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

**Washington, D.C. 20549**

 

**FORM 10-QSB**

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

 

**For quarterly period ended March31, 2003**

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

 

**Commission file number   0-13343**

 

**Illini Corporation**

(Exact name of small businessissuer 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

 

As of April 30, 2003, there were 411,701 shares of common stock, $0.01par value outstanding.

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

 

 

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**ILLINI CORPORATION**

INDEX TO FORM 10-QSB

March 31,2003

 
| **PART I.   FINANCIAL INFORMATION** |
|-----------------------------------------------|
|                                          |   |   |
|                                          | Item 1. | Financial Statements  (Unaudited) |
|                                          |   |   |
|                                          |   | Consolidated Balance Sheets  March 31, 2003 and December 31, 2002 |
|                                          |   |   |
|                                          |   | Consolidated  Statements of Income  Three Months Ended March 31, 2003 and 2002 |
|                                          |   |   |
|                                          |   | Consolidated  Statements of Shareholders’ Equity  Three Months Ended March 31, 2003 and 2002 |
|                                          |   |   |
|                                          |   | Consolidated  Statements of Comprehensive Income  Three Months Ended March 31, 2003 and 2002 |
|                                          |   |   |
|                                          |   | Consolidated  Statements of Cash Flows  Three Months Ended March 31, 2003 and 2002 |
|                                          |   |   |
|                                          |   | Notes  to Unaudited Consolidated Financial Statements |
|                                          |   |   |
|                                          | Item 2. | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                          |   |   |
|                                          | Item 3. | Controls and Procedures |
|                                          |   |   |
| **PART II.   OTHER INFORMATION**    |
|                                          |   |   |
| **SIGNATURES**                                |
|                                               |  |  |  |  |

 

----

 

**Information Concerning Forward-LookingStatements**

*Statementscontained in this Form 10-QSB which are not historical facts are“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.These statements involve important known and unknown risks, uncertainties andother factors and can be identified by phrases using “estimate,” “anticipate,”“believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,”“may,” “should” and similar expressions or words.  Such forward-looking statements are subject to risk anduncertainties which could cause actual results to differ materially from thoseprojected.  Such risks and uncertaintiesinclude potential change in interest rates, competitive factors in thefinancial services industry, general economic conditions, the effect of newlegislation and other risks detailed in documents filed by Illini Corporationwith the Securities and Exchange Commission from time to time.*

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**March 31, 2003 and December 31, 2002**

**Unaudited**

** **
|                                                                                                 |   | **March 31,  2003**         |        | **December  31,  2002** |       |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|-------------------------|------------|
|                                                                                                 |   | **(dollars  in thousands)** |        |
| **ASSETS**                                                                                           |   |                        |        |                    |       |
| Cash and due  from banks                                                                             |   | **$**                       | **6,846**   | ** **              | $          | 7,654 |   |
| Interest-bearing  deposits in other banks                                                            |   | **33**                      | ** **  | 33                      |       |
| Federal funds  sold                                                                                  |   | **21,339**                  | ** **  | 12,166                  |       |
| Cash and cash  equivalents                                                                           |   | **28,218**                  |        | 19,853                  |       |
| Securities  available for sale, at fair value                                                        |   | **41,297**                  | ** **  | 42,969                  |       |
| Loans, net of  the allowance for loan losses                                                         |   | **201,232**                 | ** **  | 207,366                 |       |
| Premises and  equipment                                                                              |   | **6,624**                   | ** **  | 6,681                   |       |
| Accrued interest  receivable                                                                         |   | **2,242**                   | ** **  | 2,346                   |       |
| Other real  estate owned                                                                             |   | **2,058**                   | ** **  | 787                     |       |
| Goodwill                                                                                             |   | **1,856**                   | ** **  | 1,856                   |       |
| Intangible  assets                                                                                   |   | **295**                     | ** **  | 312                     |       |
| Other assets                                                                                         |   | **465**                     | ** **  | 489                     |       |
| Total  Assets                                                                                   |   | **$**                       | **284,287** | ** **              | $          | 282,659 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                       |   |                        | ** **  |                    | ** ** |
| Noninterest-bearing  demand deposits                                                                 |   | **$**                       | **33,003**  | ** **              | **$**      | 35,110 | ** ** |
| Interest-bearing  deposits:                                                                          |   |                        | ** **  |                    |       |
| NOW and money  market accounts                                                                       |   | **57,241**                  | ** **  | 56,595                  |       |
| Savings deposits                                                                                     |   | **21,458**                  | ** **  | 19,938                  |       |
| Time deposits,  $100,000 and over                                                                    |   | **25,399**                  | ** **  | 22,794                  |       |
| Other time  deposits                                                                                 |   | **110,074**                 | ** **  | 110,397                 |       |
| Total deposits                                                                                       |   | **247,175**                 | ** **  | 244,834                 |       |
| Repurchase  agreements                                                                               |   | **661**                     | ** **  | 656                     |       |
| FHLB advances  and other borrowings                                                                  |   | **8,382**                   | ** **  | 8,395                   |       |
| Preferred  securities of subsidiary trust                                                            |   | **9,000**                   | ** **  | 9,000                   |       |
| Accrued interest  payable                                                                            |   | **1,157**                   | ** **  | 1,332                   |       |
| Other  liabilities                                                                                   |   | **2,431**                   | ** **  | 3,221                   |       |
| Total  liabilities                                                                                   |   | **268,806**                 | ** **  | 267,438                 |       |
|                                                                                                 |   |                        | ** **  |                    |       |
| **COMMITMENTS AND CONTINGENT  LIABILITIES**                                                          |   |                        | ** **  |                    | ** ** |
|                                                                                                 |   |                        | ** **  |                    |       |
| Shareholders’  equity                                                                           |   |                        | ** **  |                    |       |
| Preferred stock,  $0.01 par value, authorized and unissued 10,000,000 shares                         |   | **—**                  | ** **  | —                  |       |
| Common stock,  $0.01 par value, authorized 45,000,000 shares; 571,789 shares issued and  outstanding |   | **6**                       | ** **  | 6                       |       |
| Capital surplus                                                                                      |   | **9,070**                   | ** **  | 9,070                   |       |
| Retained  earnings                                                                                   |   | **12,132**                  | ** **  | 11,885                  |       |
| Accumulated  other comprehensive income                                                              |   | **1,477**                   | ** **  | 1,464                   |       |
| Less:  Treasury shares, at cost, 160,088 shares                                                 |   | **(7,204**                  | **)**       | (7,204                  | )          |
| Total  shareholders’ equity                                                                     |   | **15,481**                  | ** **  | 15,221                  |       |
| Total  Liabilities and Shareholders’ Equity                                                     |   | **$**                       | **284,287** | ** **              | $          | 282,659 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

