** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 

| **ý** |   | **Annual Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|------------|--------|-------------------------------------------------------------------------------------------|
|       |   |                                                                                      |
| **o**      |   | **Transition Report under Section 13 or 15(d)  of the Securities Exchange Act of 1934**   |

 

**Forthe fiscal year ended December 31, 2002**

**Commissionfile number 0-13343**

 

**ILLINICORPORATION**

(Name of smallbusiness issuer in its charter)

 

**Illinois**

(State ofIncorporation)

 

**37-1135429**

(I.R.S. EmployerI.D. No.)

 

**3200West Iles Avenue**

**Springfield,Illinois 62707**

(Address ofprincipal executive offices and zip code)

 

Issuer’s telephonenumber

**(217)787-5111**

 

Securitiesregistered pursuant to Section 12(b) of

the Exchange Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of

the Exchange Act:

**CommonStock, par value $.01 per share**

(Title and Class)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months, and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.  ý

 

The Registrant’s revenuesfor fiscal year 2002 were $20,335,000.

 

On March 1, 2003, 411,701shares of common stock were outstanding. The aggregate market value of such shares held by non-affiliates of theregistrant was approximately $11,787,000 (based on the average of the bid andasked prices of securities traded as of March 12, 2003).

 

 

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**TABLE OF CONTENTS**

 
| **Part I**   |                                                                                          |
|--------------|-----------------------------------------------------------------------------------------------|
| 1.           | Description of  Business                                                                      |   |
| 2.           | Description of  Properties                                                                    |   |
| 3.           | Legal Proceedings                                                                             |   |
| 4.           | Submission  of Matters to a Vote of Security Holders                                          |   |
|         |                                                                                          |
| **Part II**  |                                                                                          |
| 5.           | Market  for Common Equity and Related Stockholder Matters                                     |
| 6.           | Management’s  Discussion and Analysis of Financial Condition & Results of Operations |
| 7.           | Financial Statements                                                                          |
| 8.           | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure         |
|         |                                                                                          |
| **Part III** |                                                                                          |
| 9.           | Directors, Executive Officers, Promoters and  Control Persons                                 |
| 10.          | Executive  Compensation                                                                       |
| 11.          | Security Ownership of Certain Beneficial Owners  and Management                               |
| 12.          | Certain Relationships and Related Transactions                                                |
| 13.          | Exhibits and Reports on Form 8-K                                                              |
|         |                                                                                          |
| Signatures   |                                                                                          |

 

**PART I**

 

**ITEM1. - DESCRIPTION OF BUSINESS**

 

Illini Corporation(or “Corporation”), a bank holding company as defined in the Bank HoldingCompany Act of 1956, as amended, was incorporated under the laws of the Stateof Illinois in 1983.  Illini Corporationpresently operates three wholly owned subsidiaries, Illini Bank, with 13locations throughout four counties in central Illinois, Farmers State Bank ofCamp Point, Camp Point, Illinois and Illini Statutory Trust I.  Illini Corporation’s executive offices arelocated at 3200 West Iles Avenue, Springfield, Illinois 62707, and itstelephone number is 217/787-5111.

IlliniCorporation’s management philosophy is to centralize overall corporatepolicies, procedures, and administrative functions and to provide operationalsupport for the subsidiary banks.  Whileeach location is allowed flexibility in responding to local market conditionsand customer and community needs, Illini Corporation operates as a single businesssegment.  Illini Corporation is committedto being a well managed, profitable financial institution providing a broadrange of financial services and products, as well as contributing to theeconomic and social environment of its communities.

Illini Bank  (“Illini”) is an Illinois state bank, whichhad total assets of $243.2 million at December 31, 2002.  Illini maintains 13 banking facilities inthe following Illinois communities: Springfield, Lincoln, Auburn, Danvers,Divernon, Elkhart, Hudson, Mechanicsburg, Sherman, and Stonington.  Farmers State Bank of Camp Point (“CampPoint”) is an Illinois state bank, which had total assets of $38.2 million atDecember 31, 2002.  Camp Point maintainsone banking facility located in Camp Point, Illinois.

Each Bank offerstheir customers a wide variety of financial services and products.  Deposit products include a variety ofchecking, NOW, money market, savings, investment sweep accounts, andcertificates of deposit.  Lendingproducts include short, intermediate, and long-term business and agriculturalloans, commercial and residential real estate loans, personal and consumerpurchase loans, home equity loans, and personal secured and unsecured lines ofcredit.  Additional product offeringsinclude letters of credit, credit cards, notary services, safe deposit boxes,and check imaging.  During 2002, IlliniBank entered into an agreement with PRIMEVEST Financial Services, Inc. in orderto secure the services of a registered broker-dealer subject to federal andstate securities laws and the NASD Conduct Rules as a convenience and

 

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accommodation to Illini Bank’s customers.  The general purpose of the full service brokerage servicesprovided by Illini Bank is to provide customers of Illini Bank access to professionalinvestment and insurance advice, based on customer suitability.  The activity operates as a division ofIllini Bank and is called “Illini Financial Services”.  The new activity will include full servicebrokerage and insurance services that will generate fee income.  There were no significant sales recorded in2002.

Illini and CampPoint’s deposit accounts are insured by the Federal Deposit InsuranceCorporation (the “FDIC”) under the Bank Insurance Fund (“BIF”) to the maximumamount allowed by law.  IlliniCorporation is supervised and regulated by the Board of Governors of theFederal Reserve (“FRB”) and Illini and Camp Point are supervised and regulatedby the FDIC and the Office of Banks and Real Estate of the State of Illinois.

Illini StatutoryTrust I is a special purpose subsidiary created for the sole purpose of issuingcumulative trust preferred securities. Illini Corporation owns all of the securities of IST that possessgeneral voting powers. The preferred securities, issued through an underwrittenpooled public offering on February 22, 2001, were sold at their $1,000 parvalue. IST issued 9,279 shares of the preferred securities bearing a dividendrate of 10.2% for net proceeds of $9 million, after deducting underwritingcommissions and other costs. IST invested the proceeds in Illinois Corporationjunior subordinated debentures, which also have an interest rate of 10.2%.  IST’s sole asset is the holding company’sjunior subordinated debt.

 

**•**                  ***Competition***

 

The activities andgeographic markets in which Illini and Camp Point are engaged are highlycompetitive.  Competition amongfinancial institutions is based upon interest rates offered on deposit accountsand on loans and other credit and service charges, the quality of servicesrendered, the convenience of banking facilities and, in the case of loans tolarge commercial borrowers, relative lending limits.

The subsidiarybanks are subject to competition from other financial institutions and creditunions.

 

***•******                  Supervisionand Regulation - General***

 

Various federaland state banking laws and regulations affect the business of IlliniCorporation.  Illini Corporation issubject to supervision, regulation, and periodic examination by the Board ofGovernors of the FRB.  IlliniCorporation’s subsidiary banks are subject to supervision, regulation, andperiodic examinations by the Commissioner of Banks and Real Estate and theFDIC.  The following is a summary ofcertain statutes and regulations affecting Illini Corporation, Illini and CampPoint.  This summary is qualified in itsentirety by such statutes and regulations, which are subject to change based onpending and future legislation and action by regulatory agencies.  Proposals to change the laws and regulationsgoverning the operation of banks and companies which control banks and otherfinancial institutions are frequently raised in Congress.  The likelihood of any major legislation andthe impact such legislation might have on Illini Corporation, Illini or CampPoint is, however, impossible to predict.

 

•                  ***The Bank Holding Company Act***

 

As a bank holdingcompany, Illini Corporation is subject to regulation by the FRB under the BankHolding Company Act of 1956, as amended (the “BHCA”).  The BHCA requires a bank holding company to obtain the priorapproval of the FRB before acquiring substantially all of the assets or director indirect ownership or control of more than five percent of the voting sharesof a bank or a bank holding company or merging or consolidating with any otherbank holding company.

The BHCA restricts the product range of a bank holdingcompany by circumscribing the types of businesses it may own or acquire.  The BHCA limits a bank holding company toowning and managing banks or companies engaged in activities determined by theFRB to be closely related to banking. Among the activities that the FRB has determined are closely related tobanking are activities that are usual in connection with making, acquiring,brokering or servicing loans, leasing personal or real property, engaging intrust company functions, acting as investment or financial advisor, providingsecurities brokerage services, certain management consulting and counselingservices, engaging in certain insurance agency activities and providing dataprocessing services.

 

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The Gramm-Leach-Bliley Act (“GLB Act”) was enacted inNovember 1999.  Under the GLB Act, bankholding companies that meet certain standards are permitted to engage in awider range of activities including securities and insurance activities.  Specifically, a bank holding company thatelects to become a “financial holding company” may engage in many activitiesthat are financial in nature, including lending, exchanging, transferring,investing for others, or safeguarding money or securities; underwriting andselling insurance; providing financial, investment, or economic advisoryservices; underwriting, dealing in, or making a market in securities; and thoseactivities currently permitted for bank holding companies that are so closelyrelated to banking, or managing or controlling banks, as to be proper incidentthereto.  The Corporation has notelected to become a financial holding company at this time.  A bank holding company may elect to become afinancial holding company only if each of its depository institutionsubsidiaries is well-capitalized, well-managed, and has a CommunityReinvestment Act rating of “satisfactory” or better at its most recentexamination.

The GLB Act changes federal laws to facilitateaffiliation between banks and entities engaged in securities and insuranceactivities.  The law also establishes asystem of functional regulation under which banking activities, securitiesactivities, and insurance activities conducted by financial holding companiesand their subsidiaries and affiliates will be separately regulated by banking,securities, and insurance regulators, respectively.

 

•                  ***Interstate Banking and Branching***

 

Under the Riegle-Neal Interstate Banking and BranchingEfficiency Act of 1994 (the “Riegle-Neal Act”), since September 29, 1995, theFRB is permitted, under specified circumstances, to approve the acquisition bya bank holding company located in one state of a bank or a bank holding companylocated in another state, without regard to most prohibitions contained instate law.

The Riegle-Neal Act permits states to require that atarget bank have been in operation for a minimum period, up to five years, andto impose non-discriminatory limits on the percentage of the total amount ofdeposits with insured depository institutions in the state which may becontrolled by a single bank or bank holding company.  In addition, the Riegle-Neal Act imposes federal depositconcentration limits (10% of nationwide total deposits, and 30% of totaldeposits in the host state on applications subsequent to the applicant’sinitial entry to the host state), and adds new statutory conditions to FRBapproval, e.g., the applicant is adequately capitalized and adequately managed.

The Riegle-Neal Act also authorized, effective June 1,1997, the federal banking regulators to approve applications for mergers ofdepository institutions across state lines without regard to whether suchactivity is contrary to state law.  Anystate could, however, by adoption of a non-discriminatory law after September29, 1994 and before June 1, 1997, elect to opt-out of the provision.

While Illinois adopted legislation to opt-in to theinterstate merger provision, unlike some states and as permitted by federallaw, Illinois law does not authorize the establishment of de novo branches orthe purchase by an out-of-state bank of one or more branches of a bank with itsmain office in Illinois.  Since the lawsof the various states which do authorize de novo branches or branch purchasesnormally have reciprocity provisions, Illinois state-chartered banks generallyare not able to establish or acquire branches in other states except throughthe merger with a bank in another state.

Branches acquired in a host state by both out-of-statestate-chartered and national banks will be subject to community reinvestment,consumer protection, fair lending, and interstate branching laws of the hoststate to the same extent as branches of a national bank having its main officein the host state.  Among other things,the Riegle-Neal Act also preserves state taxation authority, prohibits theoperation by out-of-state banks of interstate branches as deposit productionoffices, imposes additional notice requirements upon interstate banks proposingto close branch offices in a low or moderate-income area, and creates newCommunity Reinvestment Act evaluation requirements for interstate depositoryinstitutions.

 

•                  ***Dividend Restrictions***

 

Illini Corporation’sprincipal source of income is the payment of dividends on the stock of thebanks owned by Illini Corporation. Illinois law restricts the Bank’s ability to pay these dividends.  Under the Illinois Banking Act, no dividendmay be declared by an Illinois state-chartered bank (i) except out of thebank’s net profits and (ii) unless the bank has transferred to surplus at leastone-tenth of its net profits since

 

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the date of the declaration of the last preceding dividend, until theamount of its surplus is at least equal to its capital.  Net profits under the Illinois Banking Actmust be adjusted for losses and bad debts (i.e. debts owing to the bank onwhich interest is past due and unpaid for a period of six months or more unlesssuch debts are well secured and in the process of collection).

Under the Federal DepositInsurance Corporation Improvement Act of 1991 (“FDICIA”), no insured depositoryinstitution may declare any dividend if, following the payment of suchdividend, the institution would be undercapitalized.

 

•                  ***Transactions with Affiliates andInsiders***

 

Illini Bank, Camp Point and Illini Corporation areaffiliates of each other and, as such, are subject to certain federalrestrictions on loans and extensions of credit to Illini Corporation, on investmentsin Illini Corporation and its affiliates’ securities, on acceptance of suchsecurities as collateral for loans to any borrower and on leases and servicesand other contracts between the banks and Illini Corporation.  Additionally, regulations allow each Bank toextend credit to the executive officers, directors, and principal shareholdersor their related interests only if the loan is made on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions with non-insiders. Moreover, loans to insiders must not involve more than the normal riskor repayment or present other unfavorable features and must, in certaincircumstances, be approved in advance by a majority of the entire board ofdirectors of each bank.  The aggregateamount that can be lent to all insiders is limited to each banks unimpairedcapital and surplus.  There areadditional limitations on the amount of loans that can be made to each banks’executive officers.

 

•                  ***Deposit Insurance***

 

Deposits held by Illiniand Camp Point are insured, to the extent permitted by law, by the BankInsurance Fund (“BIF”) administered by the FDIC.

As required under FDICIA,the FDIC has established a system of risk-based deposit insurance premiums.  Under this system each insured institution’sassessment is based on the probability that the BIF will incur a loss relatedto that institution, the likely amount of the loss, and the revenue needs ofthe BIF.

Under the currentrisk-based assessment system, a depository institution pays an assessment ofbetween 0 cents and 27 cents per $100 of insured deposits based on its capitallevel and risk classification.  Toarrive at a risk-based assessment for an insured institution, the FDIC placesit in one of nine risk categories using a two step analysis based first oncapital ratios and then on relevant supervisory information.

In addition, pursuant tothe Deposit Insurance Funds Act of 1996, the FDIC imposed a special assessmenton bank deposits at a rate not tied to risk classification in order to servicedebt on the Financing Corporation (FICO) bonds issued in connection with thefederal government’s bail out of the thrift industry.  Any further significant changes in the deposit insuranceassessment rate imposed by the FDIC could have a material effect on theearnings of Illini Corporation.

 

•                  ***Capital Requirements***

 

The FRB has imposedrisk-based capital guidelines applicable to Illini Corporation.  These guidelines require that bank holdingcompanies maintain capital commensurate with both on and off balance sheetcredit and other risks of their operations. Under the guidelines, a bank holding company must have a minimum ratioof total capital to risk-weighted assets of 8 percent.  In addition, a bank holding company mustmaintain a minimum ratio of Tier 1 capital equal to 4 percent of risk-weightedassets.  Tier 1 capital includes commonshareholders’ equity, qualifying perpetual preferred stock and minority interestsin equity accounts of consolidated subsidiaries, less goodwill.  As a supplement to risk-based capitalrequirements, the FRB has also imposed leverage capital ratiorequirements.  The leverage ratiorequirements establish a minimum required ratio of Tier 1 capital to totalassets less goodwill of 3 percent for the most highly rated bank holdingcompanies.  All other bank holdingcompanies are required to maintain additional Tier 1 capital yielding aleverage ratio of 4 percent to 5 percent, depending on the particularcircumstances and risk profile of the institution.  Refer to the Capital Resources Section of Item 6 and Note 17included under Item 7 for a summary of Illini Corporation’s capital ratios asof December 31, 2002 and 2001.

 

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Each bank is also subjectto risk-weighted capital standards and leverage measures, which are similar,but in some cases not identical, to the requirements for bank holdingcompanies, which apply to Illini Corporation. At December 31, 2002 Illini and Camp Point met all applicable capitalrequirements.

 

•                  ***Safety and Soundness Guidelines***

 

As required by federallaw, the federal banking regulators have adopted interagency guidelines (the“Guidelines”) establishing standards for safety and soundness for depositoryinstitutions on matters such as internal controls, internal audit systems, loandocumentation, credit underwriting, interest rate risk exposure, asset growthand quality, earnings, and compensation and other benefits.  In general, the Guidelines prescribe thegoals to be achieved in each area, and each institution will be responsible forestablishing its own procedures to achieve these goals.  If an institution fails to comply with anyof the standards set forth in the Guidelines, the institution’s primary federalregulator may require the institution to submit a plan for achieving andmaintaining compliance.  Failure tosubmit an acceptable compliance plan, or failure to adhere to a compliance planthat has been accepted by the appropriate regulator, would constitute groundsfor further enforcement action.

The Federal DepositInsurance Act generally requires all depository institutions to be examinedannually by the banking regulators. Certain combinations of conditions may extend the examination cycle to eighteenmonths.

 

•                  ***Monetary Policy and EconomicConditions***

 

The business ofcommercial banks, such as Illini and Camp Point is affected by monetary andfiscal policies of various regulatory agencies, including the FRB.  Among the regulatory techniques available tothe FRB are open market operations in United States Government securities,changing the discount rate for member bank borrowings, and imposing andchanging the reserve requirements applicable to member bank deposits and tocertain borrowings by member banks and their affiliates (including parentcompanies).  These policies influence toa significant extent the overall growth and distribution of bank loans,investments and deposits and the interest rates charged on loans, as well asthe interest rates paid on savings and time deposits.

The monetary policies ofthe FRB have had a significant effect on the operating results of commercialbanks in the past and are expected to continue to do so in the future.  In view of constantly changing conditions inthe national economy and the money market, as well as the effect of acts by themonetary and fiscal authorities, including the FRB, no definitive predictionscan be made by Illini Corporation or the banks as to future changes in interestrates, credit availability, deposit levels, or the effect of any such changeson Illini Corporation’s or the banks operations and financial condition.

 

•                  ***Federal Securities Regulation***

 

The Corporation’scommon stock is registered with the SEC under the Securities Act of 1933, asamended, and the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  Consequently, the Corporation issubject to the information, proxy solicitation, insider trading and otherrestrictions and requirements of the SEC under the Exchange Act.

As a registeredcompany with the SEC, Illini Corporation is subject to certain provisions ofthe Sarbanes-Oxley Act of 2002.  Theeffective date for this Act and the regulations adopted by the SEC will affectIllini Corporation filings primarily for the fiscal year ending 2003.  The Board of Directors and management areaware of the required changes in corporate governance and disclosure and isacting to adopt necessary actions for 2003.

 

***•******                  Employees***

 

As of December 31,2002, Illini Corporation, Illini and Camp Point had 108 total employees and 82full-time employees.

 

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•                  ***Statistical Disclosure***

 
| Consolidated Average  Balances, InterestIncome/Expense and  Yields/Rates |
|--------------------------------------------------------------------------|
| Rate/Volume  Variance Analysis                                           |
| Investment Securities Available for Sale                                 |
| Investment  Securities Available for Sale Maturity Schedule              |
| Loan Portfolio                                                           |
| Selected  Loan Maturity and Interest Rate Sensitivity                    |
| Nonperforming  Assets                                                    |
| Summary of Loan Loss  Experience                                         |
| Allocation  of Allowance for Loan Losses                                 |
| Maturities  of Time Deposits                                             |
| Return  on Equity and Assets                                             |
| Interest Rate Sensitivity  Analysis                                      |
| Noninterest  Income                                                      |
| Noninterest  Expense                                                     |

 

**ITEM2. – DESCRIPTION OF PROPERTIES**

 

Illini Corporation’scorporate offices are located at 3200 West Iles Avenue, Springfield,Illinois.  Illini owns 11 and leases twoof the banking offices at which it operates. Illini operates four bankingoffices in Springfield, Illinois and one each in the following Illinoiscommunities: Auburn, Danvers, Divernon, Elkhart, Hudson, Lincoln,Mechanicsburg, Sherman, and Stonington. Illini leases space for the banking offices in Lincoln and 615 W.Jefferson, Springfield.  Camp Point ownsand operates one office in Camp Point, Illinois, located at 206 E. Wood Street.

 

**ITEM3. - LEGAL PROCEEDINGS**

 

Item 1    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 Corporation shareholder.  The shareholder, Mary K. Quinn (“Quinn”),who owns 21 shares of stock in Illini Corporation, filed suit against ISTC onJune 9, 1998 in the Seventh Judicial Circuit Court, Sangamon County,Illinois.  Quinn sought to compel ISTCto distribute rights certificates to Illini Corporation’s shareholders and furthersought to certify all Illini Corporation shareholders as a class.  Quinn asserted that Ida R. Noll became anacquiring person under the Rights Agreement on April 16, 1998, and that theRights Agreement was triggered.  ISTChas vigorously contested Quinn’s assertions that Ida R. Noll was an acquiringperson, that the Rights Agreement had been triggered, and that ISTC had a dutyto distribute rights certificates.

On June 9, 1998, Quinnfiled 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 a Motion forSummary Judgment that asked the Court to determine as a matter of law that IdaR. Noll became an acquiring person on April 16, 1998, that the Rights Agreementwas triggered as a result and that Illini Corporation and ISTC had a duty todistribute rights certificates to all shareholders as of April 16, 1998, exceptfor Ida R. Noll.  Illini Corporationopposed Quinn’s Motion for Summary Judgment, which was heard by the Court onJune 18, 1999.  On June 29, 1999, theCourt entered an Opinion and Order denying Quinn’s Motion for Summary Judgment.

 

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On or about May 6, 1999,counsel for Quinn advised Illini Corporation’s counsel of her intent to seek aninjunction 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 counsel filed aMotion for Reconsideration of the Orders denying Quinn’s Motion for SummaryJudgment and Motion for Preliminary Injunction.  Illini Corporation and ISTC filed a Motion for Summary Judgmenton August 25, 1999.  At a hearing heldon October 18, 1999, the Court granted Illini Corporation and ISTC’s Motion forSummary Judgment and denied Quinn’s Motion for Reconsideration.  An Order was subsequently entered on January12, 2000.

Quinn’s counsel announcedon October 18, 1999, the intention to petition the Court for an order directingIllini Corporation and ISTC to pay Quinn’s attorneys’ fees pursuant to theattorney 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 for costs, expenses andattorneys fees, finding that the fee provision of the Rights Agreement did notrequire one who brought an action to enforce the agreement to prevail in thataction in order to recover fees.

