |   | 92.3 |   | 9,460 |   | 8.28 |   |
| Cash and due from banks                              |   | **5,482**                      | ** **  | **2.0** | ** ** |   |   |   |   | 6,150 |   | 2.4 |   |   |   |   |   |
| Premises and equipment                               |   | **7,039**                      | ** **  | **2.5** | ** ** |   |   |   |   | 6,769 |   | 2.7 |   |   |   |   |   |
| Other real estate owned                              |   | **688**                        | ** **  | **0.2** | ** ** |   |   |   |   | 441 |   | 0.2 |   |   |   |   |   |
| Other assets (3)                                     |   | **7,009**                      | ** **  | **2.5** | ** ** |   |   |   |   | 5,974 |   | 2.4 |   |   |   |   |   |
| **Total  assets**                                    |   | **$**                          | **279,275** | ** ** | **100.0** | **%** |   |   |   |   | $ | 249,642 |   | 100.0 | % |   |   |   |   |
|                                                 |   |                           |        |   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                      |   |                           |        |   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| Deposits:                                            |   |                           |        |   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                         |   | **$**                          | **32,550**  | ** ** | **11.7** | **%** |   |   |   |   | $ | 27,406 | ** ** | 11.0 | % |   |   |   |   |
| Interest bearing demand                              |   | **59,152**                     | ** **  | **21.2** | ** ** | **$** | **572** | ** ** | **1.95** | **%** | 56,704 |   | 22.7 |   | $ | 1,079 |   | 3.84 | % |
| Savings                                              |   | **19,191**                     | ** **  | **6.9** | ** ** | **139** | ** ** | **1.47** | ** ** | 16,923 |   | 6.8 |   | 167 |   | 1.99 |   |
| Time deposits  less than  $100,000              |   | **104,814**                    | ** **  | **37.5** | ** ** | **2,196** | ** ** | **4.22** | ** ** | 83,516 |   | 33.4 |   | 2,435 |   | 5.88 |   |
| Total core deposits                                  |   | **215,707**                    | ** **  | **77.3** | ** ** | **2,907** | ** ** | **2.72** | ** ** | 184,549 |   | 73.9 |   | 3,681 |   | 4.02 |   |
| Time deposits  $100,000 and  over               |   | **27,691**                     | ** **  | **9.9** | ** ** | **582** | ** ** | **4.24** | ** ** | 27,464 |   | 11.0 |   | 754 |   | 5.54 |   |
| Total deposits                                       |   | **243,398**                    | ** **  | **87.2** | ** ** | **3.489** | ** ** | **2.89** | ** ** | 212,013 |   | 84.9 |   | 4,435 |   | 4.22 |   |
| Short-term borrowings                                |   | **1,767**                      | ** **  | **0.7** | ** ** | **21** | ** ** | **2.41** | ** ** | 1,713 |   | 0.7 |   | 64 |   | 7.57 |   |
| Long-term borrowings                                 |   | **8,424**                      | ** **  | **3.0** | ** ** | **234** | ** ** | **5.60** | ** ** | 6,952 |   | 2.8 |   | 302 |   | 8.75 |   |
| Preferred securities of trust subsidiary (4)         |   | **9,000**                      | ** **  | **3.2** | ** ** | **466** | ** ** | **10.45** | ** ** | 7,500 |   | 3.0 |   | 323 |   | 8.69 |   |
| Total interest-bearing liabilities                   |   | **230,039**                    | ** **  | **82.4** | ** ** | **4,210** | ** ** | **3.69** | ** ** | 200,772 |   | 80.4 |   | 5,124 |   | 5.15 |   |
| Other liabilities                                    |   | **3,172**                      | ** **  | **1.1** | ** ** |   |   |   | ** ** | 3,182 |   | 1.3 |   |   |   |   |   |
| Total liabilities                                    |   | **265,761**                    | ** **  | **95.2** | ** ** |   |   |   | ** ** | 231,360 |   | 92.7 |   |   |   |   |   |
| Stockholders’ Equity                            |   | **13,514**                     | ** **  | **4.8** | ** ** |   |   |   | ** ** | 18,282 |   | 7.3 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |   | **$**                          | **279,275** | ** ** | **100.0** | **%** |   |   |   |   | $ | 249,642 |   | 100.0 | % |   |   |   |   |
| **Net  interest margin**                             |   |                           |        |   |   | **$** | **5,274** | ** ** | **4.11** | **%** |   |   |   |   | $ | 4,336 |   | 3.80 | % |
|                                                      |        |                                |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Incomeamounts are presented on a fully taxable equivalent basis (FTE), which isdefined as income on earning assets that is subject to either a reduced rate orzero rate of income tax, adjusted to give effect to the appropriate incrementalfederal income 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 $196,000 in 2002 and$168,000 in 2001.