3

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**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**Three MonthsEnded March 31, 2003 and 2002**

**(Unaudited)**

 
|                                                  |   | **2003**                                           |       | **2002**   |       |
|-------------------------------------------------------|--------|----------------------------------------------------|------------|------------|------------|
|                                                  |   | **(dollars  in thousands, except per share data)** |       |
| Interest income:                                      |   |                                               |       |       |       |
| Interest and  fees on loans                           |   | **$**                                              | **3,636**  | ** ** | $          | 3,959 |   |
| Interest on  securities:                              |   |                                               | ** ** |       | ** ** |
| Taxable                                               |   | **269**                                            | ** ** | 488        |       |
| Exempt from  federal income taxes                     |   | **232**                                            | ** ** | 195        |       |
| Interest on  short-term investments                   |   | **42**                                             | ** ** | 21         |       |
| Total interest  income                                |   | **4,179**                                          | ** ** | 4,663      |       |
| Interest  expense:                                    |   |                                               | ** ** |       |       |
| Interest on  deposits:                                |   |                                               | ** ** |       |       |
| NOW and money  market accounts                        |   | **183**                                            | ** ** | 284        |       |
| Savings deposits                                      |   | **49**                                             | ** ** | 67         |       |
| Time deposits,  $100,000 and over                     |   | **216**                                            | ** ** | 332        |       |
| Other time  deposits                                  |   | **1,055**                                          | ** ** | 1,110      |       |
| Interest on  repurchase agreements                    |   | **6**                                              | ** ** | 5          |       |
| Interest on FHLB  advances and other borrowings       |   | **97**                                             | ** ** | 144        |       |
| Interest on  preferred securities of subsidiary trust |   | **244**                                            | ** ** | 237        |       |
| Total interest  expense                               |   | **1,850**                                          | ** ** | 2,179      |       |
| Net interest  income                                  |   | **2,329**                                          | ** ** | 2,484      |       |
| Provision for  loan losses                            |   | **150**                                            | ** ** | 210        |       |
| Net interest  income after provision for loan losses  |   | **2,179**                                          | ** ** | 2,274      |       |
| Noninterest  income:                                  |   |                                               | ** ** |       |       |
| Service charges  on deposit accounts                  |   | **324**                                            | ** ** | 278        |       |
| Other fee income                                      |   | **131**                                            | ** ** | 81         |       |
| Mortgage loan  servicing fees                         |   | **(5**                                             | **)**      | 34         |       |
| Gains on sales  of mortgage loans                     |   | **57**                                             | ** ** | 18         |       |
| Gains (losses)  on sale of other real estate owned    |   | **5**                                              | ** ** | (4         | )          |
| Other                                                 |   | **26**                                             | ** ** | 31         |       |
| Total  noninterest income                             |   | **538**                                            | ** ** | 438        |       |
| Noninterest  expense:                                 |   |                                               | ** ** |       |       |
| Salaries and  employee benefits                       |   | **1,186**                                          | ** ** | 1,245      |       |
| Net occupancy  expense                                |   | **195**                                            | ** ** | 189        |       |
| Equipment  expense                                    |   | **61**                                             | ** ** | 81         |       |
| Data processing  fees                                 |   | **185**                                            | ** ** | 150        |       |
| Supplies expense                                      |   | **47**                                             | ** ** | 54         |       |
| Communication  and transportation expense             |   | **114**                                            | ** ** | 109        |       |
| Marketing and  advertising expense                    |   | **44**                                             | ** ** | 60         |       |
| Correspondent  and processing fees                    |   | **77**                                             | ** ** | 86         |       |
| Loan and other  real estate owned expense             |   | **35**                                             | ** ** | 19         |       |
| Professional  fees                                    |   | **153**                                            | ** ** | 161        |       |
| Regulatory fees                                       |   | **23**                                             | ** ** | 23         |       |
| Other                                                 |   | **152**                                            | ** ** | 124        |       |
| Total  noninterest expense                            |   | **2,272**                                          | ** ** | 2,301      |       |
| Income before  income tax expense                     |   | **445**                                            | ** ** | 411        |       |
| Income tax  expense                                   |   | **96**                                             | ** ** | 88         |       |
| Net income                                            |   | **$**                                              | **349**    | ** ** | $          | 323 |   |
| Basic and  diluted earnings per share                 |   | **$**                                              | **0.85**   | ** ** | $          | 0.78 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

4

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**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**Three MonthsEnded March 31, 2003 and 2002**

**(Unaudited)**

 
|                                              |   | **Three  Months Ended  March 31,** |       |
|---------------------------------------------------|--------|------------------------------------|------------|
|                                              |   | **2003**                           |       | **2002** |   |
|                                              |   | **(dollars  in thousands)**        |       |
| Common Stock                                      |   |                               |       |   |   |
| Beginning of  year balance                        |   | **$**                              | **6**      | ** ** | $ | 6 |   |
| End of period  balance                            |   | **6**                              | ** ** | 6 |   |
|                                              |   |                               | ** ** |   |   |
| Additional  Paid-in Capital                       |   |                               | ** ** |   |   |
| Beginning of  year balance                        |   | **9,070**                          | ** ** | 9,070 |   |
| End of period  balance                            |   | **9,070**                          | ** ** | 9,070 |   |
|                                              |   |                               | ** ** |   |   |
| Retained  Earnings                                |   |                               | ** ** |   |   |
| Beginning of  year balance                        |   | **11,885**                         | ** ** | 10,775 |   |
| Net income                                        |   | **349**                            | ** ** | 323 |   |
| Dividends on  common stock                        |   | **(102**                           | **)**      | (103 | ) |
| End of period  balance                            |   | **12,132**                         | ** ** | 10,995 |   |
|                                              |   |                               | ** ** |   |   |
| Treasury Stock                                    |   |                               | ** ** |   |   |
| Beginning of  year balance                        |   | **(7,204**                         | **)**      | (7,204 | ) |
| End of period balance                             |   | **(7,204**                         | **)**      | (7,204 | ) |
|                                              |   |                               | ** ** |   |   |
| Accumulated  Other Comprehensive Income (Loss)    |   |                               | ** ** |   |   |
| Beginning of  year balance                        |   | **1,464**                          | ** ** | 943 |   |
| Unrealized gain  (loss) on securities, net of tax |   | **13**                             | ** ** | (8 | ) |
| End of period  balance                            |   | **1,477**                          | ** ** | 935 |   |
|                                              |   |                               | ** ** |   |   |
| Total  Shareholders’ Equity                  |   | **$**                              | **15,481** | ** ** | $ | 13,802 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