The case has beenremanded to the trial court. Upon Quinn’s motion the trial court permittedQuinn to add Mrs. Noll as a party to the action.  Quinn subsequently filed a motion to compel an additionaldeposition of Burnard K. McHone, President, Illini Corporation, with respect toa certain Stock Purchase Agreement pursuant to which shares owned by Mrs.Noll’s family were redeemed by Illini Corporation.  The trial court denied the motion to compel finding that Quinnfailed to show any basis that the Stock Purchase Agreement was relevant to herclaims in the lawsuit.  Defendants fileda motion to vacate the trial court’s order to add Mrs. Noll as a party to theaction.  The trial court vacated the priororder in December 2001.  Quinn moved forrecusal of the presiding judge on the grounds that the judge is allegedlyprejudiced or biased against her.  Themotion was denied.  Illini thereaftermoved for removal of plaintiff’s counsel on the basis that counsel had aconflict of interest arising from his cooperation in the litigation with anon-class member and her counsel.  Thecourt removed the counsel for the plaintiff class and appointed new counsel torepresent the class.  The removedcounsel filed a motion for reconsideration. The motion was denied. Thereafter, the remaining class counsel, William Moran, filed a MotionFor Direction.  This Motion assertedthat differences had arisen between Moran and the class representative, Mary K.Quinn, concerning the handling of the case. Among other assertions, the Motion alleged that the removed classcounsel James Ackerman, continued to advise Ms. Quinn regarding all issuesrelated to the suit.  At a hearing onthe Motion For Direction on January 15, 2003, the trial court removed MaryQuinn as class representative.

On March 7, 2003, thetrial court appointed Richard G. Austin as successor class representative.  Illini Corporation is negotiating for asettlement of the suit with Mr. Austin and class counsel William Moran.  Mary Quinn has filed a motion to opt out ofthe class which Illini Corporation opposes.

 

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

Sangamon County Case No. 01 CH 377

 

On August 14, 2001, MaryQuinn filed a four count complaint against Ida Noll and several present andformer members of Illini Corporation’s Board of Directors in the SeventhJudicial Circuit, Sangamon County, Illinois. The named defendants in the action are Ida Noll, Burnard McHone, WilliamEtherton, Ronald Thunman, Thomas Black, John Pickrell, Kenneth Deverman, LarryCurtin, Robert Olson and William McCubbin. Quinn purports to allege derivativecauses of action arising out of Illini entering into a Stock Purchase Agreementwith Ida R. Noll and others.  Quinnasserts that the defendants caused Illini to

 

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breach the Shareholder Rights Agreement, that the directors breachedtheir fiduciary duty, and usurped a business opportunity of theShareholders.  Quinn also seeks rescissionof the Stock Purchase Agreement.  Thedirectors named as defendants in the action are represented by the law firm ofSamuels, Miller, Schreoder, Jackson & Sly. Attorney James Jackson of the Samuels Miller firm moved on behalf of thedefendant directors to dismiss the complaint. The motion was granted in part and denied in part.  Quinn thereafter moved to consolidate thissuit with her previously filed class action suit.  Illini intervened for the purposes of opposingconsolidation.  The court denied themotion to consolidate on July 25, 2002, and ordered the derivative suit stayedpending completion of the trial in the class action suit (98 CH 240) or furtherorder.

Quinn seeks recovery ofher attorney’s fees in the derivative action pursuant to the attorney feeprovision of the Shareholder Rights Agreement.

 

**ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the fourth quarter of 2002.

 

**PART II.**

 

 

**ITEM 5. - MARKETFOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

The common stock ofIllini Corporation is traded over the counter and listed on the over thecounter bulletin board (OTCBB).  Thefollowing table sets forth the high and low bid prices by calendar quarter ofthe common stock of Illini Corporation. The prices shown do not reflect retail mark-ups, markdowns, orcommissions and may not represent actual transactions.

 

| **2002**         |   | **High**  |       | **Low**    |       | **Cash  Dividends  Declared** |       |
|------------------|--------|-----------|------------|------------|------------|-------------------------------|------------|
|             |   |      |       |       |       |                          |       |
| **1st  Quarter** |   | **$**     | **33.50**  | ** ** | **$**      | **26.00**                     | ** ** | **$** | **.25** | ** ** |
| **2nd  Quarter** |   | **28.00** | ** ** | **26.00**  | ** ** | **.25**                       | ** ** |
| **3rd  Quarter** |   | **29.90** | ** ** | **28.03**  | ** ** | **.25**                       | ** ** |
| **4th  Quarter** |   | **30.50** | ** ** | **26.26**  | ** ** | **.25**                       | ** ** |
|                  |        |           |            |            |            |                               |            |  |  |  |

 

| 2001         |   | High   |   | Low    |   | Cash  Dividends  Declared |   |
|--------------|--------|--------|--------|--------|--------|---------------------------|--------|
|         |   |   |   |   |   |                      |   |
| 1st  Quarter |   | $      | 24.00  |   | $      | 24.00                     |   | $ | .25 |   |
| 2nd  Quarter |   | 25.00  |   | 22.00  |   | .25                       |   |
| 3rd  Quarter |   | 31.00  |   | 25.00  |   | .25                       |   |
| 4th  Quarter |   | 26.20  |   | 24.05  |   | .25                       |   |
|              |        |        |        |        |        |                           |        |  |  |  |

 

As of December 31, 2002,there were 1,340 shareholders of record of Illini Corporation common stock.

In 2002 and 2001, IlliniCorporation issued $1.00 per share in dividends, which resulted in $411,701 in2002 and $451,723 in 2001.  Due to itsstatus as a bank holding company, Illini Corporation’s ability to issuedividends is restricted by regulatory provisions set forth in “Item 1.Description of Business—Supervision and Regulation—Dividend Restrictions” whichis incorporated by reference herein.

 

9

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**ITEM6. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

# ***•***                    Introduction

 

The following discussionhighlights the significant factors affecting the operations and financialcondition of Illini Corporation for the two fiscal years ended December 31,2002 and December 31, 2001.  Thediscussion should be read in conjunction with the consolidated financialstatements, accompanying notes, and selected financial data as set forth in“Item 7. Financial Statements” which is incorporated by reference herein.

Illini Corporationcautions that any forward looking statements contained in this report, in areport incorporated by reference to this report, or made by management involveestimates and uncertainties and are subject to change based upon variousimportant factors.  Actual results for2003 and beyond could differ materially from results expressed or implied byforward looking statements in this report.

 

•                  ***Summary***

 

Illini Corporationcontinues to meet its operational goals. The year ending December 31, 2002 resulted in $1.522 million net incomeas compared to $1.279 million for 2001. The increase in earnings for 2002 is due primarily to an increase in netinterest income.  The $1.2 millionincrease in net interest income will be detailed later in this section.  During 2002 the Corporation was able tomanage the falling interest rate environment by closely monitoring its asset\liabilityposition.  Average loan balances wereapproximately 15% higher in 2002 then 2001. This helped offset the declining rates on the asset side of the balancesheet.  In conjunction with increasingthe loan balances, management was able to drive the costs of funds down as themarket rates moved lower.  Consequently,while interest income fell nearly $0.7 million, interest expense dropped $1.85million.

Noninterest income for2002 declined $643,000 as compared to 2001. However, as detailed later in this section, income from mortgageorigination and servicing activities were approximately $465,000 lower in 2002than in 2001.  While the Corporationcontinued to sell qualified mortgage loans into the secondary market andservice the portfolio in 2002, the results did not approach the levels reportedin 2001.

Overall the noninterestexpenses increased $175,000 in 2002 to $9.433 million.  The total increase is less than 2% from2001.  The largest contributing factorto the increase was a $574,000 increase in salaries and employee benefits.  This increase was primarily composed ofincreased wages, higher benefit costs and a significant increase in trainingand development of personnel.  Some ofthis increase was offset by the decline in expenses associated with equipmentand data processing.  The decline in2002 is principally caused by the higher levels reported in 2001.  In June 2001, Illini Bank completed asystems conversion and upgraded related computer equipment.  The one-time net expenses associated with thisconversion and upgrade totaled $292,000. Additional detail regarding changes in the noninterest expenses can befound later in this section.

Management continues tofocus on credit quality, reducing overhead costs, increasing revenues throughtargeted sales efforts, and continued development of our associates through theexecution of our business plan.

The following tabledetails changes in Illini Corporation’s net income per share over the last twofiscal years.

 

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**Change in Earnings Per Share (EPS)**

**for 2002 and 2001**

 

|                                      |   | **2002-01** |       | 2001-00    |   |
|-------------------------------------------|--------|-------------|------------|------------|--------|
| Per  share                                |   |        | ** ** |       |   |
| Net  income prior period                  |   | **$**       | **2.64**   | ** ** | $      | 2.96 |   |
| Change  in EPS attributable to change in: |   |        | ** ** |       |   |
| Net  interest income                      |   | **6.01**    | ** ** | 3.50       |   |
| Provision  for loan losses                |   | **(0.60**   | **)**      | (0.31      | )      |
| Noninterest  income                       |   | **(0.53**   | **)**      | 0.46       |   |
| Noninterest  expense                      |   | **(3.77**   | **)**      | (4.18      | )      |
| Income  tax expense                       |   | **(0.05**   | **)**      | 0.21       |   |
| Net  increase (decrease)                  |   | **1.06**    | ** ** | (0.32      | )      |
| Net  income current period                |   | **$**       | **3.70**   | ** ** | $      | 2.64 |   |

 

•                  ***Overview-Balance Sheet Review***

 

Average assets were$282.2 million in 2002, an increase of $22.6 million, or 8.7%, from 2001.  Average loans were $211.5 million in 2002,an increase of $27.8 million, or 15.1%, from 2001.  Management believes the increase in loan volume is an expected outcomefrom the reengineering of the Corporation and efforts to pursue new loanrelationships in both retail and commercial loan services.  Average deposits were $245.2 million in2002, an increase of $22.0 million, or 9.9%, from 2001.

 

•                  ***Securities***

 

Total securities as ofDecember 31, 2002 were $43.0 million, a decrease of $6.2 million, or 12.6%,over the prior year-end.  At December31, 2002 and 2001, the total securities portfolio comprised 15.2% and 17.9%respectively of total assets.

Illini Corporation’sinvestment strategy is to maximize portfolio yields commensurate with creditrisk and liquidity considerations.  Thedecision to purchase or sell securities is based upon the current assessment ofeconomic and financial conditions, including the interest rateenvironment.  Approximately $9.0million, or 20.9%, of the securities portfolio at December 31, 2002 matureswithin one year.  Scheduled maturitiesand the prepayment of mortgage-backed securities represent a source ofliquidity for Illini and Camp Point, as well as federal funds sold, federalfunds purchased lines, and lines of credit established at other banks which arediscussed further in the Liquidity section of this report.

Mortgage-backedsecurities as of December 31, 2002 totaled $17.6 million and represent 41.0% oftotal securities.  The distribution ofmortgage-backed securities include $9.3 million of U.S. government agencymortgage-backed pass through securities and $8.3 million of private issue collateralmortgage obligations, all of which are rated AAA.

At December 31, 2002,securities available for sale totaled $43.0 million.  There were no securities classified as held to maturity ortrading at the end of 2002 or 2001.  Thesecurities available for sale portfolio at the end of 2002 included grossunrealized gains of $2,301,000 and gross unrealized losses of $12,000, of whichthe combined effect, net of tax, is included as an unrealized gain instockholders’ equity.  For comparativepurposes, at December 31, 2001, gross unrealized gains of $1,575,000 and grossunrealized losses of $90,000 were included in the securities available for saleportfolio, which is set forth in “Item 7. Financial Statements —Note 3” whichis incorporated by reference herein.

 

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•                  ***Maturities and Duration***

 

The maturities andweighted average yields of the investment portfolio at the end of 2002 arepresented in the following table. Maturities of private mortgage-backed securities are based on theiraverage expected lives and include the effects of anticipated prepayments.  All other securities are listed at theiractual maturity or contractual repricing interval.  The amounts and yields disclosed reflect the net carrying value,which is the same as fair value.  Taxableequivalent adjustments, using a 34% tax rate, have been made in calculatingyields on tax-exempt obligations.

The securities portfolioat December 31, 2002, contained, in the aggregate, securities of the City ofLitchfield, the City of Girard and the County of Sangamon that had a book ormarket value in excess of 10% of shareholders’ equity of IlliniCorporation.  Excluding those issued bythe United States government, or its agencies or corporations there were noother securities of an issuer with an aggregate book or market value in excessof 10% of shareholders’ equity of Illini Corporation.

 

**Maturities and Yield of Securities**

 

|                                                                 |   | **Total**                   |       | **Weighted  Average  Tax Equivalent Yield** |       |
|----------------------------------------------------------------------|--------|-----------------------------|------------|---------------------------------------------|------------|
|                                                                 |   | **(dollars  in thousands)** |       |
| U.S.  Treasury securities:                                           |   |                        | ** ** |                                        |       |
| 0 to  1 year                                                         |   | **$**                       | **2,234**  | ** **                                  | **2.42**   | **%** |
|                                                                 |   |                        | ** ** |                                        |       |
| U.S.  government agencies:                                           |   |                        | ** ** |                                        |       |
| 0 to  1 years                                                        |   | $                           | **1,344**  | ** **                                  | **5.42**   | **%** |
| 1 to  5 years                                                        |   | **2,154**                   | ** ** | **4.33**                                    | ** ** |
| 5 to  10 years                                                       |   | **501**                     | ** ** | **4.58**                                    | ** ** |
| Total                                                                |   | **$**                       | **3,999**  | ** **                                  | **4.73**   | **%** |
|                                                                 |   |                        | ** ** |                                        |       |
| Mortgage-backed  securities and collateralized mortgage obligations: |   |                        | ** ** |                                        |       |
| 0 to  1 year                                                         |   | $                           | **4,592**  | ** **                                  | **5.09**   | **%** |
| 1 to  5 years                                                        |   | **12,495**                  | ** ** | **4.88**                                    | ** ** |
| 5 to  10 years                                                       |   | **525**                     | ** ** | **4.00**                                    | ** ** |
| Over  10 years                                                       |   | **5**                       | ** ** | **5.91**                                    | ** ** |
| Total                                                                |   | **$**                       | **17,617** | ** **                                  | **4.91**   | **%** |
|                                                                 |   |                        | ** ** |                                        |       |
| States  of the U.S. and political subdivisions:                      |   |                        | ** ** |                                        |       |
| 0 to  1 year                                                         |   | **$**                       | **821**    | ** **                                  | **8.01**   | **%** |
| 1 to  5 years                                                        |   | **2,903**                   | ** ** | **8.67**                                    | ** ** |
| 5 to  10 years                                                       |   | **7,454**                   | ** ** | **8.15**                                    | ** ** |
| Over  10 years                                                       |   | **7,179**                   | ** ** | **8.25**                                    | ** ** |
| Total                                                                |   | **$**                       | **18,357** | ** **                                  | **8.26**   | **%** |
|                                                                 |   |                        | ** ** |                                        |       |
| FHLB  stock and other equity securities, no stated maturity          |   | **$**                       | **762**    | ** **                                  | **—** | ** ** |
|                                                                 |   |                        | ** ** |                                        |       |
| Total  securities:                                                   |   |                        | ** ** |                                        |       |
| 0 to  1 year                                                         |   | **$**                       | **8,991**  | ** **                                  | **4.74**   | **%** |
| 1 to  5 years                                                        |   | **17,552**                  | ** ** | **5.44**                                    | ** ** |
| 5 to  10 years                                                       |   | **8,480**                   | ** ** | **7.68**                                    | ** ** |
| Over  10 years                                                       |   | **7,184**                   | ** ** | **8.24**                                    | ** ** |
| No  stated maturity                                                  |   | **762**                     | ** ** | **—**                                  | ** ** |
| Total                                                                |   | **$**                       | **42,969** | ** **                                  | **6.22**   | **%** |

 

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•                  ***Loans***

 

Illini Corporation’s loanportfolio consists of a diverse variety of loan types within the followingmajor categories: commercial real estate, residential real estate, consumer,commercial, and agricultural loans.

Net loans increased $10.5million from $196.9 million as of December 31, 2001 to $207.4 million as ofDecember 31, 2002.  Average total loansincreased $27.8 million from $183.7 million in 2001 to $211.5 million in2002.  Growth in the loan portfolioresulted primarily from management’s efforts to increase existing loanrelationships and in the area of new business development.

The largest increase wasin commercial real estate loans for which the average balance increased $16.8million to $100.1 million in 2002. Commercial loans increased $11.3 million onaverage to $45.0 million.

All of Illini Corporation’sloans are domestic.  Illini Corporationdoes not currently engage in foreign loans, or lease financing.  Additionally, Illini Corporation does nothave any concentration of loans exceeding 10% of total loans, which are nototherwise disclosed under “types of loans.”

Each major type of loanwill normally have different risk elements. Real estate loans and installment loans to individuals can be affectedby the general strength of the economy in a given geographical area.  A wide range of economic and other factorscan impact the businesses to which commercial loans are extended.  Such things as drought, floods, U.S. andforeign market prices, and federal government subsidies and programs can affectagricultural loans.

 

•                  ***Types of Loans***

 

A summary of loans bytype as of December 31, 2002 and 2001 is set forth in “Item 7. FinancialStatements—Note 4” which is incorporated by reference herein.

 

•                  ***Maturities and Interest Rate Sensitivity of Loans***

 

Asignificant portion, $65.1 million, or 31.0%, of Illini and Camp Point’s loanportfolios reprice within one year. While $181.4 million, or 86.5%, of the portfolio reprices within fiveyears.  The relatively short duration ofthe loan portfolio requires diligence on the part of management to replaceand/or renew maturing loans more frequently. However, it benefits the banks by decreasing its susceptibility torising interest rates and by allowing management more frequent opportunities toreassess and adjust loan agreements with borrowers and to exit deterioratingloan relationships.  A total of 52.9% ofcommercial, financial, and agricultural loans mature within one year asreferenced in the table below.

 

# ***Loans***

 
|                                     |   | **Maturity**                |       |
|------------------------------------------|--------|-----------------------------|------------|
|                                     |   | **One year  or less**       |       | **One to  five years** |   | **After  five years** |   | **Total** |   |
|                                     |   | **(dollars  in thousands)** |       |
| Commercial,  financial, and agricultural |   | **$**                       | **28,621** | ** ** | **$** | **22,806** | ** ** | **$** | **2,699** | ** ** | **$** | **54,126** | ** ** |
| Real  estate construction                |   | **10,041**                  | ** ** | **1,449** | ** ** | **416** | ** ** | **11,906** | ** ** |
|                                     |   | **$**                       | **38,662** |   | **$** | **24,255** | ** ** | **$** | **3,115** | ** ** | **$** | **66,032** |   |

 

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|                                       |   | **Interest Sensitivity**    |       |
|--------------------------------------------|--------|-----------------------------|------------|
|                                       |   | **Fixed  interest  rates**  |       | **Floating  or  adjustable  interest rates** |   | **Total** |   |
|                                       |   | **(dollars  in thousands)** |       |
| Loans  due after one but within five years |   | **$**                       | **23,438** | ** ** | **$** | **817** | ** ** | **$** | **24,255** | ** ** |
| Loans  due after five years                |   | **1,058**                   | ** ** | **2,057** | ** ** | **3,115** | ** ** |
|                                       |   | **$**                       | **24,496** |   | **$** | **2,874** | ** ** | **$** | **27,370** |   |

 

# ***Deposits***

 
|                                   |   | **Average  Balances of Deposits and  Cost of Funds** |        |
|----------------------------------------|--------|------------------------------------------------------|-------------|
|                                   |   | **2002  Average**                                    |        | 2001  Average |   |
|                                   |   | **Balance**                                          |        | **Rate** |   | Balance |   | Rate |   |
|                                   |   | **(dollars in thousands)**                           |        |
| Noninterest  bearing demand deposits   |   | **$**                                                | **32,189**  | ** ** | **—** | ** ** | $ | 28,724 |   | — |   |
| NOW  and money market deposit accounts |   | **58,983**                                           | ** **  | **1.77** | **%** | 59,356 |   | 3.21 | % |
| Savings  deposits                      |   | **19,608**                                           | ** **  | **1.33** | ** ** | 17,288 |   | 1.82 |   |
| Time  deposits                         |   | **134,387**                                          | ** **  | **4.09** | ** ** | 117,875 |   | 5.39 |   |
|                                   |   | **$**                                                | **245,167** |   | **2.77** | **%** | $ | 223,243 |   | 3.84 | % |

 
|                  |   | **Maturity  of Time Deposits Greater Than $100,000  At December 31, 2002** |       |
|-----------------------|--------|----------------------------------------------------------------------------|------------|
|                  |   |                                                                       |       |   |   |   |   |
|                  |   | **Time  Certificates  of Deposit**                                         |       | **Other  Time  Deposits** |   | **Total** |   |
|                  |   | **(dollars  in thousands)**                                                |       |
| Three  months or less |   | **$**                                                                      | **3,177**  | ** ** | **$** | **960** | ** ** | **$** | **4,137** | ** ** |
| Three  to six months  |   | **1,875**                                                                  | ** ** | **75** | ** ** | **1,950** | ** ** |
| Six  to twelve months |   | **8,487**                                                                  | ** ** | **—** | ** ** | **8,487** | ** ** |
| Over  twelve months   |   | **8,220**                                                                  | ** ** | **—** | ** ** | **8,220** | ** ** |
|                  |   | **$**                                                                      | **21,759** |   | **$** | **1,035** | ** ** | **$** | **22,794** |   |

 

Average depositsincreased $22.0 million, or 9.9%, to $245.2 million in 2002.  Illini and Camp Point’s overall cost offunds related to deposits decreased 107 basis points to 2.77% in 2002 due tothe declining interest rate environment. From December 31, 2001 to December 31,2002, noninterest bearing accounts increased $1.0 million to $35.1 million, NOWand Money Market accounts were down $3.5 million to $56.6 million, time depositsincreased $6.6 million to $133.2 million, and savings increased $1.9 million to$19.9 million in 2002.  Total depositsincreased $6.0 million, or 2.5%, to $244.8 million at December 31, 2002.

 

•                  ***Significant Accounting Policies***

 

The accounting andreporting policies of the Corporation are in accordance with accountingprinciples generally accepted in the United States and conform to generalpractices within the banking industry. The

 

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Corporation’s significant accounting policies are described in detailin the notes to the Corporation’s consolidated financial statements for theyear ended December 31, 2002. The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions. The financial position and results ofoperations can be affected by these estimates and assumptions and are integralto the understanding of reported results. Significant accounting policies arethose policies that management believes are the most important to the portrayalof the Corporation’s financial condition and results, and they requiremanagement to make estimates that are difficult, subjective, or complex.

Allowance for Loan Losses- The allowance for loan losses provides coverage for probable losses inherentin the Corporation’s loan portfolio. Management evaluates the adequacy of theallowance for credit losses each quarter based on changes, if any, inunderwriting activities, the loan portfolio composition (including product mixand geographic, industry or customer-specific concentrations), trends in loanperformance, regulatory guidance and economic factors. This evaluation isinherently subjective, as it requires the use of significant managementestimates. Many factors can affect management’s estimates of specific andexpected losses, including volatility of default probabilities, ratingmigrations, loss severity and economic and political conditions. The allowanceis increased through provisions charged to operating earnings and reduced bynet charge-offs.