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

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

 

14

----

 

**Net Interest Income – Rate/VolumeVariance Analysis(*)**

** **
|                                      |   | **Quarter  ended June 30, 2002  as compared to  quarter ended June 30, 2001** |       |
|-------------------------------------------|--------|-------------------------------------------------------------------------------|------------|
|                                      |   | **Changes in  Income/Expense**                                                |       | **Volume  Effect** |   | **Rate  Effect** |   |
|                                      |   | **(dollars  in thousands)**                                                   |       |
|                                      |   |                                                                          | ** ** |   | ** ** |   | ** ** |
| Short-term  investments                   |   | $                                                                             | (107       | ) | $ | (50 | ) | $ | (57 | ) |
| Investment  securities:                   |   |                                                                          |       |   |   |   |   |
| Taxable                                   |   | (120                                                                          | )          | (69 | ) | (51 | ) |
| Tax-exempt                                |   | 33                                                                            |       | 34 |   | (1 | ) |
| Total securities                          |   | (87                                                                           | )          | (35 | ) | (52 | ) |
| Loans:                                    |   |                                                                          |       |   |   |   |   |
| Commercial                                |   | 173                                                                           |       | 299 |   | (126 | ) |
| Agriculture                               |   | 80                                                                            |       | 59 |   | 21 |   |
| Real Estate:                              |   |                                                                          |       |   |   |   |   |
| Commercial                                |   | (9                                                                            | )          | 369 |   | (378 | ) |
| Agriculture                               |   | (37                                                                           | )          | (26 | ) | (11 | ) |
| Residential                               |   | (70                                                                           | )          | (15 | ) | (55 | ) |
| Consumer, net                             |   | (16                                                                           | )          | (15 | ) | (1 | ) |
| Credit card                               |   | 2                                                                             |       | 2 |   | — |   |
| Total loans                               |   | 123                                                                           |       | 673 |   | (550 | ) |
| Total interest  income                    |   | (71                                                                           | )          | 588 |   | (659 | ) |
|                                      |   |                                                                          |       |   |   |   |   |
| Interest-bearing  demand                  |   | (248                                                                          | )          | 8 |   | (256 | ) |
| Savings                                   |   | (13                                                                           | )          | 14 |   | (27 | ) |
| Time deposits,  less than $100,000        |   | (162                                                                          | )          | 303 |   | (465 | ) |
| Total core  deposits                      |   | (423                                                                          | )          | 325 |   | (748 | ) |
| Time deposits,  $100,000 and over         |   | (103                                                                          | )          | (41 | ) | (62 | ) |
| Total deposits                            |   | (526                                                                          | )          | 284 |   | (810 | ) |
| Short-term debt                           |   | 10                                                                            |       | 27 |   | (17 | ) |
| Long-term debt                            |   | (112                                                                          | )          | 22 |   | (134 | ) |
| Preferred  securities of subsidiary trust |   | —                                                                        |       | — |   | — |   |
| Total debt                                |   | (102                                                                          | )          | 49 |   | (151 | ) |
| Total interest  expense                   |   | (628                                                                          | )          | 333 |   | (961 | ) |
|                                      |   |                                                                          |       |   |   |   |   |
| Net interest  income (expense)            |   | $                                                                             | 557        |   | $ | 255 |   | $ | 302 |   |

 

----

(*)  Fully taxable equivalentbasis

NOTE:            The change in interestwhich can not be attributed to only a change in volume or a change in rate, butinstead represents a combination of the two factors, has been allocated to therate effect.

 