 

**ILLINICORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**Three MonthsEnded March 31, 2003 and 2002**

**(Unaudited)**

 
|                                                                                                                  |   | **Three Months  Ended  March 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                                  |   | **2003**                           |       | **2002** |   |
|                                                                                                                  |   | **(dollars  in thousands)**        |       |
| Net Income                                                                                                            |   | **$**                              | **349**    | ** ** | $ | 323 |   |
| Other  comprehensive income, unrealized gains (losses) on securities, net of  reclassification adjustment, net of tax |   | **13**                             | ** ** | (8 | ) |
| Comprehensive  income                                                                                                 |   | **$**                              | **362**    | ** ** | $ | 315 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

5

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Three Months Ended March 31, 2003 and2002**

**(Unaudited)**

 
|                                                                               |   | **2003**                    |       | **2002**   |   |
|------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                                               |   | **(dollars  in thousands)** |       |
| Cash flows from  operating activities:                                             |   |                        |       |       |   |
| Net income                                                                         |   | **$**                       | **349**    | ** ** | $      | 323 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                        | ** ** |       |   |
| Depreciation and  amortization                                                     |   | **191**                     | ** ** | 214        |   |
| Amortization of  intangible assets                                                 |   | **17**                      | ** ** | 30         |   |
| Provision for  loan losses                                                         |   | **150**                     | ** ** | 210        |   |
| Security  amortization (accretion), net                                            |   | **37**                      | ** ** | (7         | )      |
| Federal Home  Loan Bank stock dividend                                             |   | **(21**                     | **)**      | (10        | )      |
| Gains on sales  of mortgage loans                                                  |   | **(57**                     | **)**      | (18        | )      |
| (Gains) loss on  sale of other real estate owned                                   |   | **(5**                      | **)**      | 4          |   |
| (Increase)  decrease in accrued interest receivable                                |   | **104**                     | ** ** | (167       | )      |
| Decrease in  accrued interest payable                                              |   | **(175**                    | **)**      | (238       | )      |
| Origination of  secondary market mortgage loans                                    |   | **(4,791**                  | **)**      | (1,287     | )      |
| Proceeds from  the sales of secondary market mortgage loans                        |   | **5,182**                   | ** ** | 1,357      |   |
| Other, net                                                                         |   | **(774**                    | **)**      | 425        |   |
| Net cash  provided by operating activities                                         |   | **207**                     | ** ** | 836        |   |
| Cash flows from  investing activities:                                             |   |                        | ** ** |       |   |
| Proceeds from  maturities and paydowns of securities available for sale            |   | **5,598**                   | ** ** | 5,245      |   |
| Purchases of  securities available for sale                                        |   | **(3,921**                  | **)**      | (2,642     | )      |
| Net (increase)  decrease in loans                                                  |   | **4,081**                   | ** ** | (14,429    | )      |
| Purchases of  premises and equipment                                               |   | **(134**                    | **)**      | (265       | )      |
| Proceeds from  sales of other real estate owned                                    |   | **303**                     | ** ** | 15         |   |
| Net cash  provided by (used in) investing activities                               |   | **5,927**                   | ** ** | (12,076    | )      |
| Cash flows from  financing activities:                                             |   |                        | ** ** |       |   |
| Net increase  (decrease) in noninterest-bearing demand deposits                    |   | **(2,107**                  | **)**      | 990        |   |
| Net increase in  NOW, money market accounts and savings deposits                   |   | **2,166**                   | ** ** | 705        |   |
| Net increase  (decrease) in time deposits, $100,000 and over                       |   | **2,605**                   | ** ** | (2,214     | )      |
| Net increase  (decrease) in other time deposits                                    |   | **(323**                    | **)**      | 8,943      |   |
| Net increase  (decrease) in repurchase agreements and federal funds purchased      |   | **5**                       | ** ** | (447       | )      |
| Proceeds of FHLB  advances and other borrowings                                    |   | **—**                  | ** ** | 2,400      |   |
| Repayment of  FHLB advances and other borrowings                                   |   | **(13**                     | **)**      | (2,471     | )      |
| Cash dividends  paid                                                               |   | **(102**                    | **)**      | (103       | )      |
| Net cash  provided by financing activities                                         |   | **2,231**                   | ** ** | 7,803      |   |
|                                                                               |   |                        | ** ** |       |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | **8,365**                   | ** ** | (3,437     | )      |
|                                                                               |   |                        | ** ** |       |   |
| Cash and cash  equivalents at beginning of period                                  |   | **19,853**                  | ** ** | 15,585     |   |
|                                                                               |   |                        | ** ** |       |   |
| Cash and cash  equivalents at end of period                                        |   | **$**                       | **28,218** | ** ** | $      | 12,148 |   |
| Supplemental  Information:                                                         |   |                        | ** ** |       |   |
| Income taxes  paid                                                                 |   | **$**                       | **20**     | ** ** | $      | 120 |   |
| Interest paid                                                                      |   | **$**                       | **2,025**  | ** ** | $      | 2,417 |   |
| Other non-cash  investing activities:                                              |   |                        | ** ** |       |   |
| Transfer of  loans to other real estate owned                                      |   | **$**                       | **1,569**  | ** ** | $      | 570 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

6

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**ILLINI CORPORATION AND SUBSIDIARIES**

**Notes to Unaudited Consolidated Financial Statements**

**March 31, 2003**

 

(1)                                  Basis of Presentation

 

The accompanying unaudited 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 consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  For further information, refer to theconsolidated financial statements and footnotes included in the IlliniCorporation (“Corporation”) Annual Report on Form 10-KSB for the year endedDecember 31, 2002.  Certain amounts inthe 2002 consolidated financial statements have been reclassified to conform tothe 2003 presentation.  Suchreclassifications have no effect on previously reported consolidated net incomeor shareholders’ equity.  Theconsolidated balance sheet of the Corporation as of December 31, 2002 has beenderived from the audited consolidated balance sheet of the Corporation as ofthat date.