The Corporationdetermines the amount of the allowance based on relative risk characteristicsof the loan portfolio. The allowance recorded for commercial loans is based onreviews of individual credit relationships and an analysis of the migration ofcommercial loans and actual loss experience. The allowance recorded forhomogeneous consumer loans is based on an analysis of loan mix, riskcharacteristics of the portfolio, fraud loss and bankruptcy experiences, andhistorical losses, adjusted for current trends, for each homogeneous categoryor group of loans. The allowance for credit losses relating to impaired loansis based on the loan’s observable market price, the collateral for certain collateral-dependentloans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extentof the Corporation’s analysis of customer performance, portfolio trends or riskmanagement processes, certain inherent but undetected losses are probablewithin the loan portfolio. This is due to several factors including inherentdelays in obtaining information regarding a customer’s financial condition orchanges in their unique business conditions, the judgmental nature of individualloan evaluations, collateral assessments and the interpretation of economictrends. Volatility of economic or customer-specific conditions affecting theidentification and estimation of losses for larger non-homogeneous credits andthe sensitivity of assumptions utilized to establish allowances for homogenousgroups of loans are among other factors. The Corporation estimates a range ofinherent losses related to the existence of these exposures. The estimates arebased upon the Corporation’s evaluation of imprecision risk associated with thecommercial and consumer allowance levels and the estimated impact of thecurrent economic environment.

Mortgage Servicing Rights— Mortgage servicing rights (“MSRs”) associated with loans originated and sold,where servicing is retained, are capitalized and included in the consolidatedbalance sheet. The value of the capitalized servicing rights represents thepresent value of the future servicing fees arising from the right to serviceloans in the portfolio. Significant accounting policies for MSRs relate to theinitial valuation and subsequent impairment tests. The methodology used todetermine the valuation of MSRs requires the development and use of a number ofestimates, including anticipated principal amortization and prepayments of thatprincipal balance. Events that may significantly affect the estimates used arechanges in interest rates, mortgage loan prepayment speeds and the paymentperformance of the underlying loans. The carrying value of the MSRs is periodicallyreviewed for impairment based on a determination of fair value. For purposes ofmeasuring impairment, the servicing rights are compared to a valuation preparedbased on a discounted cash flow methodology, utilizing current prepaymentspeeds and discount rates. Impairment, if any, is recognized through avaluation allowance and is recorded as mortgage services, fees (costs), net.

 

# ***•***                  Liquidity

 

Liquidity represents theavailability of funding to meet obligations to depositors, borrowers, andcreditors at a reasonable cost without adverse consequences.  Accordingly, the liquidity position isinfluenced by the funding base and asset mix.

 

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Illini Corporationrequires adequate liquidity to pay its expenses and pay stockholderdividends.  Liquidity is provided toIllini Corporation in the form of dividends. Dividends from Illini totaled $1.1 million in 2002, compared to $1.2 millionin 2001.  In 2002 and 2001, dividendsfrom Camp Point amounted to $0.2 million. Illini and Camp Point’s liquidity is provided by bank cash balances,liquidation of short-term investments, loan payments, an overnight federalfunds line of credit, and borrowings from the Federal Home Loan Bank ofChicago.  While the banks are limited inthe amount of dividends they pay, as of December 31, 2002, a combined $4.9million was available for payment to Illini Corporation in the form ofdividends without prior regulatory approval.

Cash and cashequivalents, which include federal funds sold and interest bearing depositswith banks, increased $4.3 million to $19.9 million at December 31, 2002,compared to $15.6 million at December 31, 2001.

The asset portion of thebalance sheet provides liquidity primarily through loan principal repayments,maturities of investment securities, the sale of available for sale investmentsecurities, and the sale of 1-4 family mortgage loans to the secondary mortgagemarket through the Federal National Mortgage Association.

The liability portion ofthe balance sheet provides liquidity through federal funds purchased,securities sold under agreements to repurchase, other short-term debt, andlong-term debt.  As of December 31,2002, Illini had an overnight federal funds line of credit with an unaffiliatedfinancial institution in the amount of $4.3 million, all of which was availablefor borrowing.  Illini is also a memberof the Federal Home Loan Bank of (“FHLB”) and can borrow up to $16.8 million.  As of December 31, 2002, Illini had a $2.0 million FHLB advance maturingin 2003, and a $4.0 million FHLB advance maturing in 2004.  The Corporation also had a note payable inthe amount of $2.4 million, maturing in 2005.

 

•                  ***Interest Rate Sensitivity***

 

In conjunction withmaintaining a satisfactory level of liquidity, management monitors the degreeof interest rate risk assumed on the balance sheet.  Illini Corporation monitors its interest rate risk by the use ofstatic and dynamic gap models at the one-year and two-year intervals.  The static gap model monitors the differencein interest rate sensitive assets and interest rate sensitive liabilities thatmature within the specified time frame as a percentage of total interestearning assets.  The dynamic gap modelgoes further in that it assumes that interest rate sensitive assets andliabilities will be reinvested.  IlliniCorporation uses a computerized model to monitor its interest rate risk.

Illini and Camp Point’sstatic interest rate gap position as of December 31, 2002 is presented below:

 
|                                                    |   | **Interest  Rate Sensitivity Analysis** |       |
|---------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                    |   | **Up to 3  months**                     |       | **4 to  12 Months** |   | **Total  1 year** |   | **Over  1 year** |   | **Total** |   |
|                                                    |   | **(dollars  in thousands)**             |       |
| Interest-earning assets:                                |   |                                    |       |   |   |   |   |   |   |   |   |
| Loans                                                   |   | **$**                                   | **48,134** | ** ** | **$** | **16,945** | ** ** | **$** | **65,079** | ** ** | **$** | **144,755** | ** ** | **$** | **209,834** | ** ** |
| Investment  securities                                  |   | **3,862**                               | ** ** | **4,619** | ** ** | **8,481** | ** ** | **34,488** | ** ** | **42,969** | ** ** |
| Federal funds  sold and other interest-bearing deposits |   | **12,199**                              | ** ** | **—** | ** ** | **12,199** | ** ** | **—** | ** ** | **12,199** | ** ** |
| Total  interest-earning assets                          |   | **$**                                   | **64,195** | ** ** | **$** | **21,564** | ** ** | **$** | **85,759** | ** ** | **$** | **179,243** | ** ** | **$** | **265,002** | ** ** |
| Interest-bearing  liabilities:                          |   |                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Savings, NOW,  and money market (1)                     |   | **$**                                   | **38,267** | ** ** | **$** | **—** | ** ** | **$** | **38,267** | ** ** | **$** | **38,266** | ** ** | **$** | **76,533** | ** ** |
| Time deposits                                           |   | **18,183**                              | ** ** | **57,869** | ** ** | **76,052** | ** ** | **57,139** | ** ** | **133,191** | ** ** |
| Short-term debt                                         |   | **656**                                 | ** ** | **—** | ** ** | **656** | ** ** | **—** | ** ** | **656** | ** ** |
| Long-term debt                                          |   | **—**                              | ** ** | **2,000** | ** ** | **2,000** | ** ** | **6,395** | ** ** | **8,395** | ** ** |
| Preferred securities  of subsidiary trust               |   | **—**                              | ** ** | **—** | ** ** | **—** | ** ** | **9,000** | ** ** | **9,000** | ** ** |
| Total  interest-bearing liabilities                     |   | **$**                                   | **57,106** | ** ** | **$** | **59,869** | ** ** | **$** | **116,975** | ** ** | **$** | **110,800** | ** ** | **$** | **227,775** | ** ** |
|                                                    |   |                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Gap by period                                           |   | **$**                                   | **7,089**  | ** ** | **$** | **(38,305** | **)** | **$** | **(31,216** | **)** | **$** | **68,443** | ** ** | **$** | **37,227** | ** ** |
| Cumulative gap                                          |   | **$**                                   | **7,089**  | ** ** | **$** | **(31,216** | **)** | **$** | **(31,216** | **)** | **$** | **37,227** | ** ** | **$** | **37,227** | ** ** |
| Cumulative gap  as a percent of earning assets          |   | **2.68**                                | **%**      | **-11.78** | **%** | **-11.78** | **%** | **14.05** | **%** | **14.05** | **%** |

 

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(1) IlliniCorporation’s experience with transactional interest bearing demand, moneymarket accounts, and savings accounts has been that these deposits are subjectto immediate withdrawal, or re-pricing, with portions of the balances remainingrelatively constant in periods of both rising and falling rates.  Therefore, a portion of these deposits(one-half) is included in the over 1 year category.  If these deposits were all included in the total 1 year or lesscategory the cumulative ratio of interest sensitive assets to interestsensitive liabilities would be –26.22%.

 

In June 2002, IlliniCorporation renewed its consulting contract to assist in asset/liabilitymanagement efforts.  Management believesthat timely reviews enable Illini Corporation to proactively react to financialconditions in our market place.  Theasset/liability management policy adopted October 15, 1998 was revised andupdated in 2002.  There can be noassurance, however, that such steps will have the desired result.

 

***•***                  Quantitativeand Qualitative Disclosures about Market Risk

 

Derivative financialinstruments include futures, forwards, interest rate swaps, option contracts,and other financial instruments with similar characteristics.  Illini and Camp Point currently do not enterinto futures, forwards, swaps, or options. However, Illini and Camp Point are party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of its customers.  These financialinstruments include commitments to extend credit and standby letters of credit. These instruments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates and require collateral from the borrower if deemednecessary by each bank.  Standby lettersof credit are conditional commitments issued by each bank to guarantee theperformance of a customer to a third party up to a stipulated amount and withinspecified terms and conditions.

Commitments to extendcredit and standby letters of credit are not recorded as an asset or liabilityby the banks until and unless the instrument is exercised.

Each bank’s exposure tomarket risk is reviewed by the Asset/Liability Committee.  Interest rate risk is the potential ofeconomic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future netinterest income and/or a loss of current fair market values.  The objective is to measure the effect onnet interest income and to adjust the balance sheet in order to minimize theinherent risk, while at the same time maximize income.  Management realizes certain risks areinherent, such as the uncertainty of market interest rates, and that its goalis to identify and minimize the risks. The primary tool management uses to monitor and manage interest raterisk is a static gap report.  Illini andCamp Point have no market risk sensitive instruments held for trading purposes.

 

The condensed gap reportas of December 31, 2002 summarizing Illini and Camp Point’s interest ratesensitivity is as follows:

 
|                                                    |   | **Market  Risk Sensitive Instruments** |       |
|---------------------------------------------------------|--------|----------------------------------------|------------|
|                                                    |   | **1 year**                             |       | **Over 1  year through  3 years** |   | **Over 3  years through  5 years** |   | **Over  5 years** |   | **Total** |   |
|                                                    |   | **(dollars  in thousands)**            |       |
| Assets:                                                 |   |                                   |       |   |   |   |   |   |   |   |   |
| Investment securities                                   |   | **$**                                  | **8,481**  | ** ** | **$** | **3,328** | ** ** | **$** | **2,271** | ** ** | **$** | **28,889** | ** ** | **$** | **42,969** | ** ** |
| Loans                                                   |   | **65,079**                             | ** ** | **61,503** | ** ** | **54,866** | ** ** | **28,386** | ** ** | **209,834** | ** ** |
| Federal  funds sold and other interest-bearing deposits |   | **12,199**                             | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **12,199** | ** ** |
|                                                    |   |                                   |       |   |   |   |   |   |   |   |   |
|                                                    |   | **$**                                  | **85,759** |   | **$** | **64,831** | ** ** | **$** | **57,137** | ** ** | **$** | **57,275** | ** ** | **$** | **265,002** |   |
|                                                    |   |                                   |       |   |   |   |   |   |   |   |   |
| Liabilities:                                            |   |                                   |       |   |   |   |   |   |   |   |   |
| Savings,  NOW and money market (1)                      |   | **$**                                  | **38,267** | ** ** | **$** | **38,266** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **76,533** | ** ** |
| Time  deposits                                          |   | **76,052**                             | ** ** | **55,197** | ** ** | **1,226** | ** ** | **716** | ** ** | **133,191** | ** ** |
| Short-term  debt                                        |   | **656**                                | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **656** | ** ** |
| Long-term  debt                                         |   | **2,000**                              | ** ** | **6,395** | ** ** | **—** | ** ** | **—** | ** ** | **8,395** | ** ** |
| Preferred  securities of subsidiary trust               |   | —                                 | ** ** | **—** | ** ** | **—** | ** ** | **9,000** | ** ** | **9,000** | ** ** |
|                                                    |   |                                   |       |   |   |   |   |   |   |   |   |
|                                                    |   | **$**                                  | 116,975    |   | **$** | **99,858** |   | **$** | **1,226** |   | **$** | **9,716** |   | **$** | **227,775** |   |

 

 

17

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|                                     |   | **Total**   |       | **Average  Interest Rate** |       | **Fair Value** |       |
|------------------------------------------|--------|-------------|------------|----------------------------|------------|----------------|------------|
| Assets:                                  |   |        |       |                       |       |           |       |
| Investment securities(2)                 |   | **$**       | **42,969** | ** **                 | **6.32**   | **%**          | **$**      | **42,969** | ** ** |
| Loans(2)                                 |   | **209,834** | ** ** | **7.41**                   | ** ** | **210,999**    | ** ** |
| Federal funds sold                       |   | **12,199**  | ** ** | **1.54**                   | ** ** | **12,199**     | ** ** |
|                                     |   |        |       |                       |       |           |       |
| Liabilities:                             |   |        |       |                       |       |           |       |
| Savings, NOW and money market            |   | **$**       | **76,533** | ** **                 | **1.66**   | **%**          | **$**      | **76,533** | ** ** |
| Time deposits                            |   | **133,191** | ** ** | **4.09**                   | ** ** | **134,514**    | ** ** |
| Short-term debt                          |   | **656**     | ** ** | **2.67**                   | ** ** | **656**        | ** ** |
| Long-term debt                           |   | **8,395**   | ** ** | **5.19**                   | ** ** | **8,431**      | ** ** |
| Preferred securities of subsidiary trust |   | **9,000**   | ** ** | **10.44**                  | ** ** | **10,633**     | ** ** |

 

----

 

(1) Management’sexperience with interest bearing checking accounts, money market and savingsdeposits has been that, although these deposits are subject to immediatewithdrawal or repricing, a portion of the balances has remained relativelyconstant in periods of both rising and falling rates.  Therefore, a portion of these deposits (one-half) is included inthe over 1 year through 3 years.

 

(2) Interest ratesare presented on a fully taxable equivalent basis.

 

•                  ***Capital Resources***

 

Total shareholders’equity increased from $13.6 million at December 31, 2001 to $15.2 million atDecember 31, 2002.  The increase incapital is composed of comprehensive income of $2.043 million, offset bydividends paid to shareholders in the amount of $0.4 million.  The primary source of capital of IlliniCorporation is retained earnings.  Cashdividends per share were $1.00 for 2002 and 2001.  Illini Corporation retained 72.9% of its net income for 2002 and64.6% for 2001.

The core capital issupplemented by a preferred security issued by the trust subsidiary, IlliniStatutory Trust I, which was completed February 22, 2001.  Per regulation, 25% of the Tier I capitalratio can be comprised of the trust preferred issue. Illini Statutory Trust Iis a wholly-owned subsidiary of the Corporation which was formed on January 31,2001, solely for the purpose of issuing capital and common securities.  Illini Statutory Trust I issued 9,279 sharesof preferred securities bearing an interest rate of 10.20% with a maturity dateof February 22, 2031 for net proceeds of $9.0 million, after deductingunderwriting commissions, capital, and other costs.  Also included in the agreement, after the 10th yearthe bank may accelerate payment according to the terms of the agreement.  Illini Statutory Trust I invested theproceeds in junior subordinated debentures of the Corporation, which also hadan interest rate of 10.20%.  Interest onthe junior subordinated debentures and distributions on the preferredsecurities are payable semi-annually in arrears, with the first payment paid onAugust 22, 2001.  Distribution on thesecurities is cumulative and based upon the liquidation value of $1,000 percapital security.  The Corporation hasthe right, at any time, so long as no event of default has occurred and iscontinuing, to defer payments of interest on the junior subordinated debenturesfor a period not exceeding 10 consecutive semi-annual periods; provided, thatsuch deferral may not extend beyond the stated maturity of the juniorsubordinated debentures.  The securitiesare subject to mandatory redemption, in whole or in part, upon repayment of thejunior subordinated debentures at maturity or their earlier redemption.

Regulatory guidelinesrequire bank holding companies, commercial banks, and thrifts to maintaincertain minimum ratios and define companies as “well capitalized” thatsufficiently exceed the minimum ratios. The banking regulators may alter minimum capital requirements as aresult of revising their internal

 

18

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policies and their ratings of individual institutions.  To be “well capitalized,” banks mustmaintain a Tier 1 leverage ratio of no less than 5.0%, a Tier 1 risk basedratio of no less than 6.0%, and a total risk based ratio of no less than 10.0%.Illini’s ratios as of December 31, 2002 were 7.80%, 9.73%, and 10.86%,respectively, which meet the criteria for “well capitalized.” Camp Point’sratios as of December 31, 2002 were 10.34%, 15.13%, and 16.28%, respectively,which meet the criteria for “well capitalized.”  The Corporation’s ratios as of December 31, 2002 were 5.82%,7.41%, and 10.56%, respectively.

As of December 31, 2002,management is not aware of any current recommendations by banking regulatoryauthorities which, if they were to be implemented, would have or are reasonablylikely to have a material adverse impact on the Corporation’s liquidity,capital resources, or operations.

 

**RESULTS OF OPERATIONS**

 
|                                    |   | **Key Ratios  For the years ended December 31,** |   |
|-----------------------------------------|--------|--------------------------------------------------|--------|
|                                    |   |                                             |   |   |   |   |   |   |   |   |   |
|                                    |   | **2002**                                         |   | 2001 |   | 2000 |   | 1999 |   | 1998 | ** ** |
|                                    |   |                                             |   |   |   |   |   |   |   |   |   |
| Return  on average assets               |   | **0.54**                                         | %      | 0.49 | % | 0.75 | % | 0.39 | % | 0.41 | % |
| Return  on average equity               |   | **10.83**                                        |   | 8.00 |   | 9.42 |   | 4.31 |   | 4.19 |   |
| Dividend  payout ratio                  |   | **27.05**                                        |   | 37.88 |   | 33.74 |   | 71.30 |   | 71.15 |   |
| Average  equity to average assets ratio |   | **4.98**                                         |   | 6.16 |   | 7.92 |   | 9.00 |   | 9.77 |   |

 

•                  ***Net Interest Income***

 

Net interest income isthe principal component of Illini Corporation’s net income stream andrepresents the difference between interest and fee income generated fromearning assets and interest expense paid on deposits and borrowed funds.  Fluctuations in interest rates, as well asvolume and mix changes in earning assets and interest bearing liabilities, canmaterially impact net interest income. The discussion of net interest income is presented on a taxableequivalent basis to facilitate performance comparisons among various taxableand tax-exempt assets.

Interest income decreased$0.7 million from 2001 to 2002. Interest expense decreased $1.9 million from 2001 to 2002, resulting inan increase in net interest income of $1.2 million.  The net interest margin fell from 3.83% in 2001 to 3.62% in2002.  The decline in the interest marginis due to loans repricing into lower interest rates, and the increase innonperforming loans, caused by the economic downturn nationally.  The securities portfolio has a weightedaverage tax equivalent yield of 6.32%, while our loan portfolio has an averageyield of 7.41% for 2002.  With theincrease in the loan balances, total earning assets increased to $261.4million.

The $1.9 million decreasein interest expense was primarily attributable to a $0.9 million decline in NOWand money market accounts interest expense, and another $0.9 million decline intime deposit interest expense.  Ouraverage interest bearing liabilities grew $19.7 million, while experiencing a120 basis point decrease to our overall cost of funds.

The decrease in theaverage yield and cost of funds was the result of the Federal Reserve System’seffort to stimulate the economy by the repeated lowering of interestrates.  The interest rates that theCorporation charges to borrowers and pays to depositors are greatly influencedby these rates.

 

19

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**NetInterest Income - Rate/Volume Variance Analysis**

 
|                                      |   | **2002-01**                    |       | 2001-00            |       |
|-------------------------------------------|--------|--------------------------------|------------|--------------------|------------|
|                                      |   | **Changes in  Income/Expense** |       | **Volume  Effect** |       | **Rate  Effect** |   | Changes in  Income/Expense |   | Volume  Effect |   | Rate  Effect |   |
|                                      |   | (dollars in thousands)         |       |
|                                      |   |                           |       |               |       |   |   |   |   |   |   |   |   |
| Short-term  investments                   |   | **$**                          | **(213**   | **)**              | **$**      | **19** | ** ** | **$** | **(232** | ) | $ | (18 | ) | $ | 110 |   | $ | (128 | ) |
| Investment  securities:                   |   |                           |       |               |       |   |   |   |   |   |   |   |   |
| Taxable                                   |   | **(710**                       | **)**      | **(490**           | **)**      | **(220** | ) | (585 | ) | (474 | ) | (111 | ) |
| Nontaxable(*)                             |   | **136**                        | ** ** | **150**            | ** ** | **(14** | ) | 217 |   | 141 |   | 76 |   |
| Loans(*)                                  |   | **177**                        | ** ** | **2,322**          | ** ** | **(2,145** | ) | 2,393 |   | 3,073 |   | (680 | ) |
| Total  interest income                    |   | **$**                          | **(610**   | **)**              | **$**      | **2,001** | ** ** | **$** | **(2,611** | ) | $ | 2,007 |   | $ | 2,850 |   | $ | (843 | ) |
|                                      |   |                           |       |               |       |   |   |   |   |   |   |   |   |
| Savings  and NOW accounts                 |   | **(915**                       | **)**      | **30**             | ** ** | **(945** | ) | (206 | ) | 267 |   | (473 | ) |
| Time  deposits                            |   | **(859**                       | **)**      | **911**            | ** ** | **(1,770** | ) | 579 |   | 885 |   | (306 | ) |
| Short-term  debt                          |   | **(47**                        | **)**      | **(49**            | **)**      | **2** |   | (93 | ) | 70 |   | (163 | ) |
| Long-term  debt                           |   | **(183**                       | **)**      | **249**            | ** ** | **(432** | ) | 456 |   | 260 |   | 196 |   |
| Preferred  securities of Trust subsidiary |   | **154**                        | ** ** | **71**             | ** ** | **83** |   | 786 |   | —--- |   | 786 |   |
| Total  interest expense                   |   | **$**                          | **(1,850** | **)**              | **$**      | **1,212** | ** ** | **$** | **(3,062** | ) | $ | 1,522 |   | $ | 1,482 |   | $ | 40 |   |
|                                      |   |                           |       |               |       |   |   |   |   |   |   |   |   |
| Net  interest income                      |   | **$**                          | **1,240**  | ** **         | **$**      | **789** | ** ** | **$** | **451** |   | $ | 485 |   | $ | 1,368 |   | $ | (883 | ) |

 

----

(*) Fully taxableequivalent basis using the federal statutory rate of 34% for all yearspresented.

NOTE:  The change in interest which can not beattributed to only a change in volume or a change in rate, but insteadrepresents a combination of the two factors, has been allocated to the rateeffect.