15

----

 
|                                      |   | **Six months  ended June 30, 2002  as compared to  six months ended June 30, 2001** |       |
|-------------------------------------------|--------|-------------------------------------------------------------------------------------|------------|
|                                      |   | **Changes in  Income/Expense**                                                      |       | **Volume  Effect** |   | **Rate  Effect** |   |
|                                      |   | **(dollars  in thousands)**                                                         |       |
|                                      |   |                                                                                | ** ** |   | ** ** |   | ** ** |
| Short-term  investments                   |   | $                                                                                   | (157       | ) | $ | (34 | ) | $ | (123 | ) |
| Investment  securities:                   |   |                                                                                |       |   |   |   |   |
| Taxable                                   |   | (267                                                                                | )          | (152 | ) | (115 | ) |
| Tax-exempt                                |   | 55                                                                                  |       | 47 |   | 8 |   |
| Total securities                          |   | (212                                                                                | )          | (105 | ) | (107 | ) |
| Loans:                                    |   |                                                                                |       |   |   |   |   |
| Commercial                                |   | 377                                                                                 |       | 685 |   | (308 | ) |
| Agriculture                               |   | 28                                                                                  |       | 100 |   | (72 | ) |
| Real Estate:                              |   |                                                                                |       |   |   |   |   |
| Commercial                                |   | 173                                                                                 |       | 749 |   | (576 | ) |
| Agriculture                               |   | (60                                                                                 | )          | (34 | ) | (26 | ) |
| Residential                               |   | (115                                                                                | )          | (46 | ) | (69 | ) |
| Consumer, net                             |   | (11                                                                                 | )          | (5 | ) | (6 | ) |
| Credit card                               |   | 1                                                                                   |       | 4 |   | (3 | ) |
| Total loans                               |   | 393                                                                                 |       | 1,453 |   | (1,060 | ) |
| Total interest  income                    |   | 24                                                                                  |       | 1,314 |   | (1,290 | ) |
|                                      |   |                                                                                |       |   |   |   |   |
| Interest-bearing  demand                  |   | (507                                                                                | )          | 47 |   | (554 | ) |
| Savings                                   |   | (28                                                                                 | )          | 22 |   | (50 | ) |
| Time deposits,  less than $100,000        |   | (239                                                                                | )          | 621 |   | (860 | ) |
| Total core  deposits                      |   | (774                                                                                | )          | 690 |   | (1,464 | ) |
| Time deposits,  $100,000 and over         |   | (172                                                                                | )          | 6 |   | (178 | ) |
| Total deposits                            |   | (946                                                                                | )          | 696 |   | (1,642 | ) |
| Short-term debt                           |   | (43                                                                                 | )          | 2 |   | (45 | ) |
| Long-term debt                            |   | (68                                                                                 | )          | 64 |   | (132 | ) |
| Preferred  securities of subsidiary trust |   | 143                                                                                 |       | 143 |   | — |   |
| Total debt                                |   | 32                                                                                  |       | 209 |   | (177 | ) |
| Total interest  expense                   |   | (914                                                                                | )          | 905 |   | (1,819 | ) |
|                                      |   |                                                                                |       |   |   |   |   |
| Net interest  income (expense)            |   | $                                                                                   | 938        |   | $ | 409 |   | $ | 529 |   |

 

----

(*)  Fully taxable equivalentbasis

NOTE:            The change in interestwhich can not be attributed to only a change in volume or a change in rate, butinstead represents a combination of the two factors, has been allocated to therate effect.

 

16

----

 

**NoninterestIncome**

 
|                                          |   | **Three  months ended  June 30,** |    | **Percent  Change** |       | **Six months  ended  June 30,** |       | **Percent  Change** |   |
|-----------------------------------------------|--------|-----------------------------------|---------|---------------------|------------|---------------------------------|------------|---------------------|--------|
|                                          |   | **2002**                          |    | **2001**            |       | **2002/2001**                   |       | **2002**            |   | **2001** |   | **2002/2001** |   |
|                                          |   | **(dollars  in thousands)**       |    |
| Service charges  on deposit accounts          |   | **$**                             | **331** |                | $          | 366                             | ** ** | **(9.6**            | **)%** | **$** | **609** |   | $ | 699 | ** ** | **(12.9** | **)%** |
| Other fee income                              |   | **84**                            |    | 80                  | ** ** | **5.0**                         | ** ** | **165**             |   | 148 | ** ** | **11.5** | ** ** |
| Mortgage loan  servicing fees                 |   | **25**                            |    | 79                  | ** ** | **(68.4**                       | **)**      | **59**              |   | 138 | ** ** | **(57.2** | **)** |
| Gains on sale of  mortgage loans              |   | **52**                            |    | 213                 | ** ** | **(75.6**                       | **)**      | **70**              |   | 256 | ** ** | **(72.7** | **)** |
| Gains (losses)  on sales of other real estate |   | **(24**                           | **)**   | 4                   | ** ** | **(700.0**                      | **)**      | **(28**             | **)**  | 10 | ** ** | **(380.0** | **)** |
| Other                                         |   | **30**                            |    | 46                  | ** ** | **(34.8**                       | **)**      | **61**              |   | 76 | ** ** | **(19.7** | **)** |
|                                          |   | **$**                             | **498** |                | $          | 788                             | ** ** | **(36.8**           | **)%** | **$** | **936** |   | $ | 1,327 | ** ** | **(29.5** | **)** |

 

Thenoninterest income decreased $290,000 and $391,000 for the three and six monthsended June 30, 2002, respectively, when compared to the same periods in2001.  The decrease in noninterestincome is due to a decrease in transaction accounts, and lower gains on sale ofmortgage loans, lower mortgage servicing fees, a loss on sale of other realestate, all due to a weaker than expected economy.