 

Results for the three months ended March 31, 2003 may not be indicativeof the annual performance of Illini Corporation or the subsidiary banks, IlliniBank and Farmers State Bank of Camp Point (“the subsidiary banks”).  Management of the Corporation has made estimatesand assumptions relating to the reporting of assets and liabilities and thedisclosure of contingent assets and liabilities to prepare the interimconsolidated financial statements (unaudited) in conformity with accountingprinciples generally accepted in the United States of America.  Actual results could differ from thoseestimates.

 

(2)                                  Earningsper Common Share

 

Earnings per share represents income available tocommon shareholders divided by the weighted average number of sharesoutstanding during the period.  TheCompany has no common equivalent shares that could cause dilution.  The following information was used in thecomputation of basic and diluted earnings per share.

 

 
|                                        |   | **Three  Months Ended  March 31,**                 |       |
|---------------------------------------------|--------|----------------------------------------------------|------------|
|                                        |   | **2003**                                           |       | **2002** |   |
|                                        |   | **(dollars  in thousands, except per share data)** |       |
|                                        |   |                                               | ** ** |   | ** ** |
| Net Income                                  |   | **$**                                              | **349**    |   | $ | 323 |   |
|                                        |   |                                               | ** ** |   | ** ** |
| Weighted average  common shares outstanding |   | **411,701**                                        |       | 411,701 |   |
|                                             |        |                                                    |            |  |  |  |  |

 

7

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(3)                                  PendingAcquisition

 

Illini Corporation executed adefinitive agreement and plan of merger to acquire all of the outstanding stockof Illinois Community Bancorp, Inc (“ICBI”) through the merger of ICBI with awholly owned subsidiary of Illini Corporation.

 

Under the terms of the mergeragreement, ICBI’s shareholders would receive .2126 shares of common stock ofthe Illini Corporation in exchange for each share of ICBI common stock.  In the event that certain loan contingenciesare resolved prior to closing, the exchange ratio may be increased to up to..2472 shares of Illini Corporation in exchange for each share of ICBI stock.

 

As of December 31, 2001, ICBI hadtotal assets of $57 million, total liabilities of $53.7 million and totalequity of $3.3 million.  For the yearended December 31, 2001, ICBI had a net loss of $1.8 million.

 

In conjunction with the merger, ICBIrequested that Illini Corporation provide funds to pay certain liabilities ofICBI and expenses related to the transaction. Illini Corporation provided a direct loan to ICBI for these items.  The loan is secured by 100% of the commonstock of Illinois Community Bank (subsidiary bank of ICBI), bears interest atthe rate of 7% and is on a demand basis. As of December 31, 2002 the balance of the note was $481,648.  In addition, Illini Corporation advancedfunds on behalf of ICBI for certain accounting and legal matters related to themerger.  As of December 31, 2002 andMarch 31, 2003, the receivable was approximately $126,000.

 

The original agreement provided thateither party could terminate the agreement any time after May 31, 2002 ifcertain prior approvals were not obtained or it could be terminated by eitherparty after August 31, 2002 if the merger were not completed.  Prior to May 31, 2002, the parties agreed tomodify the agreement and change the respective dates to May 31, 2003 and August31, 2003.  On December 23, 2002 theFederal Reserve Board of Governors denied the merger application.  Illini Corporation subsequently filed anappeal with the Board of Governors for reconsideration.  The Corporation was notified the appeal wasdenied.  The parties are currentlyevaluating the implications of this denial.

 

(4)                                  Use of Estimates in the Preparation of FinancialStatements

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenues andexpenses during the reported period. Actual results could differ from those estimates.  A significant estimate that is particularlysensitive to change is the allowance for loan losses.

 

(5)                                  Subsequent Events

 

On April 21, 2003,the FDIC and the Office of Banks and Real Estate (OBRE), jointly, commenced aregularly scheduled examination of the bank subsidiaries which is not yetcompleted.  The ongoing examination hasinvolved a review of various processes as well as loan relationships.  As the exam is not completed, there can beno assurance that the FDIC and OBRE will not identify items, which may have animpact on the financial statements of the Company.

 

8

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

 

**THREE MONTHSENDED MARCH 31, 2003**

 

**SELECTEDFINANCIAL RESULTS**

 

The following table shows selected financial results and measures forthe three months ended March 31, 2003 compared with the same period in 2002.

 
|                            |   | **Three  Months Ended March 31,** |       |
|---------------------------------|--------|-----------------------------------|------------|
|                            |   | **2003**                          |       | **2002** |   | **Change** |   | **Change-  %** |   |
|                            |   | **(dollars  in thousands)**       |       |
| Net income                      |   | **$**                             | **349**    | ** ** | $ | 323 |   | $ | 26 |   | 8.1 | % |
| Average assets                  |   | **280,400**                       | ** ** | 278,888 |   | 1,512 |   | 0.5 | % |
| Average equity                  |   | **15,528**                        | ** ** | 13,970 |   | 1,558 |   | 11.2 | % |
| Return on assets                |   | **0.50**                          | **%**      | 0.47 | % | 0.03 | % | 6.4 | % |
| Return on equity                |   | **9.12**                          | **%**      | 9.37 | % | -0.25 | % | -2.7 | % |
| Efficiency ratio                |   | **76.28**                         | **%**      | 75.95 | % | 0.33 | % | 0.4 | % |
| Dividend payout  ratio          |   | **29.49**                         | **%**      | 31.90 | % | -2.41 | % | -7.6 | % |
| Equity to assets  ratio         |   | **5.54**                          | **%**      | 5.01 | % | 0.53 | % | 10.6 | % |
| Tier 1 leverage  ratio          |   | **5.93**                          | **%**      | 5.40 | % | 0.53 | % | 9.8 | % |
| Total risk-based  capital ratio |   | **10.84**                         | **%**      | 9.80 | % | 1.04 | % | 10.6 | % |
|                                 |        |                                   |            |  |  |  |  |  |  |  |  |  |

 

Definitions of ratios:

Return on assets - annualized net income divided by average assets.

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

Efficiency ratio - noninterest expense divided by noninterest incomeplus taxable equivalent net interest income.

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

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

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

Total risk-based capital ratio - Total risk based capital divided bytotal risk weighted assets.