 

20

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**Consolidated****AverageBalances, Interest Income/Expense and Yield/Rates**

 
|                                                |   | **Year ended  December 31,** |        |
|-----------------------------------------------------|--------|------------------------------|-------------|
|                                                |   | **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                              |   | **$**                        | **7,698**   | ** ** | **2.7** | **%** | **$** | **118** | ** ** | **1.54** | % | $ | 7,283 |   | 2.8 | % | $ | 331 |   | 4.55 | % |
| Investment securities(3)                            |   |                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |   | **29,698**                   | ** **  | **10.5** | ** ** | **1,580** | ** ** | **5.32** |   | 37,791 |   | 14.5 |   | 2,290 |   | 6.06 |   |
| Tax-exempt(1)                                       |   | **14,671**                   | ** **  | **5.2** | ** ** | **1,223** | ** ** | **8.34** |   | 12,890 |   | 5.0 |   | 1,087 |   | 8.43 |   |
| Total securities                                    |   | **44,369**                   | ** **  | **15.7** | ** ** | **2,803** | ** ** | **6.32** |   | 50,681 |   | 19.5 |   | 3,377 |   | 6.66 |   |
| Loans                                               |   |                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial(1)                                       |   | **44,989**                   | ** **  | **16.0** | ** ** | **3,199** | ** ** | **7.11** |   | 33,739 |   | 13.0 |   | 2,829 |   | 8.39 |   |
| Agriculture                                         |   | **15,800**                   | ** **  | **5.6** | ** ** | **1,012** | ** ** | **6.40** |   | 12,985 |   | 5.0 |   | 970 |   | 7.47 |   |
| Real estate                                         |   |                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                          |   | **100,104**                  | ** **  | **35.5** | ** ** | **7,378** | ** ** | **7.37** |   | 83,258 |   | 32.1 |   | 7,074 |   | 8.50 |   |
| Agriculture                                         |   | **6,604**                    | ** **  | **2.3** | ** ** | **520** | ** ** | **7.88** |   | 7,420 |   | 2.9 |   | 629 |   | 8.47 |   |
| Residential                                         |   | **31,677**                   | ** **  | **11.2** | ** ** | **2,411** | ** ** | **7.61** |   | 32,513 |   | 12.5 |   | 2,715 |   | 8.35 |   |
| Consumer, net                                       |   | **11,526**                   | ** **  | **4.1** | ** ** | **1,019** | ** ** | **8.84** |   | 13,019 |   | 5.0 |   | 1,138 |   | 8.74 |   |
| Credit card                                         |   | **839**                      | ** **  | **0.3** | ** ** | **141** | ** ** | **16.86** |   | 808 |   | 0.3 |   | 148 |   | 18.29 |   |
| Total loans                                         |   | **211,539**                  | ** **  | **75.0** | ** ** | **15,680** | ** ** | **7.41** |   | 183,742 |   | 70.8 |   | 15,503 |   | 8.44 |   |
| Allowance for loan losses                           |   | **(2,226**                   | **)**       | **(0.8** | ) |   |   |   |   | (2,241 | ) | (0.9 | ) |   |   |   |   |
| Net loans(1)(2)                                     |   | **209,313**                  | ** **  | **74.2** | ** ** | **15,680** | ** ** | **7.49** |   | 181,501 |   | 69.9 |   | 15,503 |   | 8.54 |   |
| Total interest earning assets                       |   | **261,380**                  | ** **  | **92.6** | ** ** | **18,601** | ** ** | **7.12** |   | 239,465 |   | 92.2 |   | 19,211 |   | 8.02 |   |
| Cash and due from banks                             |   | **5,899**                    | ** **  | **2.1** |   |   |   |   |   | 5,847 |   | 2.2 |   |   |   |   |   |
| Premises and equipment                              |   | **6,940**                    | ** **  | **2.5** |   |   |   |   |   | 6,961 |   | 2.7 |   |   |   |   |   |
| Other real estate owned                             |   | **753**                      | ** **  | **0.3** |   |   |   |   |   | 444 |   | 0.2 |   |   |   |   |   |
| Other assets(3)                                     |   | **7,183**                    | ** **  | **2.5** |   |   |   |   |   | 6,883 |   | 2.7 |   |   |   |   |   |
| **Total assets**                                    |   | **$**                        | **282,155** | ** ** | **100.0** | % |   |   |   |   | $ | 259,600 |   | 100.0 | % |   |   |   |   |
|                                                |   |                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                     |   |                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |   |                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest bearing deposits                       |   | **$**                        | **32,189**  | ** ** | **11.4** | % |   |   |   |   | 28,724 |   | 11.1 | % |   |   |   |   |
| Interest bearing demand                             |   | **58,983**                   | ** **  | **20.9** | ** ** | **$** | **1,044** | ** ** | **1.77** | % | 59,356 |   | 22.9 |   | $ | 1,906 |   | 3.21 | % |
| Savings                                             |   | **19,608**                   | ** **  | **6.9** | ** ** | **261** | ** ** | **1.33** |   | 17,288 |   | 6.7 |   | 314 |   | 1.82 |   |
| Time deposits less than $100,000                    |   | **109,594**                  | ** **  | **38.8** | ** ** | **4,444** | ** ** | **4.06** |   | 89,199 |   | 34.3 |   | 4,866 |   | 5.45 |   |
| Total core deposits                                 |   | **220,374**                  | ** **  | **78.0** | ** ** | **5,749** | ** ** | **2.61** |   | 194,567 |   | 75.0 |   | 7,086 |   | 3.64 |   |
| Time deposits $100,000 and over                     |   | **24,793**                   | ** **  | **8.8** | ** ** | **1,046** | ** ** | **4.22** |   | 28,676 |   | 11.0 |   | 1,483 |   | 5.17 |   |
| Total deposits                                      |   | **245,167**                  | ** **  | **86.8** | ** ** | **6,795** | ** ** | **2.77** |   | 223,243 |   | 86.0 |   | 8,569 |   | 3.84 |   |
| Short-term debt                                     |   | **1,135**                    | ** **  | **0.4** | ** ** | **30** | ** ** | **2.67** |   | 3,098 |   | 1.2 |   | 77 |   | 2.49 |   |
| Long-term debt                                      |   | **8,410**                    | ** **  | **3.0** | ** ** | **436** | ** ** | **5.19** |   | 6,000 |   | 2.3 |   | 619 |   | 10.31 |   |
| Preferred securities of trust subsidiary(4)         |   | **9,000**                    | ** **  | **3.2** | ** ** | **940** | ** ** | **10.44** |   | 8,250 |   | 3.2 |   | 786 |   | 9.53 |   |
| Total interest bearing liabilities                  |   | **231,523**                  | ** **  | **82.0** | ** ** | **8,201** | ** ** | **3.54** |   | 211,867 |   | 81.6 |   | 10,051 |   | 4.74 |   |
| Other liabilities                                   |   | **4,389**                    | ** **  | **1.6** |   |   |   |   |   | 3,025 |   | 1.2 |   |   |   |   |   |
| Total liabilities                                   |   | **268,101**                  | ** **  | **95.0** |   |   |   |   |   | 243,616 |   | 93.9 |   |   |   |   |   |
| Shareholders’ Equity                           |   | **14,054**                   | ** **  | **5.0** |   |   |   |   |   | 15,984 |   | 6.1 |   |   |   |   |   |
| **Total liabilities and shareholders’ equity** |   | **$**                        | **282,155** | ** ** | **100.0** | % |   |   |   |   | $ | 259,600 |   | 100.0 | % |   |   |   |   |
| **Net interest margin**                             |   |                         |        |   |   | **$** | **10,400** | ** ** | **3.62** | % |   |   |   |   | $ | 9,160 |   | 3.83 | % |

 

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(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 years presented.

(2)                                  Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $351,000 in 2002 and$388,000 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 a monthly average balanceversus a daily average balance.

 

21

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

 
|                                            |   | Year ended December 31,  2000 |       |
|-------------------------------------------------|--------|-------------------------------|------------|
|                                            |   |                          |       |   |   |   |   |   |   |
|                                            |   | Average  Balance              |       | Percent  of Total  Assets |   | Interest  Income/  Expense |   | Average  Yield/  Rate |   |
|                                            |   | (dollars in thousands)        |       |
| ASSETS                                          |   |                          |       |   |   |   |   |   |   |
| Interest-earning assets:                        |   |                          |       |   |   |   |   |   |   |
| Short-term investments                          |   | $                             | 5,536      |   | 2.4 | % | $ | 349 |   | 6.30 | % |
| Investment securities(3)                        |   |                          |       |   |   |   |   |   |   |
| Taxable                                         |   | 45,235                        |       | 19.9 |   | 2,875 |   | 6.36 |   |
| Tax-exempt(1)                                   |   | 11,093                        |       | 4.9 |   | 870 |   | 7.84 |   |
| Total securities                                |   | 56,328                        |       | 24.8 |   | 3,745 |   | 6.65 |   |
| Loans                                           |   |                          |       |   |   |   |   |   |   |
| Commercial(1)                                   |   | 23,844                        |       | 10.5 |   | 2,198 |   | 9.22 |   |
| Agriculture                                     |   | 12,705                        |       | 5.6 |   | 1,087 |   | 8.56 |   |
| Real estate                                     |   |                          |       |   |   |   |   |   |   |
| Commercial                                      |   | 60,570                        |       | 26.7 |   | 5,330 |   | 8.80 |   |
| Agriculture                                     |   | 7,402                         |       | 3.3 |   | 644 |   | 8.71 |   |
| Residential                                     |   | 33,184                        |       | 14.6 |   | 2,706 |   | 8.16 |   |
| Consumer, net                                   |   | 11,121                        |       | 4.9 |   | 1,020 |   | 9.18 |   |
| Credit card                                     |   | 702                           |       | 0.3 |   | 125 |   | 17.76 |   |
| Total loans                                     |   | 149,528                       |       | 65.9 |   | 13,110 |   | 8.77 |   |
| Allowance for loan losses                       |   | (1,943                        | )          | (0.9 | ) |   |   |   |   |
| Net loans(1)(2)                                 |   | 147,585                       |       | 65.0 |   | 13,110 |   | 8.88 |   |
| Total interest earning assets                   |   | 209,449                       |       | 92.2 |   | 17,204 |   | 8.21 |   |
| Cash and due from banks                         |   | 6,022                         |       | 2.7 |   |   |   |   |   |
| Premises and equipment                          |   | 7,125                         |       | 3.1 |   |   |   |   |   |
| Other real estate owned                         |   | 497                           |       | 0.2 |   |   |   |   |   |
| Other assets(3)                                 |   | 4,013                         |       | 1.8 |   |   |   |   |   |
| Total assets                                    |   | $                             | 227,106    |   | 100.0 | % |   |   |   |   |
|                                            |   |                          |       |   |   |   |   |   |   |
| **LIABILITIES**                                 |   |                          | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Deposits:                                       |   |                          |       |   |   |   |   |   |   |
| Non interest bearing deposits                   |   | $                             | 29,780     |   | 13.1 | % |   |   |   |   |
| Interest bearing demand                         |   | 52,316                        |       | 23.0 |   | $ | 2,068 |   | 3.95 | % |
| Savings                                         |   | 17,858                        |       | 7.9 |   | 358 |   | 2.01 |   |
| Time deposits less than $100,000                |   | 77,799                        |       | 34.3 |   | 4,434 |   | 5.70 |   |
| Total core deposits                             |   | 177,753                       |       | 78.3 |   | 6,860 |   | 3.86 |   |
| Time deposits $100,000 and over                 |   | 24,388                        |       | 10.7 |   | 1,336 |   | 5.48 |   |
| Total deposits                                  |   | 202,141                       |       | 89.0 |   | 8,196 |   | 4.05 |   |
| Short-term debt                                 |   | 2,193                         |       | 1.0 |   | 170 |   | 7.77 |   |
| Long-term debt                                  |   | 2,311                         |       | 1.0 |   | 163 |   | 7.05 |   |
| Total interest bearing liabilities              |   | 176,865                       |       | 77.9 |   | 8,529 |   | 4.82 |   |
| Other liabilities                               |   | 2,469                         |       | 1.1 |   |   |   |   |   |
| Total liabilities                               |   | 209,114                       |       | 92.1 |   |   |   |   |   |
| Shareholders’ Equity                       |   | 17,992                        |       | 7.9 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |   | $                             | 227,106    |   | 100.0 | % |   |   |   |   |
| Net interest margin                             |   |                          |       |   |   | $ | 8,675 |   | 4.14 | % |

 

----

(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 years presented.

(2)                                  Nonaccrualloans are included in the loan balances. Interest income includes related fee income of $345,000 in 2000.

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

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

 

22

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***•******                  Provisionfor Loan Losses, Net Charge-Offs and Allowance for Loan Losses***

 

The provision for loanlosses charged to earnings was $760,000 for 2002, an increase of $155,000, or25.6%, from the $605,000 in 2001. During 2000, the provision for loan losses was $540,000.  The ratio of net charge-offs to averageloans outstanding has increased from 0.03% to 0.38% to 0.19% for the yearsended December 31, 2000, 2001 and 2002, respectively.  The provision for loan loss expense increased to $760,000 for2002 from $605,000 in 2001 primarily due to management’s intent to maintain alevel of reserves consistent with the Corporation’s risk profile.  Nonaccrual loans decreased slightly to$4,901,000 at December 31, 2002, compared to $4,920,000 at December 31, 2001.

The management of IlliniCorporation considers a number of factors in determining the amount of theallowance for loan losses.  Thesefactors include, but are not limited to, the following:

 

•                  Historical data and trends relatingto net charge-offs, delinquency rates, average outstanding loans, and the levelof the allowance for loan losses;

•                    Otherhistorical data and trends, including the allowance as a percentage of totalloans outstanding and loan volume;

•                    Borrowersidentified on Illini’s and Camp Point’s watch list, borrowers with significantcredit exposure, and loans that are past due or on nonaccrual status;

•                    Management’scapability to administer credit risk processes to successfully underwritecredit and to identify and resolve problem loans on an ongoing basis;

•                    Resultsof continuing reviews of individual higher risk loans by management personnel;

•                    Considerationas to the impact of present economic conditions on the loan portfolio; and

•                    Theresults from semiannual loan reviews performed by an independent third party.

 

The allowance for loanlosses as a percent of total loans increased from 1.06% at December 31, 2001,to 1.18% at December 31, 2002.  In thefourth quarter of 2001 Illini wrote off $547,000 of loans of which $535,000 wasrelated to a single commercial loan. Management believes this single exposure was an anomaly during2001.  Illini did adjust its regularprovision to maintain its reserve for losses at a level estimated to besufficient to cover the risk profile of its loan portfolio.

 

23

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•                  ***Summary of Loan Loss Experience***

 

The following summarypresents the changes in the allowance for loan losses for the years endedDecember 31, 2002, 2001, and 2000:

 
|                                                                     |   | **2002**               |        | 2001   |       | 2000    |       |
|--------------------------------------------------------------------------|--------|------------------------|-------------|--------|------------|---------|------------|
|                                                                     |   | (dollars in thousands) |        |
|                                                                     |   |                   |        |   |       |    |       |
| Average loans  outstanding                                               |   | **$**                  | **211,539** |   | $          | 183,742 |       | $ | 149,528 |   |
|                                                                     |   |                   | ** **  |   | ** ** |    | ** ** |
| **Allowance for loan losses:**                                           |   |                   | ** **  |   | ** ** |    | ** ** |
| Balance at  beginning of year                                            |   | **$**                  | **2,103**   |   | $          | 2,188   |       | $ | 1,696 |   |
| Loans  charged-off:                                                      |   |                   |        |   |       |    |       |
| Commercial,  financial, and agricultural                                 |   | **(157**               | )           | (581   | )          | (55     | )          |
| Real estate                                                              |   | **(246**               | )           | (108   | )          | (23     | )          |
| Consumer                                                                 |   | **(108**               | )           | (51    | )          | (114    | )          |
| Total                                                                    |   | **(511**               | )           | (740   | )          | (192    | )          |
| Recoveries of  loans                                                     |   |                   |        |   |       |    |       |
| previously  charged-off:                                                 |   |                   |        |   |       |    |       |
| Commercial,  financial, and agricultural                                 |   | **11**                 |        | 16     |       | 79      |       |
| Real estate                                                              |   | **89**                 |        | 19     |       | 7       |       |
| Consumer                                                                 |   | **16**                 |        | 15     |       | 58      |       |
| Total                                                                    |   | **116**                |        | 50     |       | 144     |       |
| Net charge-offs                                                          |   | **(395**               | )           | (690   | )          | (48     | )          |
| Provision  charged to expense                                            |   | **760**                |        | 605    |       | 540     |       |
| Balance at end  of year                                                  |   | **$**                  | **2,468**   |   | $          | 2,103   |       | $ | 2,188 |   |
|                                                                     |   |                   |        |   |       |    |       |
| Ratio of net  charge-offs to average loans outstanding during the period |   | **0.19**               | %           | 0.38   | %          | 0.03    | %          |

 

In 2002, as illustratedin the preceding chart, loan losses increased in all areas except thecommercial, financial, and agricultural category, which had a $424,000,decrease.  The decline in this categoryis primarily attributed to the $535,000 loss on one commercial loan recorded in2001.  Excluding this one loss in 2001,the net charge-off amounts doubled in 2002. The overall increase in net losses is primarily attributed to aweakening national and local economy. Management remains committed to improving the quality of the loanportfolio through enhanced credit approval systems and active identification ofweak or deteriorating customer relationships. 

 

 

•      ***Allowance Allocation***

 

The risk of losses inherentin the loan portfolio is not precisely attributable to a particular loan orcategory of loans.  There were nochanges in estimation methods or assumptions that affected our methodology forassessing the appropriateness of the allowance for loan losses from December31, 2001 through December 31, 2002.  Thechange in allocation among the various loan categories related primarily to anincrease in the specific allowance allocation due to individual credit exposureas identified by management.  Based on itsreview for adequacy, management has estimated those portions of the allowancethat could be attributable to major categories of loans as follows:

 

24

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|                                    |   | **2002**               |       | 2001                  |       |
|-----------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                    |   |                   |       |                  |       |   |   |   |   |
|                                    |   | **Amount**             |       | **% of Total  Loans** |       | Amount |   | % of Total  Loans |   |
|                                    |   | (dollars in thousands) |       |
|                                    |   |                   |       |                  |       |   |   |   |   |
| Commercial,  financial, and agriculture |   | **$**                  | **1,369**  | ** **            | **25.79**  | % | $ | 1,527 |   | 27.30 | % |
| Real estate                             |   | **930**                | ** ** | **69.45**             |       | 357 |   | 66.23 |   |
| Consumer                                |   | **169**                | ** ** | **4.76**              |       | 219 |   | 6.47 |   |
| Total  allowance for loan losses        |   | **$**                  | **2,468**  | ** **            | **100.00** | % | $ | 2,103 |   | 100.00 | % |

 

These allocationestimates do not specifically represent that loan charge-offs of that magnitudewill be incurred, nor do these allocations restrict future loan lossesattributable to a particular category from being absorbed by the allowanceattributable to other categories.  Therisk factors considered when estimating the allocations for major loancategories are the same as the factors considered when determining the adequacyof the overall allowance as specified in the allowance summary.  Due to a significant increase ofnonperforming commercial real estate loans the allowance for this category ofloans, management increased the allocation from $357,000 in 2001 to $930,000 in2002.

 

•      ***Nonperforming Assets***

 

Nonperforming assetsconsist of loans greater than 90 days past due, nonaccrual loans, loans withrestructured terms and other real estate owned.  Loans are generally classified as nonaccrual when there arereasonable doubts as to the collectibility of principal and interest or whenpayment becomes 90 days past due, except loans which are well secured and inthe process of collection.  Interestcollection on nonaccrual loans for which the ultimate collectibility of principalis uncertain is applied as principal reduction.  Otherwise, such collections are applied to interest whenreceived.  The following table presentsinformation concerning the aggregate amount of nonperforming assets and loans90 days or more past due but still accruing interest.
|                                  |   | **December  31,**      |      |
|---------------------------------------|--------|------------------------|-----------|
|                                  |   | **2002**               |      | 2001 |   |
|                                  |   | (dollars in thousands) |      |
| Nonaccrual                            |   | **$**                  | **4,901** |   | $ | 4,920 |   |
| Renegotiated                          |   | —                 |      | — |   |
| Accruing loans  past due 90 days      |   | **23**                 |      | 15 |   |
| Other real  estate owned              |   | **787**                |      | 370 |   |
| Nonperforming  assets                 |   | **$**                  | **5,711** |   | $ | 5,305 |   |
|                                  |   |                   |      |   |   |
| Nonperforming  loans to total loans   |   | **2.35**               | %         | 2.48 | % |
| Nonperforming  assets to total assets |   | **2.02**               | %         | 1.93 | % |

 

Nonperforming assetstotaled $5,711,000 as of year-end 2002, an increase of $406,000 from the$5,305,000 at year-end 2001.  Totalnonperforming assets represent 2.02% of total assets at December 31, 2002,compared to 1.93% at December 31, 2001. Impaired loans as of December 31, 2002 and 2001 were $4,901,000 and$5,132,000 respectively, and include all nonaccrual loans.

Nonperforming loansdecreased $11,000, to a total of $4,924,000 at year-end 2002. The majority ofthe nonperforming loans are attributed to five commercial real estate loans andone commercial loan, which are in various stages of foreclosure orlitigation.  As of December 31, 2002,nonperforming loans to total loans

 

25

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were 2.35% compared to 2.48% and 0.46% for years ended 2001 and2000.  The slight decrease innonperforming loans is offset by the increase in other real estate owned.  Management continues to work through thelegal system to recover and obtain title to property so that ultimately thecollateral is available for sale.  Thistime consuming process is required by law. Nearly all of these problem loans identified in 2001 were worked in 2002and should reach a point in 2003 that will allow Illini to go forward with asale of the properties.  There were nosignificant additions to nonperforming loans in 2002.  Individual nonaccrual loans are written down to management’sestimate of the net realizable value of collateral and/or realistic estimatesof other payments from the borrower. Additionally, specific allocations to the allowance for loan losses aremade on loans where there may be uncertainties as to the collection of theestimated value of collateral.  Illiniand Camp Point do not carry loans past due more than 90 days and still accruinginterest except for credit card receivables which are handled by a third partyvendor.  By policy, the credit cardreceivables are charged off at 240 days delinquency.  Management has the discretion to accelerate that time period ifdeemed appropriate.