 

**Noninterest Expense**

 
|                                       |   | **Three  months ended  June 30,** |      | **Percent  Change** |       | **Six months  Ended  June 30,** |       | **Percent  Change** |   |
|--------------------------------------------|--------|-----------------------------------|-----------|---------------------|------------|---------------------------------|------------|---------------------|--------|
|                                       |   | **2002**                          |      | **2001**            |       | **2002/2001**                   |       | **2002**            |   | **2001** |   | **2002/2001** |   |
|                                       |   | **(dollars  in thousands)**       |      |
| Salaries and  employee benefits            |   | **$**                             | **1,283** |                | $          | 1,004                           | ** ** | **27.8**            | **%**  | **$** | **2,528** |   | $ | 2,014 | ** ** | **25.5** | **%** |
| Net occupancy  expense                     |   | **189**                           |      | 189                 | ** ** | **0.0**                         | ** ** | **378**             |   | 388 | ** ** | **(2.6** | **)** |
| Equipment  expense                         |   | **71**                            |      | 90                  | ** ** | **(21.1**                       | **)**      | **152**             |   | 194 | ** ** | **(21.6** | **)** |
| Data processing                            |   | **175**                           |      | 191                 | ** ** | **(8.4**                        | **)**      | **325**             |   | 374 | ** ** | **(13.1** | **)** |
| Supplies                                   |   | **26**                            |      | 50                  | ** ** | **(48.0**                       | **)**      | **80**              |   | 93 | ** ** | **(14.0** | **)** |
| Communication  and transportation          |   | **111**                           |      | 112                 | ** ** | **(0.9**                        | **)**      | **220**             |   | 216 | ** ** | **1.9** | ** ** |
| Marketing and  advertising                 |   | **73**                            |      | 67                  | ** ** | **9.0**                         | ** ** | **133**             |   | 124 | ** ** | **7.3** | ** ** |
| Correspondent  and processing fees         |   | **103**                           |      | 76                  | ** ** | **35.5**                        | ** ** | **189**             |   | 147 | ** ** | **28.6** | ** ** |
| Loan and other  real estate owned expenses |   | **43**                            |      | 60                  | ** ** | **(28.3**                       | **)**      | **62**              |   | 74 | ** ** | **(16.2** | **)** |
| Professional  fees                         |   | **218**                           |      | 257                 | ** ** | **(15.2**                       | **)**      | **379**             |   | 443 | ** ** | **(14.4** | **)** |
| Regulatory fees                            |   | **35**                            |      | 44                  | ** ** | **(20.5**                       | **)**      | **58**              |   | 77 | ** ** | **(24.7** | **)** |
| Other                                      |   | **123**                           |      | 145                 | ** ** | **(15.2**                       | **)**      | **247**             |   | 284 | ** ** | **(13.0** | **)** |
|                                       |   | **$**                             | **2,450** |                | $          | 2,285                           | ** ** | **7.2**             | **%**  | **$** | **4,751** |   | $ | 4,428 | ** ** | **7.3** | **%** |

 

Salariesand employee benefits increased $279,000 and $514,000 for the three and sixmonths ended June 30, 2002, respectively, when compared to the same periods in2001.  This increase is a result of anincrease in the number of full time equivalent employees, incentive pay,increased insurance benefits for employees, and normal cost of living increasesto overall base salaries.

 

DataProcessing expense decreased $49,000 for the six months ended June 30, 2002when compared to the same period in 2001. The decrease is due to cost savings from systems conversion andupgrading of the information and processing system.

 

17

----

 

Otheroperating expenses decreased $22,000 and $37,000 for the three and six monthsended June 30, 2002, respectively, when compared to the same periods in2001.  The decrease is due to costcontrols put into place in 2001.

 

**CREDIT QUALITY**

 

Grossloans totaled $216.5 million at June 30, 2002, an increase of $17.5 million, or8.79%, from $199.0 million at December 31, 2001.  The provision for loan losses has increased to $400,000 for thesix months ended June 30, 2002 as compared to $190,000 for the same period in2001.  At June 30, 2002 the allowance asa percent of total loans decreased to 1.05% as compared to 1.06% and 1.25% asof December 31, 2001 and June 30, 2001, respectively.  The decrease in the ratio is primarily a result of the growth inthe loan portfolio.  Based on theinherent risk in the loan portfolio, management believes that as of June 30,2002, the allowance for loan losses provides for probable losses.