 

The Corporation recorded net income of $349,000 for the three months endedMarch 31, 2003.  The return on averageequity decreased to 9.1% for the three months ended March 31, 2003 as comparedto 9.4% for the same period ended March 31, 2002.  Basic earnings per share for the three months ended March 31,2003 was $0.85 per share versus $0.78 for the same quarter in 2002.  This represents an increase of 9.0%.

 

**RESULTS OFOPERATIONS**

 

This discussion should be read in conjunction with the consolidatedfinancial statements, notes, and tables included elsewhere in this report and inthe 2002 Illini Corporation Annual Report on Form 10-KSB (2002 Form 10-KSB).

 

Net Interest Income

 

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

 

9

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

 
|                                             |   | **Three  months ended March 31,** |        |
|--------------------------------------------------|--------|-----------------------------------|-------------|
|                                             |   | **2003**                          |        | **2002** |   |
|                                             |   | **Average  Balance**              |        | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                             |   |                              |        |   |   |   |   |
|                                             |   |                              |        |   |   |   |   |
|                                             |   | **(dollars  in thousands)**       |        |
| **ASSETS**                                       |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                        |   |                              |        |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                          |   | **$**                             | **14,742**  | ** ** | **$** | **42** | ** ** | **1.15** | **%** | $ | 5,276 |   | $ | 21 |   | 1.59 | % |
| Investment  securities (3)                       |   |                              | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Taxable                                          |   | **23,071**                        | ** **  | **269** | ** ** | **4.66** | ** ** | 34,220 |   | 488 |   | 5.71 |   |
| Tax-exempt (1)                                   |   | **15,979**                        | ** **  | **336** | ** ** | **8.42** | ** ** | 13,451 |   | 283 |   | 8.41 |   |
| Total securities                                 |   | **39,050**                        | ** **  | **605** | ** ** | **6.20** | ** ** | 47,671 |   | 771 |   | 6.47 |   |
| Loans                                            |   |                              | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Commercial (1)                                   |   | **39,656**                        | ** **  | **665** | ** ** | **6.80** | ** ** | 46,012 |   | 855 |   | 7.54 |   |
| Agriculture                                      |   | **16,206**                        | ** **  | **222** | ** ** | **5.56** | ** ** | 15,707 |   | 231 |   | 5.97 |   |
| Real estate                                      |   |                              | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Commercial                                       |   | **100,325**                       | ** **  | **1,784** | ** ** | **7.21** | ** ** | 92,394 |   | 1,789 |   | 7.85 |   |
| Agriculture                                      |   | **6,717**                         | ** **  | **129** | ** ** | **7.78** | ** ** | 6,853 |   | 136 |   | 8.02 |   |
| Residential                                      |   | **35,388**                        | ** **  | **614** | ** ** | **7.04** | ** ** | 33,291 |   | 666 |   | 8.11 |   |
| Consumer, net                                    |   | **8,686**                         | ** **  | **193** | ** ** | **9.02** | ** ** | 12,594 |   | 270 |   | 8.69 |   |
| Credit card                                      |   | **814**                           | ** **  | **35** | ** ** | **17.45** | ** ** | 848 |   | 33 |   | 15.99 |   |
| Total loans                                      |   | **207,792**                       | ** **  | **3,642** | ** ** | **7.11** | ** ** | 207,699 |   | 3,980 |   | 7.77 |   |
| Allowance for  loan losses                       |   | **(2,552**                        | **)**       |   |   |   | ** ** | (2,203 | ) |   |   |   |   |
| Net loans (1)  (2)                               |   | **205,240**                       | ** **  | **3,642** | ** ** | **7.20** | ** ** | 205,496 |   | 3,980 |   | 7.86 |   |
| Total interest-earning  assets                   |   | **259,032**                       | ** **  | **4,289** | ** ** | **6.71** | ** ** | 258,443 |   | 4,772 |   | 7.49 |   |
| Other assets                                     |   | **21,368**                        | ** **  |   | ** ** |   | ** ** | 20,445 |   |   |   |   |   |
| Total assets                                     |   | **$**                             | **280,400** | ** ** |   | ** ** |   | ** ** | $ | 278,888 |   |   |   |   |   |
| **LIABILITIES**                                  |   |                              | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |   |                              | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Deposits:                                        |   |                              | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Interest-bearing  demand                         |   | **$**                             | **57,722**  | ** ** | **$** | **183** | ** ** | **1.29** | **%** | $ | 58,376 |   | $ | 284 |   | 1.97 | % |
| Savings                                          |   | **20,576**                        | ** **  | **49** | ** ** | **0.97** | ** ** | 18,450 |   | 67 |   | 1.47 |   |
| Time deposits  less than $100,000                |   | **110,291**                       | ** **  | **1,055** | ** ** | **3.88** | ** ** | 102,765 |   | 1,110 |   | 4.38 |   |
| Time deposits $100,000  and over                 |   | **23,897**                        | ** **  | **216** | ** ** | **3.67** | ** ** | 30,924 |   | 332 |   | 4.35 |   |
| Total  interest-bearing deposits                 |   | **212,486**                       | ** **  | **1,503** | ** ** | **2.87** | ** ** | 210,515 |   | 1,793 |   | 3.45 |   |
| Short-term  borrowings                           |   | **657**                           | ** **  | **6** | ** ** | **3.40** | ** ** | 722 |   | 5 |   | 2.78 |   |
| Long-term  borrowings                            |   | **8,382**                         | ** **  | **97** | ** ** | **4.70** | ** ** | 8,447 |   | 144 |   | 6.93 |   |
| Preferred  securities of trust subsidiary (4)    |   | **9,000**                         | ** **  | **244** | ** ** | **10.98** | ** ** | 9,000 |   | 237 |   | 10.53 |   |
| Total  interest-bearing liabilities              |   | **230,525**                       | ** **  | **1,850** | ** ** | **3.25** | ** ** | 228,684 |   | 2,179 |   | 3.86 |   |
| Other  liabilities                               |   | **34,347**                        | ** **  |   | ** ** |   | ** ** | 36,234 |   |   |   |   |   |
| Shareholders’ equity                        |   | **15,528**                        | ** **  |   | ** ** |   | ** ** | 13,970 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | **$**                             | **280,400** | ** ** |   | ** ** |   | ** ** | $ | 278,888 |   |   |   |   |   |
| **Net interest margin**                          |   |                              | ** **  | **$** | **2,439** |   | **3.82** | **%** |   |   | $ | 2,593 |   | 4.07 | % |

 

----

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

(2)                      Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $115,000 in 2003 and $88,000in 2002.