 

•      ***Noninterest Income***

 

The following tabledepicts the amount of and annual changes in noninterest income categories:
|                                                |   | Year Ended December 31, |       | Percent Change |   |
|-----------------------------------------------------|--------|-------------------------|------------|----------------|--------|
|                                                |   | **2002**                |       | 2001           |   | 2000 |   | **2002/2001** |   | 2001/2000 |   |
|                                                |   | (dollars in thousands)  |       |
| Service charges  on deposit accounts                |   | **$**                   | **1,333**  |           | $      | 1,367 |   | $ | 1,361 |   | **(2.5** | **)%** | 0.4 | % |
| Other fee income                                    |   | **374**                 |       | 290            |   | 283 |   | **29.0** | ** ** | 2.5 |   |
| Mortgage loan  servicing fees                       |   | **108**                 |       | 265            |   | 212 |   | **(59.2** | **)** | 25.0 |   |
| Gains on sales  of mortgage loans                   |   | **261**                 |       | 569            |   | 23 |   | **(54.1** | **)** | 2,373.9 |   |
| Gain on deposit  premiums                           |   | —                  | ** ** | **—**     |   | 695 |   | **N/A** | ** ** | (100.0 | ) |
| Gains (losses)  on sale of fixed assets             |   | **(1**                  | )          | (13            | )      | 379 |   | **92.3** | ** ** | (103.4 | ) |
| Gains (losses)  on sales of securities, net         |   | —                  |       | 136            |   | (13 | ) | **(100.0** | **)** | 1,146.2 |   |
| Gains (losses)  on sales of other real estate owned |   | **(18**                 | )          | 29             |   | (6 | ) | **(162.1** | **)** | 583.3 |   |
| Other                                               |   | **132**                 |       | 189            |   | 148 |   | **(30.2** | **)** | 27.7 |   |
|                                                |   | **$**                   | **2,189**  |           | $      | 2,832 |   | $ | 3,082 |   | **(22.7** | **)** | (8.1 | ) |

 

Total noninterest incomedecreased $643,000 from 2001 to 2002. The decrease is primarily attributable to two nonrecurring items thatwere recorded in 2001.  During 2002, thegain on sales of mortgage loans and servicing fees were adversely impacted byrapidly declining interest rates and historically high prepayment speeds.  This caused a significant decrease in thesize of the mortgage servicing portfolio and a substantial increase in theamount of mortgage servicing rights amortization.  Additionally, gains on the sale of securities were booked in theamount of $136,000 in 2001.  The largestgrowth area for noninterest income in 2002 was the other fee incomecategory.  In this area, fees related tomerchant processing and debit card activity increased $55,000 over 2001levels.  In addition, during 2002,Illini initiated a residential mortgage loan application fee, which generatedapproximately $41,000.  Income frommortgage loan servicing fees was adversely impacted by the amortization ofmortgage servicing rights in the amount of $167,000 during 2002 as comparedwith $24,000 for 2001.  The high amountof amortization was driven by record level prepayment speeds due to the declinein mortgage rates to the lowest levels in history.  As of December 31, 2002, Illini had a servicing portfolio ofapproximately $67.3 million.

 

26

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•                  ***Noninterest Expense***

 

The following tabledepicts the amount of and annual changes in noninterest expense categories:

 
|                                       |   | Year Ended December 31, 2002 |      | Percent Change |   |
|--------------------------------------------|--------|------------------------------|-----------|----------------|--------|
|                                       |   | **2002**                     |      | 2001           |   | 2000 |   | **2002/2001** |   | 2001/2000 |   |
|                                       |   | (dollars in thousands)       |      |
| Salaries and  employee benefits            |   | **$**                        | **4,932** |           | $      | 4,358 |   | $ | 3,770 | ** ** | **13.2** | % | 15.6 | % |
| Net occupancy  exp                         |   | **767**                      |      | 780            |   | 810 | ** ** | **(1.7** | ) | (3.7 | ) |
| Equipment  expense                         |   | **290**                      |      | 359            |   | 407 | ** ** | **(19.2** | ) | (11.8 | ) |
| Data processing                            |   | **680**                      |      | 807            |   | 717 | ** ** | **(15.7** | ) | 12.6 |   |
| Supplies                                   |   | **157**                      |      | 199            |   | 166 | ** ** | **(21.1** | ) | 19.9 |   |
| Communication  and transportation          |   | **457**                      |      | 451            |   | 462 | ** ** | **1.3** |   | (2.4 | ) |
| Marketing and  advertising                 |   | **214**                      |      | 195            |   | 189 | ** ** | **9.7** |   | 3.2 |   |
| Correspondent  and processing fees         |   | **355**                      |      | 311            |   | 266 | ** ** | **14.1** |   | 16.9 |   |
| Loan and other  real estate owned expenses |   | **154**                      |      | 102            |   | 60 | ** ** | **51.0** |   | 70.0 |   |
| Professional  fees                         |   | **819**                      |      | 914            |   | 1,078 | ** ** | **(10.4** | ) | (15.2 | ) |
| Regulatory fees                            |   | **111**                      |      | 123            |   | 100 | ** ** | **(9.8** | ) | 23.0 |   |
| Other                                      |   | **497**                      |      | 659            |   | 527 | ** ** | **(24.6** | ) | 25.0 |   |
| Total  noninterest expense                 |   | **$**                        | **9,433** |           | $      | 9,258 |   | $ | 8,552 | ** ** | **1.9** |   | 8.3 |   |

 

Total noninterest expenseincreased $175,000 in 2002, as compared to year ended 2001.  Salaries and benefits increased $574,000 andwas a result of additions to staff, adjustments to base salaries and performanceincentives.  Also noteworthy is thedecline in expenses related to equipment and data processing.    In 2002, these two items declinedapproximately $196,000 from the 2001 levels. This was primarily related to a systems conversion and hardware upgradesthat took place in June 2001 at an estimated cost of $292,000.  The decline in 2002 relates more closely toa year without significant system changes and upgrades.  Loan and other real estate owned expensesincreased due to Illini having a constant volume of nonperforming assets beingheld during all of 2002.

 

•                  ***IncomeTax Expense***

 

Total income tax expensewas $419,000 in 2002, compared to $471,000 in 2001.  The decrease is attributable to a higher level of tax-exemptincome in 2002.  The effective tax ratesfor the years ended December 31, 2002 and 2001 were 21.6% and 26.9%.

 

•                  ***Effects of Inflation***

 

The effects of inflationon financial institutions are different from the effects on other commercialenterprises due to making fewer significant capital or inventory expenditureswhich are directly affected by changing prices.  Because bank assets and liabilities are virtually all monetary innature, inflation does not affect a financial institution as much as do changesin interest rates. The general level of inflation does, in fact, underlie thegeneral level of most interest rates; however, interest rates do not increaseat the rate of inflation as do the prices of goods and services.  Rather, interest rates react more to thechanges in the expected rate of inflation and to changes in monetary and fiscalpolicy.

Inflation, however, doeshave an impact on the growth of total assets in the banking industry, oftenresulting in a need to increase capital at higher than normal rates to maintainan appropriate capital-to-asset ratio.

 

27

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**ITEM7. - FINANCIAL STATEMENTS**

 

Index to IlliniCorporation’s Consolidated Financial Statements.

 

Independent Accountants’Report

Consolidated Balance Sheetsas of December 31, 2002 and 2001

Consolidated Statementsof Income for the years ended December 31, 2002 and 2001

ConsolidatedStatements of Shareholders’ Equity for the years ended December 31, 2002 and2001

ConsolidatedStatements of Cash Flows for the years ended December 31, 2002 and 2001

Notes toConsolidated Financial Statements

 

28

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**IndependentAccountants’ Report**

 

To the Stockholders and

Board of Directors

Illini Corporation

Springfield, Illinois

 

We have audited the accompanying consolidated balance sheets of IlliniCorporation and subsidiaries as of December 31, 2002 and 2001, and the relatedconsolidated statements of income, shareholders’ equity, and cash flows for theyears then ended. These consolidated financial statements are theresponsibility of the Corporation’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements described abovepresent fairly, in all material respects, the consolidated financial positionof Illini Corporation and subsidiaries as of December 31, 2002 and 2001, andthe results of their operations and their cash flows for the years then endedin conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| /s/ BKD LLP       |   |
|-------------------|--------|
| Decatur, Illinois |
| March 12, 2003    |

 

29

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**December 31, 2002 and 2001**

 
|                                                                                                 |   | **2002**               |        | 2001    |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------|-------------|---------|--------|
|                                                                                                 |   | (dollars in thousands) |        |
|                                                                                                 |   |                   |        |    |   |
| ASSETS:                                                                                              |   |                   |        |    |   |
| Cash and due  from banks                                                                             |   | **$**                  | **7,654**   |    | $      | 8,146 |   |
| Interest-bearing  deposits in other banks                                                            |   | **33**                 |        | 29      |   |
| Federal funds  sold                                                                                  |   | **12,166**             |        | 7,410   |   |
| Cash and cash  equivalents                                                                           |   | **19,853**             |        | 15,585  |   |
| Investment  securities available for sale, at fair value                                             |   | **42,969**             |        | 49,156  |   |
| Loans, net of  allowance for loan losses                                                             |   | **207,366**            |        | 196,913 |   |
| Premises and  equipment                                                                              |   | **6,681**              |        | 6,946   |   |
| Accrued interest  receivable                                                                         |   | **2,346**              |        | 2,549   |   |
| Other real  estate owned                                                                             |   | **787**                |        | 370     |   |
| Goodwill                                                                                             |   | **1,854**              |        | 1,854   |   |
| Other assets                                                                                         |   | **803**                |        | 1,139   |   |
| Total Assets                                                                                         |   | **$**                  | **282,659** |    | $      | 274,512 |   |
|                                                                                                 |   |                   |        |    |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                          |   |                   |        |    |   |
| Noninterest-bearing  demand deposits                                                                 |   | **$**                  | **35,110**  |    | $      | 34,140 |   |
| Interest-bearing  deposits:                                                                          |   |                   |        |    |   |
| NOW and money  market accounts                                                                       |   | **56,595**             |        | 60,057  |   |
| Savings deposits                                                                                     |   | **19,938**             |        | 17,995  |   |
| Time deposits,  $100,000 and over                                                                    |   | **22,794**             |        | 31,842  |   |
| Other time  deposits                                                                                 |   | **110,397**            |        | 94,793  |   |
| Total Deposits                                                                                       |   | **244,834**            |        | 238,827 |   |
|                                                                                                 |   |                   |        |    |   |
| Short-term debt                                                                                      |   | **656**                |        | 1,613   |   |
| Long-term debt                                                                                       |   | **8,395**              |        | 8,471   |   |
| Preferred  securities of subsidiary trust                                                            |   | **9,000**              |        | 9,000   |   |
| Accrued interest  payable                                                                            |   | **1,332**              |        | 1,414   |   |
| Other  liabilities                                                                                   |   | **3,221**              |        | 1,597   |   |
| Total  Liabilities                                                                                   |   | **267,438**            |        | 260,922 |   |
|                                                                                                 |   |                   |        |    |   |
| COMMITMENTS AND CONTINGENT  LIABILITIES                                                              |   |                   |        |    |   |
|                                                                                                 |   |                   |        |    |   |
| Shareholders’  equity:                                                                          |   |                   |        |    |   |
| Preferred stock,  $0.01 par value, authorized and unissued 10,000,000 shares                         |   | —                 |        | —  |   |
| Common stock,  $0.01 par value, authorized 45,000,000 shares; 571,789 shares issued and  outstanding |   | **6**                  |        | 6       |   |
| Capital surplus                                                                                      |   | **9,070**              |        | 9,070   |   |
| Retained  earnings                                                                                   |   | **11,885**             |        | 10,775  |   |
| Accumulated  other comprehensive income                                                              |   | **1,464**              |        | 943     |   |
| Less:  Treasury shares, at cost, 160,088 shares                                                 |   | **(7,204**             | )           | (7,204  | )      |
| Total  Shareholders’ Equity                                                                     |   | **15,221**             |        | 13,590  |   |
| Total  Liabilities and Shareholders’ Equity                                                     |   | **$**                  | **282,659** |    | $      | 274,512 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ILLINI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**Years Ended December 31, 2002 and2001**

 
|                                                                                                                    |   | **2002**                                         |       | 2001   |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|--------|--------|
|                                                                                                                    |   | (dollars in thousands, except per share amounts) |       |
| Interest income:                                                                                                        |   |                                             |       |   |   |
| Interest and  fees on loans                                                                                             |   | **$**                                            | **15,604** |   | $      | 15,461 |   |
| Interest on  investment securities:                                                                                     |   |                                             |       |   |   |
| Taxable                                                                                                                 |   | **1,580**                                        |       | 2,290  |   |
| Exempt from  federal income taxes                                                                                       |   | **844**                                          |       | 750    |   |
| Interest on  short-term investments                                                                                     |   | **118**                                          |       | 331    |   |
| Total interest  income                                                                                                  |   | **18,146**                                       |       | 18,832 |   |
| Interest  expense:                                                                                                      |   |                                             |       |   |   |
| Interest on  deposits:                                                                                                  |   |                                             |       |   |   |
| NOW and money  market accounts                                                                                          |   | **1,044**                                        |       | 1,906  |   |
| Savings deposits                                                                                                        |   | **261**                                          |       | 314    |   |
| Time deposits,  $100,000 and over                                                                                       |   | **1,046**                                        |       | 1,483  |   |
| Other time  deposits                                                                                                    |   | **4,444**                                        |       | 4,866  |   |
| Interest on  short-term debt                                                                                            |   | **30**                                           |       | 77     |   |
| Interest on  long-term debt                                                                                             |   | **436**                                          |       | 619    |   |
| Interest on  preferred securities of subsidiary trust                                                                   |   | **940**                                          |       | 786    |   |
| Total interest  expense                                                                                                 |   | **8,201**                                        |       | 10,051 |   |
|                                                                                                                    |   |                                             |       |   |   |
| Net interest  income                                                                                                    |   | **9,945**                                        |       | 8,781  |   |
| Provision for  loan losses                                                                                              |   | **760**                                          |       | 605    |   |
| Net interest  income after provision for loan losses                                                                    |   | **9,185**                                        |       | 8,176  |   |
| Noninterest  income:                                                                                                    |   |                                             |       |   |   |
| Service charges  on deposit accounts                                                                                    |   | **1,333**                                        |       | 1,367  |   |
| Other fee income                                                                                                        |   | **374**                                          |       | 290    |   |
| Mortgage loan  servicing fees                                                                                           |   | **108**                                          |       | 265    |   |
| Gains on sales  of mortgage loans                                                                                       |   | **261**                                          |       | 569    |   |
| Gains on sales  of securities, net                                                                                      |   | —                                           |       | 136    |   |
| Losses on sales  of premises and equipment                                                                              |   | **(1**                                           | )          | (13    | )      |
| Gains (losses)  on sales of other real estate owned                                                                     |   | **(18**                                          | )          | 29     |   |
| Other                                                                                                                   |   | **132**                                          |       | 189    |   |
| Total  noninterest income                                                                                               |   | **2,189**                                        |       | 2,832  |   |
| Noninterest  expense:                                                                                                   |   |                                             |       |   |   |
| Salaries and  employee benefits                                                                                         |   | **4,932**                                        |       | 4,358  |   |
| Net occupancy  expense                                                                                                  |   | **767**                                          |       | 780    |   |
| Equipment  expense                                                                                                      |   | **290**                                          |       | 359    |   |
| Data processing  fees                                                                                                   |   | **680**                                          |       | 807    |   |
| Supplies expense                                                                                                        |   | **157**                                          |       | 199    |   |
| Communication  and transportation expense                                                                               |   | **457**                                          |       | 451    |   |
| Marketing and  advertising expense                                                                                      |   | **214**                                          |       | 195    |   |
| Correspondent  and processing fees                                                                                      |   | **355**                                          |       | 311    |   |
| Loan and other  real estate owned expense                                                                               |   | **154**                                          |       | 102    |   |
| Professional  fees                                                                                                      |   | **819**                                          |       | 914    |   |
| Regulatory fees                                                                                                         |   | **111**                                          |       | 123    |   |
| Other                                                                                                                   |   | **497**                                          |       | 659    |   |
| Total  noninterest expense                                                                                              |   | **9,433**                                        |       | 9,258  |   |
| Income before  income tax expense                                                                                       |   | **1,941**                                        |       | 1,750  |   |
| Income tax  expense                                                                                                     |   | **419**                                          |       | 471    |   |
| Net income                                                                                                              |   | **$**                                            | **1,522**  |   | $      | 1,279 |   |
| Basic earnings  per share (based on weighted average common shares outstanding of 411,701 in  2002 and 483,741 in 2001) |   | **$**                                            | **3.70**   |   | $      | 2.64 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ILLINI CORPORATION AND SUBSIDIARIES**

#### **CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

#### **Years Ended December 31, 2002 and 2001**

 
|                                                                                                     |   | **Common  stock**      |       | **Capital  surplus** |       | **Retained  earnings** |       | **Treasury  stock** |       | **Accumulated  other  comprehensive  income** |       | **Total** |       |
|----------------------------------------------------------------------------------------------------------|--------|------------------------|------------|----------------------|------------|------------------------|------------|---------------------|------------|-----------------------------------------------|------------|-----------|------------|
|                                                                                                     |   | (dollars in thousands) |       |
|                                                                                                     |   |                   |       |                 |       |                   |       |                |       |                                          |       |      |       |
| Balance at January 1, 2001                                                                               |   | $                      | 6          |                 | $          | 9,070                  |       | $                   | 9,948      |                                          | $          | —    |       | $ | 334 |   | $ | 19,358 |   |
|                                                                                                     |   |                   |       |                 |       |                   |       |                |       |                                          |       |      |       |
| Comprehensive income:                                                                                    |   |                   | ** ** |                 | ** ** |                   | ** ** |                | ** ** |                                          | ** ** |      | ** ** |
| Net income                                                                                               |   | —                 |       | —               |       | 1,279                  |       | —              |       | —                                        |       | 1,279     |       |
| Change in unrealized gains on securities available for sale, net of tax  and reclassification adjustment |   | —                 |       | —               |       | —                 |       | —              |       | 609                                           |       | 609       |       |
| Total comprehensive income                                                                               |   |                   |       |                 |       |                   |       |                |       |                                          |       | 1,888     |       |
| Purchase of treasury stock (160,088 shares)                                                              |   | —                 |       | —               |       | —                 |       | (7,204              | )          | —                                        |       | (7,204    | )          |
| Cash dividends paid, $1.00 per share                                                                     |   | —                 |       | —               |       | (452                   | )          | —              |       | —                                        |       | (452      | )          |
|                                                                                                     |   |                   |       |                 |       |                   |       |                |       |                                          |       |      |       |
| Balance at December 31, 2001                                                                             |   | 6                      |       | 9,070                |       | 10,775                 |       | (7,204              | )          | 943                                           |       | 13,590    |       |
|                                                                                                     |   |                   |       |                 |       |                   |       |                |       |                                          |       |      |       |
| Comprehensive income:                                                                                    |   |                   | ** ** |                 | ** ** |                   | ** ** |                | ** ** |                                          | ** ** |      | ** ** |
| Net income                                                                                               |   | —                 |       | —               |       | 1,522                  |       | —              |       | —                                        |       | 1,522     |       |
| Change in unrealized gains on securities available for sale, net of tax  and reclassification adjustment |   | —                 |       | —               |       | —                 |       | —              |       | 521                                           |       | 521       |       |
| Total comprehensive income                                                                               |   |                   |       |                 |       |                   |       |                |       |                                          |       | 2,043     |       |
| Cash dividends paid, $1.00 per share                                                                     |   | —                 |       | —               |       | (412                   | )          | —              |       | —                                        |       | (412      | )          |
|                                                                                                     |   |                   |       |                 |       |                   |       |                |       |                                          |       |      |       |
| Balance at December 31, 2002                                                                             |   | $                      | 6          |                 | $          | 9,070                  |       | $                   | 11,885     |                                          | $          | (7,204    | )          | $ | 1,464 |   | $ | 15,221 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ILLINI CORPORATION AND SUBSIDIARIES**

#### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**Years Ended December 31, 2002 and2001**

 
|                                                                               |   | **2002**               |       | **2001** |   |
|------------------------------------------------------------------------------------|--------|------------------------|------------|----------|--------|
|                                                                               |   | (dollars in thousands) |       |
| Cash flows from  operating activities:                                             |   |                   |       |     |   |
| Net income                                                                         |   | $                      | **1,522**  |     | $      | 1,279 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                   |       |     |   |
| Depreciation                                                                       |   | **821**                |       | 939      |   |
| Amortization of  goodwill and other intangibles                                    |   | **80**                 |       | 196      |   |
| Provision for  loan losses                                                         |   | **760**                |       | 605      |   |
| Investment  security amortization (accretion), net                                 |   | **52**                 |       | (106     | )      |
| Gains on sales  of securities, net                                                 |   | —                 |       | (136     | )      |
| Federal Home  Loan Bank stock dividend                                             |   | **(38**                | )          | (40      | )      |
| Gains on sales  of mortgage loans                                                  |   | **(261**               | )          | (569     | )      |
| Losses on sale  of premises and equipment                                          |   | **1**                  |       | 13       |   |
| Deferred tax  benefit                                                              |   | **44**                 |       | (48      | )      |
| (Gains) losses  on sales of other real estate owned                                |   | **18**                 |       | (29      | )      |
| (Increase)  decrease in accrued interest receivable                                |   | **203**                |       | (154     | )      |
| Increase  (decrease) in accrued interest payable                                   |   | **(82**                | )          | 233      |   |
| Origination of  secondary market mortgage loans                                    |   | **(19,192**            | )          | (26,325  | )      |
| Proceeds from  the sales of secondary market mortgage loans                        |   | **19,157**             |       | 27,040   |   |
| Other, net                                                                         |   | **1,553**              |       | (880     | )      |
| Net cash  provided by operating activities                                         |   | **4,638**              |       | 2,018    |   |
| Cash flows from  investing activities:                                             |   |                   |       |     |   |
| Proceeds from  sales of investment securities available for sale                   |   | —                 |       | 1,004    |   |
| Proceeds from  maturities and paydowns of investment securities available for sale |   | **22,648**             |       | 26,593   |   |
| Purchases of  investment securities available for sale                             |   | **(15,671**            | )          | (20,906  | )      |
| Net increase in  loans                                                             |   | **(11,545**            | )          | (31,065  | )      |
| Purchases of  premises and equipment                                               |   | **(557**               | )          | (1,350   | )      |
| Proceeds from  sale of premises and equipment                                      |   | —                 |       | 7        |   |
| Proceeds from  sales of other real estate owned                                    |   | **193**                |       | 200      |   |
| Net cash used in  investing activities                                             |   | **(4,932**             | )          | (25,517  | )      |
| Cash flows from  financing activities:                                             |   |                   |       |     |   |
| Net increase in  noninterest bearing deposit accounts                              |   | **970**                |       | 1,415    |   |
| Net increase  (decrease) in NOW, money market accounts and savings deposits        |   | **(1,519**             | )          | 8,830    |   |
| Net increase  (decrease) in time deposits, $100,000 and over                       |   | **(9,048**             | )          | 5,699    |   |
| Net increase in  other time deposits                                               |   | **15,604**             |       | 19,591   |   |
| Net decrease in  short-term debt                                                   |   | **(957**               | )          | (6,868   | )      |
| Proceeds from  issuance of preferred securities of subsidiary trust                |   | —                 |       | 9,000    |   |
| Purchase of  treasury shares                                                       |   | —                 |       | (2,494   | )      |
| Proceeds of  long-term debt                                                        |   | **2,400**              |       | —   |   |
| Repayment of  long-term debt                                                       |   | **(2,476**             | )          | (2,239   | )      |
| Cash paid for  other intangibles                                                   |   | —                 |       | (421     | )      |
| Cash dividends  paid                                                               |   | **(412**               | )          | (452     | )      |
| Net cash  provided by financing activities                                         |   | **4,562**              |       | 32,061   |   |
|                                                                               |   |                   |       |     |   |
| Net increase in  cash and cash equivalents                                         |   | **4,268**              |       | 8,562    |   |
| Cash and cash  equivalents at beginning of period                                  |   | **15,585**             |       | 7,023    |   |
| Cash and cash  equivalents at end of period                                        |   | **$**                  | **19,853** |     | $      | 15,585 |   |
|                                                                               |   |                   |       |     |   |
| Supplemental  information:                                                         |   |                   |       |     |   |
| Interest paid                                                                      |   | **$**                  | **8,283**  |     | $      | 9,818 |   |
| Income taxes  paid                                                                 |   | **608**                |       | 1,025    |   |
| Other non-cash  investing activities:                                              |   |                   |       |     |   |
| Transfer of  loans to other real estate owned                                      |   | **628**                |       | 182      |   |
| Purchase of  treasury shares financed by note payable                              |   | —                 |       | 4,710    |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ILLINI CORPORATION AND SUBSIDIARIES**

Notes to ConsolidatedFinancial Statements

December 31, 2002 and2001

 

**(1)   Summaryof Significant Accounting Policies**

Illini Corporation, whichoperates as a single business segment, provides a full range of bankingservices to individual, corporate, and institutional customers through its 14locations throughout central Illinois. Illini Corporation and its wholly-owned subsidiaries, Illini Bank(“Illini”), Farmers State Bank of Camp Point (“Camp Point”), and IlliniStatutory Trust I (“IST”) are subject to competition from other financial andnonfinancial institutions providing financial products in central Illinois.Additionally, Illini Corporation, Illini, and Camp Point are subject to theregulations of certain federal and state agencies and undergo periodicexaminations by those regulatory authorities.