 
|                            |   |     |       | **Six months  ended**

**June 30,** |      |
|---------------------------------|--------|----------|------------|-------------------------------------|-----------|
|                            |   |     |       | **2002**                            |      |   |   | **2001** |   |
|                            |   |     |       | **(dollars in thousands)**          |      |
| Allowance for Loan Losses:      |   |     |       |                                |      |   |   |   |   |
| Balance at  beginning of period |   |     |       | **$**                               | **2,103** |   |   |   | $ | 2,188 |   |
| Provision  charged to expense   |   |     |       | **400**                             |      |   |   | 190 |   |
|                            |   |     |       |                                |      |   |   |   |   |
| Charge-offs                     |   | **(285** | **)**      |                                |      | (87 | ) |   |   |
| Less:  recoveries          |   | **63**   | ** ** |                                |      | 27 |   |   |   |
| Net charge-offs                 |   |     |       | **(222**                            | **)**     |   |   | (60 | ) |
| Balance at end  of period       |   |     |       | **$**                               | **2,281** |   |   |   | $ | 2,318 |   |

 

 

 

Illini Corporation’sprimary business of making commercial, real estate, and consumer loans entailspotential losses, the magnitude of which depends on a variety of economicfactors affecting borrowers, which are beyond the control of theCorporation.  Accordingly, a significantfactor in the Corporation’s past and future operating results is the level ofthe provision for loan losses*. *Netcharge-offs increased to $207,000 and $222,000 for the three and six monthsended June 30, 2002, respectively, as compared to $6,000 and $60,000 for thecomparable periods in the prior year. These increases primarily relate to commercial real estate loans.

 
| **Credit  Quality**                  |   | **June 30,  2002**          |       | **December  31,  2001** |       | **June 30,  2001** |       |
|--------------------------------------|--------|-----------------------------|------------|-------------------------|------------|--------------------|------------|
|                                 |   | **(dollars  in thousands)** |       |
| **Nonperforming assets:**            |   |                        |       |                    |       |               |       |
| Accruing loans  past due 90 days     |   | **$**                       | **—** |                    | $          | —             |       | $ | — |   |
| Nonaccrual                           |   | **4,017**                   |       | 4,920                   |       | 2,123              |       |
| Renegotiated                         |   | **—**                  |       | —                  |       | —             |       |
| Other real  estate owned             |   | **816**                     |       | 370                     |       | 494                |       |
| Total  nonperforming assets          |   | **$**                       | **4,833**  |                    | $          | 5,290              |       | $ | 2,617 |   |
|                                 |   |                        |       |                    |       |               |       |
| **Key ratios**:                      |   |                        | ** ** |                    | ** ** |               | ** ** |
| Nonperforming  loans to ending loans |   | **1.86**                    | **%**      | 2.47                    | %          | 1.14               | %          |
| Allowance to  total loans            |   | **1.05**                    |       | 1.06                    |       | 1.25               |       |
| Allowance to  nonperforming loans    |   | **56.78**                   |       | 42.74                   |       | 109.19             |       |

 

18

----

 

AtJune 30, 2002, impaired loans totaled $4.3 million, including $4.0 million ofloans on nonaccrual and $322,000 of loans past due less than 90 days, comparedto $4.9 million of loans on nonaccrual and $212,000, which were past due lessthan 90 days, at December 31, 2001. Non-performing assets have declined $457,000 from December 31,2001.  As reported in the 10-KSB,non-performing assets totaled $5.3 million.* *Sixborrowers make up $3.6 million or 83.72% of the total non-performingassets.  These loans are collateralizedby commercial real estate and are in various stages of foreclosure.  The balance of non-performing assets are two1-4 family mortgages in foreclosure, and two commercial real estate propertiesin other real estate owned pending sale. The decline in nonaccrual loans is primarily attributable to theincrease in loan charge-offs and the increase in other real estate ownedassets.  Management continues tovigorously pursue the collection of the loans.

 

IlliniCorporation’s loan underwriting guidelines and credit review procedures andpolicies are designed to protect the Corporation from credit losses.  Illini Corporation’s process for monitoringloan quality includes detailed monthly trend analysis of delinquencies andnonperforming assets. Management extensively monitors significant creditrelationships through appraisals, assessment of the financial condition ofborrowers, restrictions on out-of-area lending, and avoidance of loanconcentrations.

 

Asdiscussed in the Corporation’s 2001 Form 10-KSB and previous Form 10-QSBreports, management has implemented several initiatives to improve creditquality.  These steps included anofficer driven problem loan identification system, a revamped allowance forloan losses adequacy determination process, a new loan policy, and improvedreporting systems (credit quality and production).  Management is committed to continuing these initiatives and hassupplemented these efforts in 2002 by engaging an outside firm to perform acomprehensive review of each bank’s loan portfolio to assess its credit qualityand the effectiveness of management’s loan quality systems and controls.