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

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

 

10

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Net interestmargin is a measure of the net return on interest-earning assets and iscomputed by dividing annualized net interest income by the average of totalinterest-earning assets for the period.

 

Fluctuations innet interest income can result from the changes in the volumes of assets andliabilities as well as changes in interest rates.  In November 2002, the Federal Reserve dropped the target rate forFederal funds by 50 basis points.  Noaction has been taken by the Federal Reserve in the first quarter of 2003.

 

**FINANCIAL CONDITION**

 

Average earningassets of the Corporation for the first three months of 2003 increased 0.2% or$0.6 million to $259.0 million from $258.4 million at March 31, 2002.

 

Average net loans decreased slightly to $205.2 million for the threemonths ended March 31, 2003 compared to $205.5 million for the same period in2002.  The overall average loanportfolio volume has remained relatively constant between the two periods.  In comparing the two periods, the portfoliohas the following noteworthy changes in average balances:  commercial loans down $6.3 million,commercial real estate up $7.9 million, residential real estate up $2.1 millionand consumer loans down $3.9 million. The average yield on the loan portfolio, net of the allowance for loanlosses, decreased 66 basis points to 7.20% for the three months ended March 31,2003, compared to 7.86% for the three months ended March 31, 2002.  The decrease in average yields for the threemonth period is due to lower interest rates and adjustable rate loans repricingdownward.

 

Average securities decreased $8.6 million for the three months endedMarch 31, 2003, as compared to the same period in 2002.  The decrease is primarily offset by $9.4million increase in short-term investments. A significant portion of the decline in the investment portfolio isrelated to the rapid repayment of the mortgage-backed securities.  Management has opted to increase the liquidityposition, and maintain a rather conservative investment strategy given thecurrent interest rate environment.  Theaverage yield of the securities portfolio was 6.20% for the three months endedMarch 31, 2003, a decrease of 27 basis points as compared to the same period in2002.

 

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 thethree months ended March 31, 2003 increased 4.0% or $8.5 million to $220.9million from $212.4 million for the three months ended March 31, 2002.  The average rate paid on total interest bearingliabilities for the three months ended March 31, 2003 decreased 61 basis pointsto 3.25% when compared to 3.86% for the three months ended March 31, 2002.

 

The small increase in average core deposits for the three months endedMarch 31, 2003 as compared to the same period in 2002 demonstrates a local,stable funding source for the banks activities.

 

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.

 

During the three months ended March 31, 2003, other real estate ownedincreased $1,271,000 or 161.5% from December 31, 2002.  This net increase was reported as IlliniBank moved a loan secured by two golf course properties into other real estateowned and also disposed of a commercial property from other real estate owned.More information regarding the changes between nonperforming loans and otherreal estate owned can be found in the Credit Quality section of this document.

 

11

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Noninterest Income

 

The noninterest income increased $100,000 or approximately 22.8% forthe three months ended March 31, 2003, when compared to the same period in2002.  The increase in noninterestincome is primarily related to a $46,000 increase in service charges on depositaccounts and a $50,000 increase in other fee income.  The other fee income increase relates to an application fee onresidential real estate loans that was instituted in the fourth quarter of2002. These fees in the first quarter of 2003 amounted to $31,800.

 

Noninterest Expense

 

In comparing the three months ended March 31, 2003 to March 31, 2002,noninterest expense declined $29,000 or 1.3%. There were no significant changes in any individual component ofnoninterest expense.

 

The provision for loan losses was $150,000 for thethree months ended March 31, 2003 versus $210,000 for the same period in2002.  The $60,000 decline represents a dropof 28.6%.  The allowance for loan lossesis increased by provisions charged to operations and is available to absorbloan losses.  Loan losses are chargedagainst the allowance when management believes and confirms that the loanbalance is not collectable. Subsequent recoveries, if any, are credited to theallowance.  Illini Corporation utilizesa systematic, documented approach in determining the appropriate level of theallowance for loan losses.  Management’sapproach, which provides for general and specific allowances, is based oncurrent economic conditions, past loan losses, collection experience, riskcharacteristics of the portfolio, assessing collateral values by obtainingindependent appraisals for significant properties, results of regulatoryexaminations, and such other factors which, in management’s judgment, deserverecognition in estimating loan losses.

 

Management believes the allowance for loan losses isadequate to absorb probable incurred losses in the loan portfolio.  While management uses available informationto recognize losses on loans, future additions to the allowance for loan lossesmay be necessary based on changes in economic conditions.

 

**CREDIT QUALITY**

 

Gross loans totaled $203.5 million at March 31, 2003, a decrease of$6.3 million, or 3.0%, from $209.8 million at December 31, 2002.  The provision for loan losses has decreasedto $150,000 for the three months ended March 31, 2003 as compared to $210,000for the same period in 2002.  At March31, 2003 the allowance as a percent of total loans was 1.13% as compared to1.18% and 1.08% as of December 31, 2002 and March 31, 2002, respectively.  The decrease in the ratio is primarily aresult of the charge-offs taken in the first quarter of 2003.  Based on the inherent risk in the loanportfolio, management believes that as of March 31, 2003, the allowance forloan losses is adequate.

 
|                             |   | **Three  months ended  March 31,** |        |
|----------------------------------|--------|------------------------------------|-------------|
|                             |   | **2003**                           |        | **2002** |   |
|                             |   | **(dollars  in thousands)**        |        |
| **Allowance for Loan Losses:**   |   |                               |        |   |   |
| Balance at  beginning of period  |   | **$**                              | **2,468**   | ** ** | $ | 2,103 |   |
|                             |   |                               | ** **  |   |   |
| Charge-offs                      |   | **(363**                           | **)**       | (21 | ) |
| Recoveries                       |   | **41**                             | ** **  | 6 |   |
| Net charge-offs                  |   | **(322**                           | **)**       | (15 | ) |
|                             |   |                               | ** **  |   |   |
| Provision  charged to operations |   | **150**                            | ** **  | 210 |   |
| Balance at end  of period        |   | **$**                              | **2,296**   | ** ** | $ | 2,298 |   |
| Average loans  outstanding       |   | **$**                              | **207,792** | ** ** | $ | 207,699 |   |

 