IST is a wholly ownedsubsidiary, which was formed on January 31, 2001, to issue cumulative trustpreferred securities.  IlliniCorporation owns all of the securities of IST that possess general votingpowers. The preferred securities, issued through an underwritten pooled publicoffering on February 22, 2001, were sold at their $1,000 par value. IST issued9,279 shares of the preferred securities bearing a dividend rate of 10.2% fornet proceeds of $9 million, after deducting underwriting commissions and othercosts. IST invested the proceeds in Illinois Corporation junior subordinateddebentures, which also have an interest rate of 10.2%. The junior subordinateddebentures mature on February 22, 2031, which date may be shortened to a datenot earlier than February 22, 2011, if certain conditions are met. IST’s soleasset is the holding company’s junior subordinated debt. Considered together,Illini Corporation’s obligations with respect to the issuance of the preferredsecurities constitute a full and unconditional guarantee of IST’s obligationswith respect to the preferred securities. The Corporation used $3 million of the proceeds from the juniorsubordinated debt to increase the equity capital of Illini.  Interest on the junior subordinateddebentures and distributions on the preferred securities are payablesemi-annually in arrears.  Distributionson the preferred securities are cumulative and based upon the liquidation valueof $1,000 per preferred security. Illini Corporation has the right, at any time, so long as no event ofdefault has occurred and is continuing, to defer payments of interest on thejunior subordinated debentures, which will require deferral of distribution onthe preferred securities, for a period not exceeding 10 consecutive semi-annualperiods, provided, that such deferral may not extend beyond the stated maturityof the junior subordinated debentures. The preferred securities are subject to mandatory redemption, in wholeor in part, upon repayment of the junior subordinated debentures at maturity ortheir earlier redemption.

The obligation withrespect to the holders of the preferred securities, is recorded as a liabilityin the accompanying consolidated balance sheets as “preferred securities ofsubsidiary trust”.  The related dividendexpense is reported as interest expense in the accompanying consolidatedstatements of income.

The accounting andreporting policies of Illini Corporation conform to accounting principlesgenerally accepted in the United States of America.  The preparation of the consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions, including thedetermination of the allowance for loan losses, that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

Following is adescription of the more significant of these policies:

 

***(a)******         Principlesof Consolidation***

Theconsolidated financial statements include the accounts of Illini Corporation,Illini, Camp Point, and IST after elimination of all significant intercompanyaccounts and transactions.

 

***(b)******         Cashand Cash Equivalents***

Forpurposes of the consolidated statements of cash flows, cash and cash equivalentsinclude cash and due from banks, interest-bearing deposits in other banks, andfederal funds sold, all of which are considered to be highly liquid assets.

 

34

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***(c)******          InvestmentSecurities***

Investmentsecurities designated as available for sale, which include any security whichIllini Corporation has no immediate plan to sell but which may be sold in thenear future under different circumstances, are stated at fair value.  Amortization of premiums and accretion ofdiscounts on securities available for sale are recorded using the interestmethod over the period to maturity of the respective security.  Unrealized holding gains and losses foravailable for sale securities are excluded from earnings and reported as a netamount in a separate component of shareholders’ equity until realized.

Realizedgains and losses for securities are included in earnings using the specificidentification method for determining the cost basis of securities sold.  Interest and dividends on investments indebt and equity securities are included in income when earned.

 

***(d)******         Loans***

Loansthat management has the intent and ability to hold for the foreseeable futureor until maturity or payoffs are reported at their outstanding principal balancesadjusted for any charge-offs, the allowance for loan losses and any deferredfees or costs on originated loans.

It isthe policy of Illini Corporation to discontinue, generally when a loan becomesninety days past due, the accrual of interest when full collectibility ofprincipal or interest on any loan is in doubt. Subsequent interest paymentsreceived on such loans are applied to principal if there is any doubt as to thecollectibility of such principal.  Otherwise,these receipts are recorded as interest income.  Accrual of interest may be resumed on a loan when performance isin accordance with the contract, and the borrower demonstrates the ability topay and remain current.

Loanorigination fees and certain direct loan origination costs are deferred andrecognized over the lives of the related loans as an adjustment of the loanyield using a method approximating the interest method on a loan-by-loan basis.

 

***(e)******          Allowancefor Loan Losses***

Theallowance for loan losses is increased by provisions charged to operations andis available to absorb loan losses. Loan losses are charged against the allowance when management believesand confirms that the loan balance is not collectable.  Subsequent recoveries, if any, are creditedto the allowance.  Illini Corporationutilizes a systematic, documented approach in determining the appropriate levelof the allowance for loan losses. Management’s approach, which provides for general and specificallowances, is based on current economic conditions, past loan losses,collection experience, risk characteristics of the portfolio, assessingcollateral values by obtaining independent appraisals for significantproperties, and such other factors which, in management’s judgment, deserverecognition in estimating loan losses.

Managementbelieves the allowance for loan losses is adequate to absorb losses in the loanportfolio.  While management usesavailable information to recognize losses on loans, future additions to theallowance for loan losses may be necessary based on changes in economicconditions.

Aloan is considered impaired when it is probable Illini Corporation will beunable to collect all amounts due, both principal and interest, according tothe contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impairedloan are discounted at the loan’s effective interest rate.  Alternatively, impairment is measured on aloan by loan basis for non-homogenous loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate, orreference to an observable market price, if one exists, or the fair value ofthe collateral for a collateral-dependent loan.  Large groups of smaller balance homogenous loans are collectivelyevaluated for impairment.  Accordingly,Illini Corporation does not separately identify individual consumer andresidential loans for impairment disclosures. Illini Corporation uses its existing nonaccrual methods for recognizinginterest on impaired loans.

 

***(f)******            MortgageLoans Held for Sale***

Mortgageloans held for sale are recorded at the lower of cost or market value on anaggregate basis.  Deferred fees on loansheld for sale are not amortized.  Gainsand losses on the sale of these loans and loan origination fees are recognizedupon sale of the related loans and included in the consolidated statements ofincome as noninterest income. Additionally, loan administration fees,

 

35

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representing incomeearned from servicing these loans sold in the secondary market, are calculatedon the outstanding principal balances of the loans serviced and recorded asnoninterest income as earned.

 

***(g)******         LoanServicing***

Thecost of mortgage-servicing rights acquired is amortized in proportion to, andover the period of, estimated net servicing revenues.  Impairment of mortgage-servicing rights is assessed based on thefair value of those rights.  Fair valuesare estimated using discounted cash flows based on a current market interestrate.  For purposes of measuringimpairment, the rights are stratified based on the predominant riskcharacteristics of the underlying loans. The predominant characteristic currently used for stratification is typeof loan.  The amount of impairmentrecognized is the amount by which the capitalized mortgage servicing rights fora stratum exceed their fair value.

 

***(h)******         Premisesand Equipment***

Premisesand equipment are stated at cost less accumulated depreciation. Depreciation iscomputed using primarily the straight-line method.  The estimated useful lives are 40 years for bank premises, 7 to40 years for improvements to bank premises, and 3 to 20 years for furniture andequipment.  Costs for maintenance andrepairs are expensed as incurred.

 

***(i)******            FederalHome Loan Bank Stock***

FederalHome Loan Bank Stock is stated at cost and is a required investment forinstitutions that are members of the Federal Home Loan Bank system.  The required investment in the common stockis based on a predetermined formula.

 

***(j)******            IncomeTaxes***

IlliniCorporation and its subsidiaries file a consolidated federal income tax return.

Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.

 

***(k)******         Goodwill***

IlliniCorporation recognized goodwill with the purchase of banks in Camp Point, Auburnand McLean County.  Goodwill is testedannually for impairment.  If the impliedfair value of goodwill is lower than its carrying amount, a goodwill impairmentis indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value arenot recognized in the financial statements.

 

***(l)    Other RealEstate Owned***

Otherreal estate owned (“OREO”) represents property acquired through foreclosure ordeeded to Illini Corporation in lieu of foreclosure on loans on which the borrowershave defaulted.  OREO also includesformer bank premises that management no longer intends to use as bankingfacilities.

OREOis recorded on an individual asset basis at the lower of fair value lessestimated disposal costs or cost.  Ifthe fair value less estimated disposal costs is less than cost, the deficiencyis recorded by a direct write down of the individual OREO asset.  Any subsequent write downs to reflectcurrent fair value are charged to noninterest expense.

 

***(m)******      EarningsPer Share***

Basicearnings per share is computed by dividing income available to commonshareholders by the weighted-average number of common shares outstanding forthe period.  Diluted earnings per sharegives effect to potential common stock, such as stock options or convertiblenotes.  Illini Corporation has notissued instruments which are dilutive.

 

36

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***(n)******         FinancialInstruments***

Financialinstruments are defined as cash, evidence of an ownership interest in anentity, a contract that both imposes on one entity a contractual obligation todeliver cash or another financial instrument to a second entity, to exchangeother financial instruments on potentially unfavorable terms with the secondentity and conveys to that second entity a contractual right to receive cash oranother financial instrument from the first entity or to exchange otherfinancial instruments on potentially favorable terms with the first entity.

 

***(o)******         TreasuryStock***

Treasurystock is stated at cost.  Cost is determinedby the first-in, first-out (FIFO) method.

 

***(p)   Reclassifications***

Certainamounts in the 2001 consolidated financial statements have been reclassified toconform to the 2002 presentation.  Suchreclassifications have no effect on previously reported consolidated net incomeor shareholders’ equity.

 

***(q)   Useof Estimates in the Preparation of Financial Statements***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported period.  Actual results could differ from those estimates.

Material estimates that are particularly susceptible tosignificant change relate to the determination of the allowance for loanlosses, the valuation of real estate acquired in connection with foreclosuresor in satisfaction of loans, and mortgage servicing rights.  In connection with the determination of theallowance for loan losses and the valuation of foreclosed assets held for sale,management obtains independent appraisals for significant properties.  Management estimates mortgage servicingrights taking into consideration changes in interest rates, current prepaymentrates and expected future cash flows.

 

**(2)   Shareholders’ Equity**

During 2002 theshareholders approved an increase in the number of authorized shares of commonstock to 45,000,000 shares and the reduction of the par value of common sharesfrom $10 per share to $.01 per share. Additionally, the shareholders authorized 10,000,000 shares of preferredstock with a par value of $.01 per share. The change in par value is reflected in the financial statements for allperiods presented.

 

**(3)   InvestmentSecurities**

The amortized cost andfair value of investment securities classified as available for sale atDecember 31, 2002 and 2001 are presented below:

 
|                                                      |   | **Amortized  cost**    |       | **Gross  unrealized  gains** |       | **Gross  unrealized  losses** |       | **Fair  value** |       |
|-----------------------------------------------------------|--------|------------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
|                                                      |   | (dollars in thousands) |       |
| **December 31, 2002**                                     |   |                   |       |                         |       |                          |       |            |       |
|                                                      |   |                   |       |                         |       |                          |       |            |       |
| United States  Treasury and United States agencies        |   | **$**                  | **6,132**  | ** **                   | **$**      | **101**                       | ** ** | **$**           | **—** | ** ** | **$** | **6,233** | ** ** |
| Mortgage-backed  securities                               |   | **8,995**              | ** ** | **312**                      | ** ** | **—**                    | ** ** | **9,307**       | ** ** |
| Collateralized  mortgage obligations                      |   | **8,227**              | ** ** | **95**                       | ** ** | **12**                        | ** ** | **8,310**       | ** ** |
| Obligations of  state and political subdivisions          |   | **16,564**             | ** ** | **1,793**                    | ** ** | **—**                    | ** ** | **18,357**      | ** ** |
| Federal Home  Loan Bank stock and other equity securities |   | **762**                | ** ** | **—**                   | ** ** | **—**                    | ** ** | **762**         | ** ** |
|                                                      |   | **$**                  | **40,680** |                         | **$**      | **2,301**                     | ** ** | **$**           | **12**     | ** ** | **$** | **42,969** |   |
|                                                      |   |                   |       |                         |       |                          |       |            |       |
| December 31,  2001                                        |   |                   |       |                         |       |                          |       |            |       |
|                                                      |   |                   |       |                         |       |                          |       |            |       |
| United States  Treasury and United States agencies        |   | $                      | 4,250      |                         | $          | 101                           |       | $               | —     |   | $ | 4,351 |   |
| Mortgage-backed  securities                               |   | 13,405                 |       | 218                          |       | 3                             |       | 13,620          |       |
| Collateralized  mortgage obligations                      |   | 15,395                 |       | 177                          |       | 49                            |       | 15,523          |       |
| Obligations of  state and political subdivisions          |   | 13,905                 |       | 1,079                        |       | 38                            |       | 14,946          |       |
| Federal Home  Loan Bank stock                             |   | 716                    |       | —                       |       | —                        |       | 716             |       |
|                                                      |   | $                      | 47,671     |                         | $          | 1,575                         |       | $               | 90         |   | $ | 49,156 |   |

 

37

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The amortized cost andfair value of debt securities classified as available for sale atDecember 31, 2002, by contractual maturity, are shown below. Expectedmaturities may differ from contractual maturities because certain issuers havethe right to call or prepay obligations with or without call or prepaymentpenalties.

 
|                                    |   | **Amortized  cost**    |       | **Fair  value** |       |
|-----------------------------------------|--------|------------------------|------------|-----------------|------------|
|                                    |   | (dollars in thousands) |       |
| Due in one year  or less                |   | **$**                  | **4,336**  | ** **      | **$**      | **4,399** | ** ** |
| Due after one  year through five years  |   | **4,743**              | ** ** | **5,057**       | ** ** |
| Due after five  years through ten years |   | **7,247**              | ** ** | **7,955**       | ** ** |
| Due after ten  years                    |   | **6,370**              | ** ** | **7,179**       | ** ** |
|                                    |   | **22,696**             |       | **24,590**      |       |
| Mortgage-backed  securities             |   | **8,995**              | ** ** | **9,307**       | ** ** |
| Collateralized  mortgage obligations    |   | **8,227**              | ** ** | **8,310**       | ** ** |
|                                    |   | **$**                  | **39,918** |            | **$**      | **42,207** |   |

 

Proceeds from sales ofinvestment securities during 2002 and 2001 were $0 and $1.0 million,respectively.  Gross gains of $0 and$136,000 for 2002 and 2001, respectively, were realized on those sales.  The tax expense (benefit) recognized from thesesales was $0 and $51,000 for 2002 and 2001.

The market value ofsecurities pledged to secure United States Government and other publicdeposits, securities sold under agreements to repurchase, and for otherpurposes as required by law was approximately $19.2 million and $24.5 millionat December 31, 2002 and 2001, respectively.

 

Other comprehensiveincome is as follows:

 
|                                                                      |   | **2002**               |    | **2001** |   |
|---------------------------------------------------------------------------|--------|------------------------|---------|----------|--------|
|                                                                      |   | (dollars in thousands) |    |
| Unrealized  holding gains arising during the period                       |   | $                      | **804** |     | $      | 1,099 |   |
| Less:  Reclassification adjustment for gains  realized in net income |   | **—**             |    | 136      |   |
| Net  unrealized gains, before tax expense                                 |   | **804**                |    | 963      |   |
| Tax  expense                                                              |   | **(283**               | )       | (354     | )      |
| Other  comprehensive income                                               |   | $                      | **521** |     | $      | 609 |   |

 

38

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**(4)   Loans**

The loan portfolio atDecember 31, 2002 and 2001 is composed of the following loan types:

 
|                                     |   | **2002**               |        | 2001    |   |
|------------------------------------------|--------|------------------------|-------------|---------|--------|
|                                     |   | (dollars in thousands) |        |
| Commercial,  financial, and agricultural |   | **$**                  | **54,126**  |    | $      | 54,326 |   |
| Real estate:                             |   |                   |        |    |   |
| Construction                             |   | **11,906**             |        | 15,030  |   |
| Mortgage loans  held for investment      |   | **128,018**            |        | 116,740 |   |
| Mortgage loans  held for sale            |   | **5,800**              |        | 37      |   |
| Consumer                                 |   | **9,984**              |        | 12,883  |   |
| Total loans                              |   | **209,834**            |        | 199,016 |   |
| Allowance for  loan losses               |   | **(2,468**             | )           | (2,103  | )      |
| Net loans                                |   | **$**                  | **207,366** |    | $      | 196,913 |   |

 

Illini Corporation grantsagricultural, commercial, industrial, residential, and consumer loans tocustomers in central Illinois through its network of banking offices.  Illini Corporation does not have anysignificant concentration of credit in any one economic sector; however, amajority of Illini Corporation’s lending occurs in and around central Illinois,with a substantial portion of such loans secured by real estate.  As such, Illini Corporation is susceptibleto changes in the economic environment in the central Illinois area.

A summary of impairedloans, which includes nonaccrual loans, at December 31, 2002 and 2001 is asfollows:

 
|                                                               |   | **2002**               |      | 2001   |   |
|--------------------------------------------------------------------|--------|------------------------|-----------|--------|--------|
|                                                               |   | (dollars in thousands) |      |
| Nonaccrual loans                                                   |   | **$**                  | **4,901** |   | $      | 4,920 |   |
| Impaired loans  continuing to accrue interest                      |   | **—**             |      | 212    |   |
| Total impaired  loans                                              |   | **$**                  | **4,901** |   | $      | 5,132 |   |
|                                                               |   |                   |      |   |   |
| Allowance for  losses on specific impaired loans                   |   | **$**                  | **527**   |   | $      | 354 |   |
| Impaired loans  with no specific related allowance for loan losses |   | **3,493**              |      | 4,669  |   |
| Average balance  of impaired loans during the year                 |   | **4,820**              |      | 3,882  |   |
| Accruing loans  delinquent 90 days or more                         |   | **23**                 |      | 15     |   |

 

Interest income of$579,000 in 2002 and $344,000 in 2001 would have been recognized had nonaccrualloans remained current.  The amountrecognized as interest income on other impaired loans continuing to accrueinterest was $0 in 2002 and $16,000 in 2001. The amount recognized as interest income on nonaccrual loans was $95,568and $247,384 for the years ended December 31, 2002 and 2001, respectively.

Illini has threeborrowers with loans secured by commercial properties that are in the finalstages of foreclosure at December 31, 2002. These properties include a golf course, a restaurant, and a retailbuilding.  The properties are supportingloans of approximately $1,365,000, $1,058,000 and $1,087,000, respectively atDecember 31, 2002.  Illini obtainedtitle to the golf course subsequent to year-end and transferred the property toother real estate owned at its carrying value of approximately $1,465,000.  The carrying value of the loans at December31, 2002 for each of the three borrowers reflects management’s best estimate ofthe amount to be realized from the sales of the properties.  While the estimates are based on valuationsby independent appraisers, there have been no recent sales of comparableproperties in the area to consider in preparing the valuations, and the marketfor such properties is limited. Therefore, the

 

39

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amount that Illini realizes from the sales of the properties coulddiffer materially in the near term from the carrying values reflected in thesefinancial statements.

A summary of changes in the allowance for loan lossesfor the years ended December 31, 2002 and 2001 is as follows:

** **
|                                        |   | **2002**               |      | 2001   |   |
|---------------------------------------------|--------|------------------------|-----------|--------|--------|
|                                        |   | (dollars in thousands) |      |
| Balance at  beginning of year               |   | **$**                  | **2,103** |   | $      | 2,188 |   |
| Provision  charged to operating expense     |   | **760**                |      | 605    |   |
|                                        |   |                   |      |   |   |
| Loans charged  off                          |   | **(511**               | )         | (740   | )      |
| Recoveries of  loans previously charged off |   | **116**                |      | 50     |   |
| Net loan  charge-offs                       |   | **(395**               | )         | (690   | )      |
| Balance at end  of year                     |   | **$**                  | **2,468** |   | $      | 2,103 |   |

 

The following tablerecaps the 2002 activity for loans made by Illini and Camp Point to executiveofficers, directors, and principal shareholders (insiders) of IlliniCorporation and subsidiaries and/or their related interests.  Such loans were made in the normal course ofbusiness on substantially the same terms, including interest rates andcollateral requirements, as those prevailing at the same time for comparabletransactions with other persons and did not involve more than normal creditrisk or present other unfavorable features.

 
|                          |   | **Insider  loans**     |       |
|-------------------------------|--------|------------------------|------------|
|                          |   | (dollars in thousands) |       |
| Balance at  December 31, 2001 |   | **$**                  | **451**    | ** ** |
| Advances on  existing loans   |   | **1,370**              | ** ** |
| Payments  received            |   | **(1,290**             | **)**      |
| Balance at  December 31, 2002 |   | **$**                  | **531**    | ** ** |

 

**(5)   Loan Servicing**

Mortgage loans servicedfor others are not included in the accompanying consolidated balancesheets.  The unpaid principal balancesof mortgage loans serviced for others totaled approximately  $70.7 million and $83.8 million at December31, 2002 and 2001, respectively.

Mortgage servicing rightsof $108,428 and $168,124 were capitalized in 2002 and 2001, respectively.  The book value of capitalized mortgageservicing rights was $371,073 and $429,550 at December 31, 2002 and 2001, respectively.  Amortization of mortgage servicing rightswas $166,904 and $23,975 in 2002 and 2001, respectively.