 

**CAPITALRESOURCES**

 

The current economic and regulatory environment places increasedemphasis on capital strength.  A strongcapital position, which is vital to the continued profitability of IlliniCorporation, also promotes depositor and investor confidence and provides asolid foundation for the future growth of the organization.  Illini Corporation has satisfied its capitalrequirements principally through the retention of earnings.  The decrease in total risk based capital isdue to growth in the first three months of 2002.  The increase in Tier 1 risk based and leverage capital is due toamortization of identifiable intangible assets.* *As of June 30, 2002, the Corporation’s subsidiary banks metthe criteria to be classified as “well capitalized.”

 
|                       |   | **June 30,  2002** |   | **December  31,  2001** |   |
|----------------------------|--------|--------------------|--------|-------------------------|--------|
| Tier 1  risk-based capital |   | 6.79               | %      | 6.75                    | %      |
| Total risk-based  capital  |   | 9.87               | %      | 10.04                   | %      |
| Leverage capital           |   | 5.50               | %      | 5.35                    | %      |

 

Earnings retention is affected by the board of director’s declarationof cash dividends.  The dividend payoutratio is an indicator of the level of earnings retained.  The Board of Directors of the Corporationconsiders the capital strength of the Corporation and the banks in determiningthe appropriate level of cash dividends to be paid to shareholders.  The dividend payout ratio for the three andsix months ended June 30, 2002 was 31.0% and 31.4%, respectively as compared to41.9% and 44.1% for the three and six months ended June 30, 2001. The dividendper share for the three and six months ended June 30, 2002 is unchanged fromthe same periods in 2001.

 

19

----

 

As discussed in the Corporation’s 2001 Form 10-KSB, the Corporation has$9 million of trust preferred securities outstanding.  Per regulation, 25% of the Tier 1 capital ratio can be comprisedof the trust preferred issue.  As ofJune 30, 2002, the portion eligible for inclusion in the Tier 1 computationamounted to approximately $4.4 million

 

**LIQUIDITY**

 

Illini Corporation’s policy is to manage interest rate risk to a levelwhich places limits on the sensitivity of its earnings to changes in marketinterest rates.  An explanation of theasset/liability management process is found in the Corporation’s 2001 Form10-KSB, beginning on page 15.

 

The assets portion of the balance sheet provides liquidity primarilythrough loan principal repayments, maturities of investment securities, and salesof investment securities available for sale. The liability side of the balance sheet provides liquidity throughvarious customers’ interest-bearing and noninterest-bearing deposit accounts.  Short-term borrowings are an additionalsource of liquidity and represent Illini Corporation’s incremental borrowingcapacity.

 

Illini Corporation uses a comprehensive analysis of its asset/liabilityfunction, including a review of its funds management policy and its principalmeasure of liquidity.  The Corporation implementeda new measure of liquidity measurement, called “Basic Surplus,” which redefinesliquid assets as the total available assets held by the Corporation which canbe converted to cash in thirty days or less, reduced by short term liabilities.  As of June 30, 2002, the most recentcalculation, Illini Corporation’s core liquidity was $25.9 million, or 9.3% oftotal average assets.

 

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

 

20

----

 

**PART II.  OTHERINFORMATION**

 

Item1     Legal Proceedings 

Mary Quinn v. Illini Corporation and Illinois StockTransfer Co.,

Sangamon County Case No. 98 CH 240

 

Illini Corporationadopted a Shareholder Rights Agreement on June 20, 1997, and named IllinoisStock Transfer Company (“ISTC”) as its rights agent thereunder.  Illini Corporation was notified in May 1998of a threatened complaint against ISTC by an Illini Corporationshareholder.  The shareholder, Mary K.Quinn (“Quinn”), who owns 21 shares of stock in Illini Corporation, filed suitagainst ISTC on June 9, 1998 in the Seventh Judicial Circuit Court, SangamonCounty, Illinois.  Quinn sought tocompel ISTC to distribute rights certificates to Illini Corporation’s shareholdersand further sought to certify all Illini Corporation shareholders as aclass.  Quinn asserted that Ida R. Nollbecame an acquiring person under the Rights Agreement on April 16, 1998, andthat the Rights Agreement was triggered. ISTC has vigorously contested Quinn’s assertions that Ida R. Noll was anacquiring person, that the Rights Agreement had been triggered, and that ISTChad a duty to distribute rights certificates.