12

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IlliniCorporation’s primary business of making commercial, real estate, and consumerloans entails potential losses, the magnitude of which depends on a variety ofeconomic factors affecting borrowers, which are beyond the control of theCorporation.  Accordingly, a significantfactor in the Corporation’s past and future operating results is the level ofthe provision for loan losses*. *Netcharge-offs increased to $322,000 for the three months ended March 31, 2003, ascompared to $15,000 for the comparable period in the prior year.  Of the $322,000 of net charge-offs in firstquarter 2003, $317,000 was related to one commercial loan that carried a 100%allocation in the computation of the allowance for loan losses.

 
| **Credit  Quality**                 |   | **March 31,  2003**         |       | **December  31,  2002** |       | **March 31,  2002** |       |
|-------------------------------------|--------|-----------------------------|------------|-------------------------|------------|---------------------|------------|
|                                |   | **(dollars  in thousands)** |       |
| **Nonperforming assets:**           |   |                        |       |                    |       |                |       |
| Accruing loans  past due 90 days    |   | **$**                       | **3**      | ** **              | $          | 23                  |       | $ | 22 |   |
| Nonaccrual                          |   | **3,391**                   | ** ** | 4,901                   |       | 4,169               |       |
| Renegotiated                        |   | **623**                     | ** ** | —                  |       | —              |       |
| Other real  estate owned            |   | **2,058**                   | ** ** | 787                     |       | 921                 |       |
| Total  nonperforming assets         |   | **$**                       | **6,075**  | ** **              | $          | 5,711               |       | $ | 5,112 |   |
|                                |   |                        | ** ** |                    |       |                |       |
| **Key ratios**:                     |   |                        | ** ** |                    | ** ** |                | ** ** |
| Nonperforming  loans to loans       |   | **1.97**                    | **%**      | 2.35                    | %          | 1.97                | %          |
| 90 days  delinquent to ending loans |   | **0.00**                    | ** ** | 0.01                    |       | 0.01                |       |
| Allowance to  total loans           |   | **1.13**                    | ** ** | 1.18                    |       | 1.08                |       |
| Allowance to  nonperforming loans   |   | **57.16**                   | ** ** | 50.11                   |       | 54.83               |       |

 

At March 31, 2003, impaired loans totaled $4.3 million, including $3.4million of loans on nonaccrual and $931,000 of impaired loans past due less than90 days, compared to $4.9 million of loans on nonaccrual and $0, which wereimpaired and past due less than 90 days, at December 31, 2002.  Nonperforming assets have increased $364,000from December 31, 2002.  As noted in theCorporation’s 2002 Form 10-KSB and prior filings, the nonaccrual loan balancehas continued to increase.  The declinein nonaccrual balances in the first quarter of 2003 is related to thesubsidiary bank acquiring title to certain real estate assets and moving themto “other real estate owned”.  Thetransfer of title to the bank subsidiary allows the bank to initiate the saleof the property.  This is necessary todispose of the property and close the transaction.

 

The Company has other potential problem loans that are currently performing,but where some concerns exist as to the ability of the borrower to comply withpresent loan repayment terms.  Excludingnonperforming loans and impaired loans, these loans totaled $9,793,000 at March31, 2003.  The classification of theseloans, however, does not imply that management expects losses on each of theseloans, but believes that a higher level of scrutiny and close monitoring isprudent under the circumstances.  Suchclassifications relate to specific concerns for each individual borrower and donot relate to any concentration risk common to all loans in this group.

 

Illini Corporation’s loan underwriting guidelines and credit reviewprocedures and policies are designed to protect the Corporation from creditlosses.  Illini Corporation’s processfor monitoring loan quality includes detailed monthly trend analysis ofdelinquencies and nonperforming assets. Management extensively monitorssignificant credit relationships through appraisals, assessment of thefinancial condition of borrowers, restrictions on out-of-area lending, andavoidance of loan concentrations.

 

As discussed in the Corporation’s 2002 Form 10-KSB and previous Form10-QSB reports, management has implemented several initiatives to improvecredit quality.  These steps included anofficer driven problem loan

 

13

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identification system, a revamped allowance for loan losses adequacydetermination process, a new loan policy, and improved reporting systems(credit quality and production). Management is committed to continuing these initiatives and hassupplemented these efforts in 2003 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 historicallysatisfied its capital requirements principally through the retention ofearnings.

 

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

 
|                                                   |   | **Regulatory  requirements  to be:** |   | **Actual  Regulatory Capital Ratios** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|
|                                                   |   | **Adequately  Capitalized**          |   | **Well-  Capitalized**                |   | **March 31,  2003** |   | **December  31,  2002** |   |
| Total risk-based  capital as % of risk-weighted assets |   | 8.0                                  | %      | 10.0                                  | %      | 10.8 | % | 10.6 | % |
| Tier 1 capital  as % of risk-weighted assets           |   | 4.0                                  | %      | 6.0                                   | %      | 7.7 | % | 7.4 | % |
| Tier 1 capital  as % quarterly average assets          |   | 4.0                                  | %      | 5.0                                   | %      | 5.9 | % | 5.8 | % |

 

Risk-based capital guidelines require the classification of assets andsome off-balance items in terms of credit-risk exposure and the measuring ofcapital as a percentage of the risk adjusted assets totals.  Management believes, and data in the abovetable show that, as of March 31, 2003 and December 31, 2002 the Company met allcapital adequacy requirements to which it is subject.  As of those dates, the Corporation’s subsidiary banks were “wellcapitalized” under regulatory prompt corrective action provisions.

 

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 threemonths ended March 31, 2003 was 29.5% as compared to 31.9% for the three monthsended March 31, 2002. The $0.25 dividend per share for the three months endedMarch 31, 2003 is unchanged from the same period in 2002.

 

As discussed in the Corporation’s 2002 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 ofMarch 31, 2003, the portion eligible for inclusion in the Tier 1 computationamounted to approximately $4.7 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 2002 Form10-KSB, beginning on page 15.

 

14

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

 

Illini Corporation uses a comprehensive analysis of its asset/liabilityfunction, including a review of its funds management policy and its principalmeasure of liquidity.  The Corporationutilizes a liquidity measurement, called “Basic Surplus,” which redefines liquidassets as the total available assets held by the Corporation which can beconverted to cash in thirty days or less, reduced by short termliabilities.  As of March 31, 2003, themost recent calculation, Illini Corporation’s core liquidity was $26.4 million,or 9.3% of total average assets.