 

**(6)   Premisesand Equipment**

A summary of premises andequipment at December 31, 2002 and 2001 by major category is as follows:

** **
|                           |   | **2002**               |      | 2001   |   |
|--------------------------------|--------|------------------------|-----------|--------|--------|
|                           |   | (dollars in thousands) |      |
| Land                           |   | **$**                  | **1,013** |   | $      | 1,013 |   |
| Bank premises                  |   | **7,277**              |      | 6,935  |   |
| Furniture and  equipment       |   | **5,951**              |      | 6,185  |   |
|                           |   | **14,241**             |      | 14,133 |   |
| Less accumulated  depreciation |   | **7,560**              |      | 7,187  |   |
|                           |   | **$**                  | **6,681** |   | $      | 6,946 |   |

 

40

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**(7)****         Goodwill**

The changes in thecarrying amount of goodwill for the years ended December 31, 2002 and 2001,were:

 
|                       |   | **2002**               |      | 2001   |   |
|----------------------------|--------|------------------------|-----------|--------|--------|
|                       |   | (dollars in thousands) |      |
| Balance  as of January 1   |   | $                      | **1,854** |   | $      | 2,016 |   |
| Amortization               |   | **—**             |      | 162    |   |
| Balance  as of December 31 |   | $                      | **1,854** |   | $      | 1,854 |   |

 

Effective January 1,2002, the Corporation adopted Financial Accounting Standards Board StatementNo. 142, *Goodwilland Other Intangibles*, which requires transitional disclosuresregarding the change in amortization and other treatment of goodwill for theyear ended December 31, 2001, as follows:

 
|                                   |   | 2001   |   |
|----------------------------------------|--------|--------|--------|
|                                   |   |   |   |
| Reported  net income                   |   | $      | 1,279  |   |
| Add  back:  Goodwill amortization |   | 162    |   |
| Adjusted  net income                   |   | $      | 1,441  |   |
|                                   |   |   |   |
| Basic  earnings per share              |   |   |   |
| Reported  net income                   |   | $      | 2.64   |   |
| Add  back:  Goodwill amortization |   | 0.33   |   |
| Adjusted  net income                   |   | $      | 2.97   |   |

 

All goodwill is allocatedto the banking segment of the business. The fair value of the banking segment of the business was estimatedusing an independent valuation.  Thetransition impairment test upon the initial adoption of SFAS 142 as well as theannual impairment test for 2002 indicated there was no impairment of goodwill.

 

**(8)   Deposits**

At December 31, 2002, thescheduled maturities of time deposits are as follows:

 

| **Year**   |   | **Amount**             |    |
|------------|--------|------------------------|---------|
|       |   | (dollars in thousands) |    |
| 2003       |   | $                      | 75,016  |   |
| 2004       |   | 47,338                 |    |
| 2005       |   | 8,788                  |    |
| 2006       |   | 1,333                  |    |
| 2007       |   | 714                    |    |
| Thereafter |   | 2                      |    |
|       |   | $                      | 133,191 |   |

 

41

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**(9)   Short-termdebt**

A summary of short-termdebt at December 31, 2002 and 2001 is as follows:

 
|                                         |   | **2002**               |       | 2001   |   |
|----------------------------------------------|--------|------------------------|------------|--------|--------|
|                                         |   | (dollars in thousands) |       |
| Federal funds  purchased                     |   | **$**                  | **—** |   | $      | 1,200 |   |
| Securities sold  under repurchase agreements |   | **656**                |       | 413    |   |
| Total short-term  debt                       |   | **$**                  | **656**    |   | $      | 1,613 |   |

 

Securities sold underagreements to repurchase consist of obligations of the Corporation to otherparties.  The obligations are secured byvarious securities and such collateral is held by Commerce Bank a safekeepingagent.  The maximum amount ofoutstanding agreements at any month end during 2002 and 2001 totaled $656,000and $450,000 and the monthly average of such agreements totaled $479,000 and$379,000, respectively.  The agreementsat December 31, 2002 mature within 36 months.

 

**(10)**** ****Long-Term Debt**

The following summarizeslong-term debt at December 31, 2002 and 2001.

** **
|                                                                |   | **2002**               |      | 2001       |   |
|---------------------------------------------------------------------|--------|------------------------|-----------|------------|--------|
|                                                                |   | (dollars in thousands) |      |
| Note payable                                                        |   | **$**                  | **2,395** | ** ** | **$**  | 2,471 | ** ** |
| Federal Home  Loan Bank advances, due at various dates              |   |                   |      |       |   |
| through February  28, 2004, fixed rates ranging from 3.45% to 6.28% |   | **$**                  | **6,000** |       | $      | 6,000 |   |
| Total long-term  debt                                               |   | **$**                  | **8,395** |       | $      | 8,471 |   |

 

The note payable atDecember 31, 2001 was a result of the stock purchase agreement in which IlliniCorporation purchased 160,688 shares of stock from certain former shareholdersduring 2001.  The purchase agreementprovided one-third of the purchase price paid by Illini Corporation in cash atclosing on June 14, 2001.  The balanceof unpaid principal was due in three equal installments on March 31 of 2002,2003 and 2004.  Illini Corporationprepaid a majority of the note during 2001. Interest was paid quarterly on the unpaid principal balance at sevenpercent (7%) per annum.  The Corporationprovided a letter of credit to the sellers in lieu of pledging the purchasedshares.  The stock purchase agreementwith the former shareholders also provides for a contingency in the case thatIllini Corporation were to be acquired or issue shares of common stock at aprice in excess of $45.00 per share at any time prior to the second anniversarydate of April 12, 2003.  During thefirst six months all of such difference would be payable; during the second sixmonths 75% of such difference would be payable; during the third six months 50%of such difference would be payable; and during the last six months 25% of suchdifference would be payable.

On March 27, 2002, IlliniCorporation borrowed $2,400,000 from Marine Bank, Springfield to pay off thebalance of the note to the former shareholders.  The floating rate note is indexed to the Wall Street Journal PrimeRate plus 1.00% (5.25% at December 31, 2002). The note requires 11 quarterly payments of approximately $42,600, with afinal payment of all unpaid principal and interest on April 15, 2005.  The note is secured by 100% of the commonstock of Illini Bank, and the Farmers State Bank of Camp Point.  The note contains various operating andreporting covenants, all of which Illini Corporation complied with as ofDecember 31, 2002.

The Federal Home LoanBank advances are secured by first-mortgage loans totaling $12.2 million.  Advances are subject to restrictions orpenalties in the event of prepayment.

At December 31, 2002, thescheduled maturities, including expected prepayments, of long-term debt are asfollows:

 

42

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| **Year** |   | **Amount**             |   |
|----------|--------|------------------------|--------|
|     |   | (dollars in thousands) |   |
| 2003     |   | $                      | 2,000  |   |
| 2004     |   | 4,000                  |   |
| 2005     |   | 2,395                  |   |
|     |   | $                      | 8,395  |   |

 

**(11) IncomeTaxes**

Thecomponents of income tax expense (benefit) for the years ended December 31,2002 and 2001 are as follows:

 
|                   |   | **2002**               |    | 2001   |   |
|------------------------|--------|------------------------|---------|--------|--------|
|                   |   | (dollars in thousands) |    |
| Current income  taxes: |   |                   |    |   |   |
| Federal                |   | **$**                  | **281** |   | $      | 436 |   |
| State                  |   | **94**                 |    | 83     |   |
| Deferred income  taxes |   | **44**                 |    | (48    | )      |
|                   |   | **$**                  | **419** |   | $      | 471 |   |

 

A reconciliation ofexpected income tax expense to federal income tax expense, computed by applyingthe federal statutory rate of 34% to income before income tax expense for theyears ended December 31, 2002 and 2001 to reported income tax expense, isas follows:

 
|                                                 |   | **2002**               |    | 2001   |   |
|------------------------------------------------------|--------|------------------------|---------|--------|--------|
|                                                 |   | (dollars in thousands) |    |
|                                                 |   |                   |    |   |   |
| Income tax  expense at statutory rate                |   | **$**                  | **660** |   | $      | 595 |   |
| Increase  (decrease) in income taxes resulting from: |   |                   |    |   |   |
| Tax-exempt  income                                   |   | **(312**               | )       | (249   | )      |
| Goodwill  amortization                               |   | —                 |    | 55     |   |
| State income  taxes                                  |   | **52**                 |    | 55     |   |
| Other, net                                           |   | **19**                 |    | 15     |   |
| Income tax  expense                                  |   | **$**                  | **419** |   | $      | 471 |   |

 

The tax effect oftemporary differences that give rise to significant portions of the deferredtax assets and deferred tax liabilities at December 31, 2002 and 2001 arepresented below:

 

43

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|                                                 |   | **2002**               |     | 2001   |   |
|------------------------------------------------------|--------|------------------------|----------|--------|--------|
|                                                 |   | (dollars in thousands) |     |
| Deferred tax assets:                                 |   |                   |     |   |   |
| Loans,  principally due to allowance for loan losses |   | **$**                  | **753**  |   | $      | 530 |   |
| Intangible  assets                                   |   | **77**                 |     | 92     |   |
| Legal fees                                           |   | **117**                |     | 147    |   |
| Other                                                |   | —                 |     | 18     |   |
|                                                 |   | **947**                |     | 787    |   |
| Deferred tax  liabilities:                           |   |                   |     |   |   |
| Available-for-sale  securities market valuation      |   | **825**                |     | 542    |   |
| Investment  securities, basis differences            |   | **2**                  |     | 3      |   |
| Mortgage  servicing rights                           |   | **144**                |     | 167    |   |
| Premises and  equipment, basis differences           |   | **259**                |     | 25     |   |
| Cash to accrual  conversion                          |   | —                 |     | 20     |   |
| Federal Home  Loan Bank stock                        |   | **49**                 |     | 35     |   |
|                                                 |   | **1,279**              |     | 792    |   |
| Net  deferred tax liability                          |   | **$**                  | **(332** | )      | $      | (5 | ) |

 

**(12) EmployeeBenefits**

Illini Corporation has adefined contribution 401(k) plan that covers substantially all employees.  Employees may contribute up to 100% ofeligible compensation to the plan. Illini Corporation’s contributions arevoluntary and at the discretion of the Board of Directors.  All contributions are subject to statutoryrestrictions.  Employer contributionscharged to expense were approximately $67,000 and $61,000 in 2002 and 2001,respectively.

In March 2002, theshareholders approved the adoption of a qualified incentive stock option plan(60,000 shares) for executive employees of the Corporation and a non-qualifiedincentive stock option plan (7,500 shares) for directors of the Corporation.  As ofDecember 31, 2002, no formal stock option plan has been adopted for employeesor directors of the Corporation.

 

**(13) CondensedFinancial Information of Parent Company**

Following are condensedbalance sheets as of December 31, 2002 and 2001 and the related condensedschedules of income and cash flows for each of the years in the two-year periodended December 31, 2002 of Illini Corporation (parent company only):

 

44

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**Condensed Balance Sheets**

**December 31, 2002 and 2001**

** **
|                                                     |   | **2002**               |       | 2001   |   |
|----------------------------------------------------------|--------|------------------------|------------|--------|--------|
|                                                     |   | (dollars in thousands) |       |
| ASSETS:                                                  |   |                   |       |   |   |
| Cash                                                     |   | **$**                  | **383**    |   | $      | 760 |   |
| Investment  securities available for sale, at fair value |   | **9**                  |       | — |   |
| Investment in  subsidiaries                              |   | **26,086**             |       | 24,212 |   |
| Loans                                                    |   | **482**                |       | 397    |   |
| Excess of cost  over fair value of net assets acquired   |   | **346**                |       | 377    |   |
| Other assets                                             |   | **363**                |       | 483    |   |
|                                                     |   | **$**                  | **27,669** |   | $      | 26,229 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:              |   |                   |       |   |   |
| Junior  subordinated debt to subsidiary                  |   | **$**                  | **9,279**  |   | $      | 9,279 |   |
| Long-term debt                                           |   | **2,395**              |       | 2,471  |   |
| Other  liabilities                                       |   | **774**                |       | 889    |   |
| Shareholders’  equity                               |   | **15,221**             |       | 13,590 |   |
|                                                     |   | **$**                  | **27,669** |   | $      | 26,229 |   |

 

 

**Condensed Schedules of Income**

**Years Ended December 31, 2002 and2001**

** **
|                                                                             |   | **2002**               |      | 2001   |   |
|----------------------------------------------------------------------------------|--------|------------------------|-----------|--------|--------|
|                                                                             |   | (dollars in thousands) |      |
| REVENUE:                                                                         |   |                   |      |   |   |
| Dividends  received from subsidiaries                                            |   | **$**                  | **1,258** |   | $      | 1,400 |   |
| Other                                                                            |   | **73**                 |      | 103    |   |
|                                                                             |   | **1,331**              |      | 1,503  |   |
| EXPENSES:                                                                        |   |                   |      |   |   |
| Interest expense                                                                 |   | **1,087**              |      | 1,013  |   |
| Professional  fees                                                               |   | **504**                |      | 726    |   |
| Other                                                                            |   | **303**                |      | 367    |   |
|                                                                             |   | **1,894**              |      | 2,106  |   |
| Loss before  income tax benefit and equity in distributed income of subsidiaries |   | **(563**               | )         | (603   | )      |
| Income tax  benefit                                                              |   | **724**                |      | 766    |   |
| Equity in  undistributed income of subsidiaries                                  |   | **1,361**              |      | 1,116  |   |
| Net income                                                                       |   | $                      | **1,522** |   | $      | 1,279 |   |

 

45

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**Condensed Schedules of Cash Flows**

**Years Ended December 31, 2002 and2001**

** **
|                                                                                         |   | **2002**               |       | 2001       |       |
|----------------------------------------------------------------------------------------------|--------|------------------------|------------|------------|------------|
|                                                                                         |   | (dollars in thousands) |       |
| Cash flows from  operating activities:                                                       |   |                   |       |       |       |
| Net income                                                                                   |   | **$**                  | **1,522**  |       | $          | 1,279 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |   |                   |       |       |       |
| Depreciation and  amortization                                                               |   | **31**                 |       | 57         |       |
| Equity in  undistributed income of subsidiaries                                              |   | **(1,361**             | )          | (1,116     | )          |
| Other, net                                                                                   |   | **13**                 |       | 858        |       |
| Net cash  provided by operating activities                                                   |   | **205**                |       | 1,078      |       |
| Cash flows from  investing activities:                                                       |   |                   |       |       |       |
| Purchase of  investment securities available for sale                                        |   | **(9**                 | )          | (1,020     | )          |
| Proceeds from  sales of investment securities available for sale                             |   | —                 |       | 1,020      |       |
| Payments for  investment in and advances to subsidiaries                                     |   | —                 |       | (3,550     | )          |
| Net increase in  loans                                                                       |   | **(85**                | )          | (397       | )          |
| Net cash used in  investing activities                                                       |   | **(94**                | )          | (3,947     | )          |
| Cash flows from  financing activities:                                                       |   |                   |       |       |       |
| Repayment of  short-term debt                                                                |   | —                 |       | (1,000     | )          |
| Proceeds from  issuance of long-term debt                                                    |   | **2,400**              | ** ** | **—** | ** ** |
| Repayment of  long-term debt                                                                 |   | **(2,476**             | )          | (2,239     | )          |
| Purchase of  treasury shares                                                                 |   | —                 |       | (2,494     | )          |
| Cash paid for  other intangibles                                                             |   | —                 |       | (421       | )          |
| Proceeds from  junior subordinated debt to subsidiary                                        |   | —                 |       | 9,279      |       |
| Cash dividends  paid                                                                         |   | **(412**               | )          | (452       | )          |
| Net cash  provided by (used in) financing activities                                         |   | **(488**               | )          | 2,673      |       |
| Net decrease in  cash                                                                        |   | **(377**               | )          | (196       | )          |
|                                                                                         |   |                   |       |       |       |
| Cash at beginning  of year                                                                   |   | **760**                |       | 956        |       |
| Cash at end of  year                                                                         |   | **$**                  | **383**    |       | $          | 760 |   |
| Supplemental  information:                                                                   |   |                   |       |       |       |
| Income taxes  paid                                                                           |   | **$**                  | **608**    |       | $          | 1,025 |   |
| Interest paid                                                                                |   | **1,069**              |       | 709        |       |
| Purchase of  treasury shares with note payable                                               |   | —                 |       | 4,710      |       |

 

**(14) Commitmentsand Credit Risk**

Illini Corporation isparty to financial instruments with off-balance-sheet risk in the normal courseof business to meet the financing needs of its customers. These financialinstruments include commitments to extend credit and standby letters of credit.Such instruments may involve, to varying degrees, elements of credit risk inexcess of the amounts recognized in the consolidated balance sheets.  The contractual amounts of these instrumentsreflect the extent of involvement Illini Corporation has in particular classesof financial instruments.

Illini Corporation’sexposure to credit loss in the event of nonperformance by the other party tothe financial instrument for commitments to extend credit and standby lettersof credit is represented by the contractual amount of these instruments.  Illini Corporation uses the same creditpolicies in making commitments and conditional obligations as it does forfinancial instruments recorded in the consolidated balance sheets.  The off-balance-sheet financial instrumentsof Illini Corporation at December 31, 2002 and 2001 are presented below:

 

46

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|                                                                    |   | **2002**               |       | 2001   |   |
|-------------------------------------------------------------------------|--------|------------------------|------------|--------|--------|
|                                                                    |   | (dollars in thousands) |       |
| Financial instruments whose contractual amounts represent credit  risk: |   |                   |       |   |   |
| Commitments to  extend credit                                           |   | **$**                  | **19,034** |   | $      | 36,863 |   |
| Letters of  credit                                                      |   | **2,447**              |       | 2,500  |   |
|                                                                    |   | **$**                  | **21,481** |   | $      | 39,363 |   |

 

Commitmentsto extend credit, which include lines of credits, are agreements to lend to acustomer as long as there is no violation of any condition established in thecontract.  Of the total commitments toextend credit at December 31, 2002 and 2001, approximately $11.1 million and$26.0 million, respectively, represent fixed-rate loan commitments.  Commitments generally have fixed expiration datesor other termination clauses and may require payment of a fee.  Since certain of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.  Illini Corporation evaluates each customer’s creditworthiness ona case-by-case basis.  The amount ofcollateral obtained upon extension of credit is based on management’s creditevaluation of the counterparty. Collateral held varies, but generally includes residential or income-producingcommercial property, inventory, accounts receivable, and/or equipment.

Standby letters of creditare conditional commitments issued by Illini Corporation to guarantee theperformance of a customer to a third party. The credit risk involved in issuing such letters of credit isessentially the same as that involved in extending other financing arrangementswith customers.  Illini Corporationholds collateral to support such commitments for which collateral is deemednecessary.

 

**(15) Disclosuresabout Fair Value of Financial Instruments**

The following tablepresents estimated fair values of Illini Corporation’s financialinstruments.  The fair values of certainof these instruments were calculated by discounting expected cash flows, whichinvolves significant judgments by management and uncertainties.  Fair value is the estimated amount at whichfinancial assets or liabilities could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale.  Because no market exists for certain ofthese financial instruments and because management does not intend to sellthese financial instruments, the Corporation does not know whether the fairvalues shown below represent values at which the respective financial instrumentscould be sold individually or in the aggregate.

Following is a summary ofthe carrying amounts and fair values of Illini Corporation’s financialinstruments at December 31, 2002 and 2001:

 
|                                          |   | **Carrying  amount**        |        | **Fair  value** |       |
|-----------------------------------------------|--------|-----------------------------|-------------|-----------------|------------|
|                                          |   | **(dollars  in thousands)** |        |
| **December 31, 2002**                         |   |                        | ** **  |            | ** ** |
|                                          |   |                        |        |            |       |
| **Balance sheet assets:**                     |   |                        |        |            |       |
| **Cash and cash  equivalents**                |   | **$**                       | **19,853**  | ** **      | **$**      | **19,853** | ** ** |
| **Investment securities**                     |   | **42,969**                  | ** **  | **42,969**      | ** ** |
| **Loans, net**                                |   | **207,366**                 | ** **  | **208,531**     | ** ** |
| **Accrued interest receivable**               |   | **2,346**                   | ** **  | **2,346**       | ** ** |
|                                          |   | **$**                       | **272,534** |            | **$**      | **273,699** |   |
| **Balance sheet liabilities:**                |   |                        |        |            |       |
| **Deposits**                                  |   | **$**                       | **244,834** | ** **      | **$**      | **246,157** | ** ** |
| **Short-term debt**                           |   | **656**                     | ** **  | **656**         | ** ** |
| **Long-term debt**                            |   | **8,395**                   | ** **  | **8,431**       | ** ** |
| **Preferred securities of subsidiary  trust** |   | **9,000**                   | ** **  | **10,633**      | ** ** |
| **Accrued interest payable**                  |   | **1,332**                   | ** **  | **1,332**       | ** ** |
|                                          |   | **$**                       | **264,217** |            | **$**      | **267,209** | ** ** |

 

47

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|                                      |   | Carrying  amount |    | Fair  value |   |
|-------------------------------------------|--------|------------------|---------|-------------|--------|
| December 31,  2001                        |   |             |    |        |   |
|                                      |   |             |    |        |   |
| Balance sheet  assets:                    |   |             |    |        |   |
| Cash and cash  equivalents                |   | $                | 15,585  |        | $      | 15,585 |   |
| Investment  securities                    |   | 49,156           |    | 49,156      |   |
| Loans, net                                |   | 196,913          |    | 198,882     |   |
| Accrued interest  receivable              |   | 2,549            |    | 2,549       |   |
|                                      |   | $                | 264,203 |        | $      | 266,172 |   |
| Balance sheet  liabilities:               |   |             |    |        |   |
| Deposits                                  |   | $                | 238,837 |        | $      | 240,056 |   |
| Short-term debt                           |   | 1,613            |    | 1,613       |   |
| Long-term debt                            |   | 8,471            |    | 8,471       |   |
| Preferred  securities of subsidiary trust |   | 9,000            |    | 9,969       |   |
| Accrued interest  payable                 |   | 1,414            |    | 1,414       |   |
|                                      |   | $                | 259,325 |        | $      | 261,523 |   |

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate such value:

 

***Cash and Cash Equivalents***

Forcash and cash equivalents the carrying amount is a reasonable estimate of fairvalue.

 

***Investment securities***

Fair values of investmentsecurities are based on quoted market prices or dealer quotes.

 

***Loans***

The fair value of loansis estimated by discounting the future cash flows using the current rates atwhich similar loans would be made to borrowers with similar credit ratings andfor the same remaining maturities. Loans with similar characteristics were aggregated for purposes of thecalculations.  The carrying amount ofaccrued interest approximates its fair value.

Fair value fornonperforming loans is based on recent external appraisals.  If appraisals are not available, estimatedcash flows are discounted using a rate commensurate with the risk associatedwith the estimated cash flows. Assumptions regarding credit risk, cash flows,and discount rates are judgmentally determined using available marketinformation and specific borrower information.

 

***Deposits***

The fair value ofdeposits with no stated maturity, such as noninterest-bearing demand deposits,NOW and money market accounts, and savings accounts is equal to the amountspayable on demand.  The fair value oftime deposits is based on the discounted value of contractual cash flows.  The discount rate is estimated using therates currently offered for deposits of similar remaining maturities.  The carrying amount of accrued interestpayable approximates its fair value.