 

On June 9, 1998,Quinn filed a Motion to Certify the Class, which was granted on December 29,1998.  On January 13, 1999, Quinn filedan Amended Complaint adding Illini Corporation as a defendant to heraction.  Both Illini Corporation andISTC answered the Amended Complaint and denied that Ida R. Noll was anacquiring person.  Quinn asserted thatshe was entitled to recover her attorneys’ fees from Illini Corporation andISTC.

 

Quinn filed aMotion for Summary Judgment that asked the Court to determine as a matter oflaw that Ida R. Noll became an acquiring person on April 16, 1998, that theRights Agreement was triggered as a result and that Illini Corporation and ISTChad a duty to distribute rights certificates to all shareholders as of April16, 1998, except for Ida R. Noll. Illini Corporation opposed Quinn’s Motion for Summary Judgment, whichwas heard by the Court on June 18, 1999. On June 29, 1999, the Court entered an Opinion and Order denying Quinn’sMotion for Summary Judgment.

 

On or about May 6,1999, counsel for Quinn advised Illini Corporation’s counsel of her intent toseek an injunction that would preclude Illini Corporation from completing itsacquisition of the Farmers State Bank of Camp Point (Camp Point), pendingfurther order of the Court.  Quinnsubsequently filed a Motion for Preliminary Injunction and a Memorandum of Lawin Support of her Motion.  Quinn arguedthat the class (consisting of all Illini Corporation’s shareholders as of April16, 1998, except for Ida R. Noll) would be irreparably harmed if the Camp Pointmerger closed prior to a determination on the merits of her suit.  Illini Corporation filed extensive briefs inopposition to the Motion for Preliminary Injunction, and the Court heard theMotion on July 1, 1999.  The Courtentered a written Order on July 13, 1999, denying the Motion for PreliminaryInjunction.

 

Quinn’s counselfiled a Motion for Reconsideration of the Orders denying Quinn’s Motion forSummary Judgment and Motion for Preliminary Injunction.  Illini Corporation and ISTC filed a Motionfor Summary Judgment on August 25, 1999. At a hearing held on October 18, 1999, the Court granted IlliniCorporation and ISTC’s Motion for Summary Judgment and denied Quinn’s Motionfor Reconsideration.  An Order wassubsequently entered on January 12, 2000.

 

Quinn’s counselannounced on October 18, 1999, the intention to petition the Court for an orderdirecting Illini Corporation and ISTC to pay Quinn’s attorneys’ fees pursuantto the attorney fee provision of the Rights Agreement.  Quinn’s fee petition was heard and denied.  Quinn filed a pending appeal as to all adverse orders.  On July 31, 2000, the Appellate Court issuedan order reversing the trial court’s order granting summary judgment to IlliniCorporation and remanding the case for trial. The Appellate Court found that genuine issue of material fact remainedconcerning whether the Illini Corporation board of directors acted in goodfaith (1) in determining on April 30, 1998 that Ida Noll’s acquisition ofshares was inadvertent and (2) in amending the agreement on June 30,1998.  The Appellate Court also reversedthe trial court’s order denying Quinn’s request

 

21

----

 

for costs, expenses and attorneys fees, finding that the fee provisionof the Rights Agreement did not require one who brought an action to enforcethe agreement to prevail in that action in order to recover fees..

 

The case has been remanded to the trial court. UponQuinn’s motion the trial court permitted Quinn to add Mrs. Noll as a party tothe action.  Quinn subsequently filed amotion to compel an additional deposition of Burnard K. McHone, President,Illini Corporation, with respect to a certain Stock Purchase Agreement pursuantto which shares owned by Mrs. Noll’s family were redeemed by IlliniCorporation.  The trial court denied themotion to compel finding that Quinn failed to show any basis that the StockPurchase Agreement was relevant to her claims in the lawsuit.  Defendants filed a motion to vacate thetrial court’s order to add Mrs. Noll as a party to the action.  The trial court vacated the prior order inDecember, 2001.  Illini anticipates thatthe case will be tried in 2002.  Quinnhas moved for recusal of the presiding judge on the grounds that the judge isallegedly prejudiced or biased against her. That motion was heard on August 9, 2002.  The granting of that motion would result in the reassignment ofthe case to a new judge, and, could result in the rescheduling of the trial toa later date.  Illini does not believethat grounds exist for removal of the judge and is opposing Quinn’smotion.  The Corporation will vigorouslydefend this lawsuit.

 

Mary Quinn v. Ida R. Noll, Burnard McHone, et al.