 

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

 

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

 

Based upon anevaluation within the 90 days prior to the filing date of this report, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect the Company’s internal controls subsequent to the date of theevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

**PART II.  OTHERINFORMATION**

 

Item 1    Legal Proceedings 

 

Mary Quinn v.Illini Corporation and Illinois Stock Transfer Co.,

Sangamon County Case No. 98 CH 240

 

The case was filed in 1998 by a shareholder of IlliniCorporation against Illinois Stock Transfer Company, as Rights Agent for IlliniCorporation under Illini Corporation’s Shareholder Rights Agreement (the“Rights Agreement”), for specific performance of the Rights Agreement, bothindividually and on behalf of a class of Illini Corporation shareholders.  The complaint alleges that the RightsAgreement was triggered in April of 1998, and that the Rights Agent has a dutyunder the Rights Agreement to distribute Rights Certificates to theshareholders of Illini Corporation. Illini Corporation was added as a Defendant in 1999, and the class hasbeen certified.  Plaintiff seeks torecover her attorneys’ fees from Illini Corporation in addition to the otherrelief sought.  In January of 2000, thetrial court entered Summary Judgement in favor of Illini Corporation andIllinois Stock Transfer Company.  Plaintiffappealed this ruling denying Plaintiff’s summary judgement motion to the IllinoisAppellate Court.  The Appellate Courtreversed the Summary Judgement for Defendants and remanded the case for trialon the issue of whether the Illini Corporation Board of Directors acted in goodfaith in determining that a shareholder’s acceptance of a gift of IlliniCorporation Stock did not trigger the Rights Amendment and later, in IlliniCorporation’s later amendment of the Rights Agreement.  The Appellate Court further ruled thePlaintiff’s attorneys’ fees were recoverable under the Rights Agreement.  After a series of unsuccessful motions filedby the plaintiff’s counsel, Illini Corporation entered a motion to remove theplaintiff’s counsel.  The court removedthe counsel for the plaintiff class and appointed new counsel to represent

 

15

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the class.  Theremoved counsel filed a motion for reconsideration, which was denied.  The new counsel filed a Motion For Directionto remove the class representative, which was granted on January 15, 2003.  On March 7, 2003 the trial court appointed asuccessor class representative.  IlliniCorporation is negotiating for a settlement of the suit with the new classrepresentative and class counsel.  Theformer class representative filed a motion to opt out of the class.  Quinn’s Motion to Opt Out or VoluntarilyDismiss was denied.  Quinn has now fileda motion to intervene as plaintiff in the class suit.  That motion is scheduled for hearing on June 5, 2003.  Illini will vigorously oppose.

 

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

Sangamon County Case No. 01 CH 377

 

The case was filed in August of 2001 by a shareholder against a formershareholder and several present and former directors of IlliniCorporation.  The complaint purports tobring a derivative cause of action arising out of the redemption of the sharesof the former shareholder, which is alleged to have caused the defendants tobreach the Shareholder Rights Agreement. The complaint seeks rescission of the stock redemption and recover ofattorneys’ fees.  In July 2002 the courtordered this derivative suit stayed pending completion of the trial in theclass action suit (discussed above) or upon further order.

 

Mary Quinn v. Ida R. Noll, William McCubbin, et al.

Sangamon County Case No. 2001 CH 00377, filed April 4,2003, CIV.-3

 

Ed Ludwig and Phyllis Ludwig v. Ida Noll, William McCubbin, et al.

Sangamon County Case No. 2003 CH 00193

 

In April 2003, Illini, its directors, and one of its officers werenamed defendants in two separate complaints filed in the Circuit Court ofSangamon County.  Among other things,the complaints seek to rescind the stock purchase agreement entered into byIllini in 2001 to purchase approximately 30% of its common shares from a minorityshareholder group.  The Company hasreviewed the complaints and believes the lawsuits lack merit.  The stock purchase agreement was a normalbusiness transaction beneficial to its shareholders and was entered into afterappropriate due diligence and consultation with the Company’s outside financialadvisors.  Illini will vigorously defendthe lawsuits.

 

Item 2    Changes in Securities- none

 

Item 3    Defaults Upon SeniorSecurities – none

 

Item 4    Submission of Mattersto a Vote of Security Holders - none

 

Item 5    Other Information- none

 

Item 6             Exhibitsand Reports on Form 8-K

 

(a)           Exhibits:

99.1                  CEO Certification pursuant to 18 U.S.C. section1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

99.2                  CFO Certification pursuant to 18 U.S.C. section1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

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(b)           Reports on Form 8-K :

 

(1)                The Corporation filed a Form 8-K dated January 3,2003 under Item 5, which reported The Board of Governors of the Federal ReserveSystem denied the application of Illini Corporation to acquire IllinoisCommunity Bancorp, Inc., located in Effingham, Illinois.

 

(2)                The Corporation filed a Form 8-K and 8-K/A datedApril 8, 2003 under Item 4, which reported the dismissal of its priorcertifying accounts, BKD, LLP and to the engagement of Crowe Chizek and CompanyLLC as its principal accountants.

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
| Illini  Corporation       |                          |
|---------------------------|-------------------------------|
| (Registrant)              |                          |
|                      |                          |
|                      |                          |
| By:                       | /s/  Burnard K. McHone        |   | May  14, 2003 |   |
| Burnard  K. McHone        | Date  signed                  |
| President                 |                          |
|                      |                          |
|                      |                          |
| By:                       | /s/  George A. Rosenbaum, Jr. |   | May  14, 2003 |   |
| George  A. Rosenbaum, Jr. | Date  signed                  |
| Chief  Financial Officer  |                          |

 

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Form of Certification forQuarterly Reports on Form 10-QSB

 

I, Burnard K. McHone, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-QSB of Illini Corporation;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin the quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  | May 14, 2003 |   |                                  | /s/ Burnard K. McHone |   |
|--------|--------------|--------|---------------------------------------|-----------------------|--------|
|   |         |   | Burnard K. McHone                     |
|   |         |   | President and Chief Executive Officer |

 

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Form of Certification forQuarterly Reports on Form 10-QSB

 

I, George A. Rosenbaum Jr., certify that:

 

1.               I have reviewedthis quarterly report on Form 10-QSB of Illini Corporation;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge,the financial statements, and other financial information included in thequarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  | May 14, 2003 |   |                     | /s/ George A. Rosenbaum, Jr. |   |
|--------|--------------|--------|--------------------------|------------------------------|--------|
|   |         |   | George A. Rosenbaum, Jr. |
|   |         |   | Chief Financial Officer  |

 

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