Sangamon County Case No. 01 CH 377

 

On August 14,2001, Mary Quinn filed a four count complaint against Ida Noll and severalpresent and former members of Illini Corporation’s Board of Directors in theSeventh Judicial Circuit, Sangamon County, Illinois.  The named defendants in the action are Ida Noll, Burnard McHone,William Etherton, Ronald Thunman, Thomas Black, John Pickrell, KennethDeverman, Larry Curtin, Robert Olson and William McCubbin. Quinn purports toallege derivative causes of action arising out of Illini entering into a StockPurchase Agreement with Ida R. Noll and others.  Quinn asserts that the defendants caused Illini to breach theShareholder Rights Agreement, that the directors breached their fiduciary duty,and usurped a business opportunity of the Shareholders.  Quinn also seeks rescission of the StockPurchase Agreement.  The directors namedas defendants in the action are represented by the law firm of Samuels, Miller,Schreoder, Jackson & Sly.  AttorneyJames Jackson of the Samuels Miller firm moved on behalf of the defendantdirectors to dismiss the complaint.  Themotion was granted in part and denied in part. Quinn thereafter moved to consolidate this suit with her previouslyfiled class action suit.  Illiniintervened for the purposes of opposing consolidation.  The court denied the motion to consolidateon July 25, 2002, and ordered the derivative suit stayed pending completion ofthe trial in the class action suit (98 CH 240) or further order.

 

Quinn seeksrecovery of her attorney’s fees in the derivative action pursuant to theattorney fee provision of the Shareholder Rights Agreement.

 

Item2     Changes in Securities - none

 

Item3     Defaults Upon Senior Securities – none

 

Item4     Submission of Matters to a Vote of SecurityHolders

The Annual Meeting ofShareholders of the Corporation was held on June 27, 2002, for the purpose ofelecting three directors each to serve a term of three years and ratifying theappointment of BKD,LLP (formerly known as Olive,LLP) as the Corporation’sindependent auditors for fiscal year ending December 31, 2002.  Proxies for the meeting were solicited bymanagement pursuant to Regulation 14A under Securities Exchange Act of 1934,and there was no solicitation in opposition to management’s solicitation.

 

22

----

 

 

Allthree of Management’s nominees for director listed in the proxy statement wereelected.  The results of the vote wereas follows:

 
|                |   | **Shares  Voted  “For”** |   | **Shares  “Withheld”** |   | **Broker  Non  Votes** |   |
|---------------------|--------|------------------------------------|--------|----------------------------------|--------|------------------------|--------|
| William N. Etherton |   | 330,569                            |   | 3,662                            |   | 57                     |   |
| Jesse Werner, Jr.   |   | 332,532                            |   | 1,699                            |   | 57                     |   |
| John H. Pickrell    |   | 326,567                            |   | 7,664                            |   | 57                     |   |

 

Theappointment of BKD, LLP (formerly know as Olive, LLP) as the Corporation’sauditors for the fiscal year ending December 31, 2002, was ratified.  The results of the vote were as follows:

 
|                     |   | **“For”** |   | **“Against”** |   | **“Abstain”** |   |
|--------------------------|--------|---------------------|--------|-------------------------|--------|-------------------------|--------|
| Ratification of BKD, LLP |   | 330,477             |   | 1,325                   |   | 2,429                   |   |

 

Item5     Other Information - none

 

Item 6                Exhibitsand Reports on Form 8-K

 
| (a)           Exhibits:             |
|---------------------------------------------------------------------------------------|
|                                                                                  | The  Exhibits filed herewith are set forth in the Exhibit Index filed as a part of  these Form 10-QSB. |
|                                                                                  |
| (b)           Reports on Form 8-K : |
| There  were no reports on Form 8-K filed for the quarter ended June 30, 2002.         |

 

23

----

 

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| Illini  Corporation       |                          |
|---------------------------|-------------------------------|
| (Registrant)              |                          |
|                      |                          |
|                      |                          |
| By:                       | /s/  Burnard K. McHone        |   | August  13, 2002 |   |
| Burnard  K. McHone        | Date  signed                  |
| President                 |                          |
|                      |                          |
|                      |                          |
| By:                       | /s/  George A. Rosenbaum, Jr. |   | August  13, 2002 |   |
| George  A. Rosenbaum, Jr. | Date  signed                  |
| Chief  Financial Officer  |                          |

 

24

----

 

**EXHIBIT INDEX**

 
| **Number** |   | **Description**                                                                                                                                                                                                                                                                  |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                             |
| 10.1       |   | Extension  Letter, “Agreement and Plan of Merger Among Illini Corporation (“Illini”),  Effingham Merger Corporation and Illinois Community Bancorp, Inc. (“ICBI”) dated  as of November 21, 2001 (the Merger Agreement”)”, dated May 8, 2002. |
|       |   |                                                                                                                                                                                                                                                                             |
| 99.1       |   | CEO  Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to  section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                             |
| 99.2       |   | CFO  Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to  section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                     |

 

25

----