 

***Short-term Debt***

Short-term debt consistsof short-term borrowing arrangements. The rates approximate market rates, thus the fair value approximatescarrying value.

 

***Long-term Debt***

The fair values of theseborrowings are estimated using a discounted cash flow calculation, based oncurrent rates for similar debt.

 

***Preferred Securities of Subsidiary Trust***

The fair values ofpreferred securities of subsidiary trust are estimated using a discounted cashflow calculation, based on current rates for similar securities.

 

48

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***Significant Estimates and Concentrations***

Accounting principlesgenerally accepted in the United States of America require disclosure ofcertain significant estimates and current vulnerabilities due to certainconcentrations.  Estimates related tothe allowance for loan losses and mortgage servicing rights are reflected inthe footnote regarding loans and mortgage servicing rights.  Current vulnerabilities due to certainconcentrations of credit risk are discussed in the footnote on commitments andcredit risk.

 

***Commitments to Extend Credit and Standby Letters of Credit***

The fair value ofcommitments to extend credit and standby letters of credit are estimated usingthe fees currently charged to enter into similar agreements, taking intoaccount the remaining terms of the agreements, the likelihood of thecounterparties drawing on such financial instruments, and the presentcreditworthiness of such counterparties. Illini Corporation believes such commitments have been made on termswhich are competitive in the markets in which it operates; however, no premiumor discount is offered thereon, and accordingly, Illini Corporation has notassigned a value to such instruments for purposes of this disclosure.

 

**(16) Litigation**

Various legal claims havearisen against Illini Corporation in the normal course of business, which, inthe opinion of Illini Corporation management, will not result in any materialliability to Illini Corporation.  Two(2) additional cases remain pending.

The first case was filedin 1998 by a shareholder of Illini Corporation against Illinois Stock TransferCompany, as Rights Agent for Illini Corporation under Illini Corporation’sShareholder Rights Agreement (the “Rights Agreement”), for specific performanceof the Rights Agreement, both individually and on behalf of a class of IlliniCorporation shareholders.  The complaintalleges that the Rights Agreement was triggered in April of 1998, and that theRights Agent has a duty under the Rights Agreement to distribute RightsCertificates to the shareholders of Illini Corporation.  Illini Corporation was added as a Defendantin 1999, and the class has been certified. Plaintiff seeks to recover her attorneys’ fees from Illini Corporationin addition to the other relief sought. In January of 2000, the trial court entered Summary Judgement in favorof Illini Corporation and Illinois Stock Transfer Company.  Plaintiff appealed this ruling denyingPlaintiff’s summary judgement motion to the Illinois Appellate Court.  The Appellate Court reversed the SummaryJudgement for Defendants and remanded the case for trial on the issue ofwhether the Illini Corporation Board of Directors acted in good faith indetermining that a shareholder’s acceptance of a gift of Illini Corporation Stockdid not trigger the Rights Amendment and later, in Illini Corporation’s lateramendment of the Rights Agreement.  TheAppellate Court further ruled the Plaintiff’s attorneys’ fees were recoverableunder the Rights Agreement.  After aseries of unsuccessful motions filed by the plaintiff’s counsel, IlliniCorporation entered a motion to remove the plaintiff’s counsel.  The court removed the counsel for theplaintiff class and appointed new counsel to represent the class.  The removed counsel filed a motion forreconsideration, which was denied.  Thenew counsel filed a Motion For Direction to remove the class representative,which was granted on January 15, 2003. On March 7, 2003 the trial court appointed a successor classrepresentative.  Illini Corporation isnegotiating for a settlement of the suit with the new class representative andclass counsel.  The former classrepresentative has filed a motion to opt out of the class, which IlliniCorporation opposes.

The second case was filedin August of 2001 by a shareholder against a former shareholder and severalpresent and former directors of Illini Corporation.  The complaint purports to bring a derivative cause of actionarising out of the redemption of the shares of the former shareholder, which isalleged to have caused the defendants to breach the Shareholder RightsAgreement.  The complaint seeksrescission of the stock redemption and recover of attorneys’ fees.  In July 2002 the court ordered thisderivative suit stayed pending completion of the trial in the class action suit(discussed above) or upon further order.

 

**(17) RegulatoryRestrictions**

Illini Corporation,Illini, and Camp Point are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on Illini Corporation’sconsolidated financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, Illini Corporation, Illini,

 

49

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and Camp Point must meet specific capital guidelines that involvequantitative measures of Illini Corporation, Illini, and Camp Point’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting principles.  IlliniCorporation, Illini, and Camp Point capital amounts and classifications arealso subject to qualitative judgments by the regulators about components,risk-weightings, and other factors.

Quantitative measuresestablished by regulations to ensure capital adequacy require IlliniCorporation, Illini, and Camp Point to maintain minimum amounts and ratios (setforth in the table below) of total and Tier I capital (as defined in theregulations) to risk-weighted assets (as defined), and of Tier I capital toaverage assets (as defined).  Managementbelieves, as of December 31, 2002, Illini Corporation, Illini, and Camp Pointmeet all capital adequacy requirements to which they are subject.

As of December 31, 2002,the Corporation’s subsidiary banks were “well capitalized” under regulatoryprompt corrective action provisions.  Tobe categorized as adequately or well capitalized, each bank must maintainminimum total risk-based, Tier I risk-based, and Tier I leverage ratios as setforth in the table.  There are noconditions or events since that notification that management believes havechanged Illini’s or Camp Point’s category.

Illini Corporation’s,Illini’s, and Camp Point’s actual and required capital amounts and ratios as ofDecember 31, 2002 and 2001 are as follows:

 
|                                           |   | **December  31, 2002**      |       |
|------------------------------------------------|--------|-----------------------------|------------|
|                                           |   |                        |       |   |   |   |   |   |   | **To be well  capitalized** |   |
|                                           |   |                        |       |   |   |   |   |   |   | **under  prompt corrective** |   |
|                                           |   | **Actual**                  |       | **Capital  requirements** |   | **action  provisions** |   |
|                                           |   | **Amount**                  |       | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                           |   | **(dollars  in thousands)** |       |
| Total capital (to risk-weighted assets):       |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | **$**                       | **23,058** | ** ** | **10.56** | **%** | **$** | **17,468** | ** ** | **8.00** | **%** | **—** | ** ** | **—** | ** ** |
| Illini                                         |   | **20,987**                  | ** ** | **10.86** | ** ** | **15,460** | ** ** | **8.00** | ** ** | **$** | **19,325** | ** ** | **10.00** | **%** |
| Camp Point                                     |   | **4,002**                   | ** ** | **16.28** | ** ** | **1,967** | ** ** | **8.00** | ** ** | **2,458** | ** ** | **10.00** | ** ** |
| Tier I capital  (to risk-weighted assets):     |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | **16,176**                  | ** ** | **7.41** | ** ** | **8,734** | ** ** | **4.00** | ** ** | **—** | ** ** | **—** | ** ** |
| Illini                                         |   | **18,803**                  | ** ** | **9.73** | ** ** | **7,730** | ** ** | **4.00** | ** ** | **11,595** | ** ** | **6.00** | ** ** |
| Camp Point                                     |   | **3,719**                   | ** ** | **15.13** | ** ** | **983** | ** ** | **4.00** | ** ** | **1,475** | ** ** | **6.00** | ** ** |
| Tier I capital  (to quarterly average assets): |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | **16,176**                  | ** ** | **5.82** | ** ** | **11,110** | ** ** | **4.00** | ** ** | **—** | ** ** | **—** | ** ** |
| Illini                                         |   | **18,803**                  | ** ** | **7.80** | ** ** | **9,641** | ** ** | **4.00** | ** ** | **12,052** | ** ** | **5.00** | ** ** |
| Camp Point                                     |   | **3,719**                   | ** ** | **10.34** | ** ** | **1,439** | ** ** | **4.00** | ** ** | **1,798** | ** ** | **5.00** | ** ** |
|                                                |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

50

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|                                           |   | **December  31, 2001**      |   |
|------------------------------------------------|--------|-----------------------------|--------|
|                                           |   |                        |   |   |   |   |   |   |   | To be well capitalized |   |
|                                           |   |                        |   |   |   |   |   |   |   | under prompt corrective |   |
|                                           |   | **Actual**                  |   | **Capital  requirements** |   | action provisions |   |
|                                           |   | **Amount**                  |   | **Ratio** |   | **Amount** |   | **Ratio** |   | Amount |   | Ratio |   |
|                                           |   | **(dollars  in thousands)** |   |
| Total capital  (to risk-weighted assets):      |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | $                           | 21,501 |   | 10.04 | % | $ | 17,140 |   | 8.00 | % | — |   | — |   |
| Illini                                         |   | 19,495                      |   | 10.27 |   | 15,181 |   | 8.00 |   | $ | 18,976 |   | 10.00 | % |
| Camp Point                                     |   | 3,726                       |   | 14.69 |   | 2,029 |   | 8.00 |   | 2,536 |   | 10.00 |   |
| Tier I capital  (to risk-weighted assets):     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | 14,467                      |   | 6.75 |   | 8,570 |   | 4.00 |   | — |   | — |   |
| Illini                                         |   | 17,634                      |   | 9.29 |   | 7,590 |   | 4.00 |   | 11,386 |   | 6.00 |   |
| Camp Point                                     |   | 3,484                       |   | 13.74 |   | 1,014 |   | 4.00 |   | 1,522 |   | 6.00 |   |
| Tier I capital  (to quarterly average assets): |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | 14,467                      |   | 5.35 |   | 10,809 |   | 4.00 |   | — |   | — |   |
| Illini                                         |   | 17,634                      |   | 7.51 |   | 9,395 |   | 4.00 |   | 11,744 |   | 5.00 |   |
| Camp Point                                     |   | 3,484                       |   | 9.94 |   | 1,403 |   | 4.00 |   | 1,753 |   | 5.00 |   |
|                                                |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Dividends from itssubsidiaries are the principal source of funds for payment of dividends byIllini Corporation to its shareholders.

Illini and Camp Point aresubject to certain restrictions on the amount of dividends that may be declaredwithout prior regulatory approval.  AtDecember 31, 2002, Illini had $4.4 million of retained earnings available fordividends without prior regulatory approval. At December 31, 2002, Camp Point had $411,000 of retained earningsavailable for dividends without prior regulatory approval.

At December 31, 2002 and2001, approximately $1,549,000 and $1,552,000, respectively, of cash and duefrom banks represented required reserves on deposits maintained by Illini Corporationin accordance with Federal Reserve Bank requirements.

 

**(18)****  PendingAcquisition**

IlliniCorporation executed a definitive agreement and plan of merger to acquire allof the outstanding stock of Illinois Community Bancorp, Inc (“ICBI”) through themerger of ICBI with a wholly owned subsidiary of Illini Corporation.

Underthe terms of the merger agreement, ICBI’s shareholders would 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 million, total liabilities of$53.7 million and total equity of $3.3 million.  For the year ended December 31, 2001, ICBI had a net loss of $1.8million.

Inconjunction with the merger, ICBI requested that Illini Corporation providefunds to pay certain liabilities of ICBI and expenses related to thetransaction.  Illini Corporationprovided a direct loan to ICBI for these items.  The loan is secured by 100% of the common stock of IllinoisCommunity Bank (subsidiary bank of ICBI), bears interest at the rate of 7% andis on a demand basis.  As of December31, 2002 the balance of the note was $481,648. In addition, Illini Corporation advanced funds on behalf of ICBI forcertain accounting and legal matters related to the merger.  As of December 31, 2002, the receivable wasapproximately $126,000.

Theoriginal agreement provided that either party could terminate the agreement anytime after May 31, 2002 if certain prior approvals were not obtained or itcould be terminated by either party after August 31, 2002 if the merger werenot completed.  Prior to May 31, 2002,the parties agreed to modify the agreement and change the respective dates toMay 31, 2003 and August 31, 2003.  OnDecember 23, 2002 the Federal Reserve Board of Governors denied the mergerapplication.  Illini Corporationsubsequently filed an appeal

 

51

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with the Board of Governors for reconsideration.  The Corporation has not received a reply tothe appeal request.

 

**ITEM 8****. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**PART III****.**

 

**ITEM 9****. -DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITHSECTION 16(A) OF THE EXCHANGE ACT**

 

Information required by this Item is incorporated byreference from the sections entitled “Election of Directors,” “Directors andExecutive Officers,” “Executive Officers,” “Business Experience of Non-DirectorExecutive Officers” and “Section 16(a) Beneficial Ownership ReportingCompliance” in the Proxy Statement, anticipated to be distributed toshareholders on or before April 18, 2003.

 

**ITEM 10. - EXECUTIVE COMPENSATION**

 

Information required by this Item is incorporated byreference from the sections entitled “Executive Compensation,” “EmploymentAgreement” and “Compensation of Directors” in the Proxy Statement, anticipatedto be distributed to shareholders on or before April 18, 2003.

 

**ITEM 11****. - SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Information required by this Item is incorporated byreference from the section entitled “Security Ownership of Certain BeneficialOwners and Management” in the Proxy Statement, anticipated to be distributed toshareholders on or before April 18, 2003.

 

**ITEM 12****. - CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required by this item is incorporated byreference from the section titled Transactions with Directors, ExecutiveOfficers and Associates in the Proxy Statement, anticipated to be distributedto shareholders on or before April 18, 2003.

 

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**ITEM 13****. - EXHIBITSLIST AND REPORTS ON FORM 8-K**

 

(a) The followingexhibits have been filed with the Securities and Exchange Commission asrequired:

 
| (2)       |   | Not applicable                                                                                                                                                                                                                                    |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)(i)    |   | (1) Articles of Incorporation  (incorporated by reference to Illini’s Form 10-K for the year ended December  31, 1984).                                                                                                                      |
|      |   | (2) Amended to the  Articles of Incorporation of Illini Corporation (incorporated by reference to  Illini Corporation’s Form 8-K filed on April 3, 2002).                                                                                    |
| (3)(ii)   |   | (3) Amended and  Restated Bylaws of Illini Corporation, effective June 27, 2002.                                                                                                                                                                  |
| (4)       |   | (1) Rights Agreement by  and between Illini Corporation and Illinois Stock Transfer Company, as rights  agent (incorporated by reference to Illini’s Form 8-K filed on June 25,  1997).                                                      |
|      |   | (2)First Amendment to  Rights Agreement dated July 1, 1998 (incorporated by reference to Illini’s  Form 8-K filed on July 13, 1998).                                                                                                         |
|      |   | (3) Second Amendment to  Rights Agreement dated July 6, 1999 (incorporated by reference to Illini  Corporation’s Form 8-K filed on July 12, 1999).                                                                                           |
|      |   | (4) Third Amendment to  Rights Agreement dated November 18, 1999 (incorporated by reference to Illini  Corporation’s Form 8-K filed on November 26, 1999).                                                                                   |
| (9)       |   | Not applicable.                                                                                                                                                                                                                                   |
| (10)(i)   |   | (1) Non-Compete,  Standstill and Sale of Personal Goodwill Agreement dated November 19, 1999 by  and between Illini Corporation and Ernest H. Huls (incorporated by reference  to Illini Corporation’s Form 8-K filed on November 26, 2000). |
| (10)(iii) |   | (1) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Burnard K. McHone, dated December 16, 1999.                                                                                                       |
|      |   | (2) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and James L. Adkins, dated December 16, 1999.                                                                                                         |
|      |   | (3) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Ronald Wenger, dated December 16 1999.                                                                                                            |
|      |   | (4) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Doug F. Finn, dated December 16, 1999.                                                                                                            |
|      |   | (5) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and George A. Rosenbaum, dated December 31, 2002.                                                                                                     |
|      |   | (6)Illini Corporation  Directors’ Stock Option Plan, approved March 21, 2002.                                                                                                                                                                |
|      |   | (7)Illini Corporation  Incentive Stock Option Plan, approved March 21, 2002                                                                                                                                                                       |
| (11)      |   | Statement regarding  computation of earnings per share is included in “Item 7. Financial  Statements-Note 1(*m*)” which is incorporated by reference  herein.                                                                           |
| (12)      |   | Not applicable                                                                                                                                                                                                                                    |
| (13)      |   | This document (Form 10-KSB)  will be distributed within 30 days as the annual report to security holders.                                                                                                                                         |
| (16)      |   | Not applicable.                                                                                                                                                                                                                                   |
| (18)      |   | Not applicable.                                                                                                                                                                                                                                   |
| (21)      |   | Subsidiaries of the  Registrant: Illini Bank, an Illinois state chartered bank, Farmers State Bank  of Camp Point, an Illinois state chartered bank, and Illini Statutory Trust  I, a special purpose Delaware trust subsidiary.                  |
| (22)      |   | Not applicable.                                                                                                                                                                                                                                   |
| (23)      |   | Not applicable.                                                                                                                                                                                                                                   |
| (24)      |   | Not applicable.                                                                                                                                                                                                                                   |
| (99)      |   | Not applicable.                                                                                                                                                                                                                                   |

 

(b)              During the threemonths ended December 31, 2002, and through the date of this report, theCorporation filed the following Current Reports on Form 8-K:

Form8-K filed January 6, 2003 announcing the denial of the proposed ICBI mergerwith the Corporation.

 

53

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant has caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Dated:                              | March 28, 2003 |   |
|-------------------------------------|----------------|--------|
|                                |
| Illini Corporation,  Registrant, by |
|                                |           |
| /s/ Burnard K. McHone               |           |
|                                |           |
| Burnard K. McHone,  President       |
|                                     |                |        |  |

 

In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **/s/ Thomas A. Black**          |   | **March 28, 2003** |   | **/s/ Burnard K. McHone**                     |   | **March 28, 2003** |
|----------------------------------|--------|--------------------|--------|-----------------------------------------------|--------|--------------------|
| Thomas A. Black,  Chairman       |   | Date               |   | Burnard K. McHone,  Director & Pres.      |   | Date               |
|                             |   |               |   | (Principal Executive  Officer)                |   |               |
| **/s/ Lawrence B. Curtin**       |   | **March 28, 2003** |   | **/s/ Robert F. Olson**                       |   | **March 28, 2003** |
| Lawrence B. Curtin, Director     |   | Date               |   | Robert F. Olson,  Director                    |   | Date               |
|                             |   |               |   |                                          |   |               |
| **/s/ William N. Etherton**      |   | **March 28, 2003** |   | **/s/ John H. Pickrell**                      |   | **March 28, 2003** |
| William N. Etherton,  Director   |   | Date               |   | John H. Pickrell,  Director                   |   | Date               |
|                             |   |               |   |                                          |   |               |
| **/s/ William B. McCubbin**      |   | **March 28 2003**  |   | **/s/ N. Ronald Thunman**                     |   | **March 28, 2003** |
| William B. McCubbin,  Director   |   | Date               |   | N. Ronald Thunman,  Director                  |   | Date               |
|                             |   |               |   |                                          |   |               |
| **/s/ Anthony F. Liberatore**    |   | **March 28, 2003** |   | **/s/ George A. Rosenbaum, Jr.**              |   | **March 28, 2003** |
| Anthony F. Liberatore,  Director |   | Date               |   | George A. Rosenbaum  Jr., CFO                 |   | Date               |
|                             |   |               |   | (Principal Financial  and Accounting Officer) |   |               |
| **/s/ Jane A. Schachtsiek**      |   | **March 28, 2003** |   |                                          |   |               |
| Jane A. Schachtsiek,  Director   |   | Date               |   |                                          |   |               |
|                             |   |               |   |                                          |   |               |
| **/s/ Jesse A. Werner, Jr.**     |   | **March 28, 2003** |   |                                          |   |               |
| Jesse A. Werner, Jr.,  Director  |   | Date               |   |                                          |   |               |

 

54

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Certification Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

 

I, Burnard K. McHone, certify that:

 

1.               I have reviewedthis annual report on Form 10-KSB of Illini Corporation;

 

2.               Based on myknowledge, this annual 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 annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin the annual 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 annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-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 thisannual 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 annual report (the “EvaluationDate”); and

 

c)              presented in thisannual 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 officers 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 officers and I have indicated in this annual report whether ornot 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:  | March  28,  2003                 |   | /s/ Burnard K. McHone |   |
|--------|---------------------------------------|--------|-----------------------|--------|
|   | Burnard K. McHone                     |
|   | President and Chief Executive Officer |

 

55

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Certification Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

 

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

 

1.               I have reviewedthis annual report on Form 10-KSB of Illini Corporation;

 

2.               Based on myknowledge, this annual 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 annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin the annual 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 annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-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 thisannual 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 annual report (the“Evaluation Date”); and

 

c)              presented in thisannual 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 officers 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 officers and I have indicated in this annual report whether ornot 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:  | March 28, 2003           |   | /s/ George A. Rosenbaum, Jr. |   |
|-------------|--------------------------|--------|------------------------------|--------|
|        | George A. Rosenbaum, Jr. |
|        | Chief Financial Officer  |

 

 

56

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| ***Illini  Corporation, Illini Bank and  Farmers State Bank of Camp Point Officers*** |   | **Illini Bank Locations**                      |   |                                |   |
|---------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                  |   |                                           |   |                                |   |
| **Illini Corporation**                                                                |   | 3200 West Iles Avenue   Springfield            |   | West Main St.   Mechanicsburg       |   |
| Burnard K. McHone                                                                     |   | *Stephanie Lyon, Bank Manager I*               |   | *Cathy Brackemyer, Bank Manager II* |   |
| President                                                                             |   | *Vickie Bly, Corporate Banking*                |   |                                |   |
|                                                                                  |   | *Jim McGuire, Corporate Banking*               |   |                                |   |
| James L. Adkins                                                                       |   |                                           |   |                                |   |
| Sr. Vice President /  Chief Operating Officer                                         |   | 120 South Chatham Road   Springfield           |   | 2201 Woodlawn, Ste. 100   Lincoln   |   |
| George A. Rosenbaum, Jr.                                                              |   | *Ann Cowhick, Bank Manager I*                  |   | *Sharon Awe, Bank Manager I*        |   |
| Sr. Vice President /  Chief Financial Officer                                         |   |                                           |   |                                |   |
|                                                                                  |   | 615 West Jefferson St.                         |   | 120 Governor Oglesby                |   |
| Ronald Wenger                                                                         |   | Springfield                                    |   | Elkhart                             |   |
| Sr. Vice President /  Corporate Banking                                               |   | *Dottie Bellm, Bank Manager I*                 |   | *Sharon Awe, Bank Manager I*        |   |
|                                                                                  |   |                                           |   |                                |   |
| Doug F. Finn                                                                          |   | 2120 Peoria Road                               |   | 116 East Exchange                   |   |
| Vice President / Sales  & Service                                                 |   | Springfield                                    |   | Danvers                             |   |
|                                                                                  |   | *Jean Jachino, Bank Manager I*                 |   | *Tom Caisley, Bank Manager II*      |   |
| Juanita L. Mathis                                                                     |   |                                           |   |                                |   |
| Vice President /  Operations                                                          |   | 375 West Andrew Road                           |   | 103 Franklin                        |   |
|                                                                                  |   | Sherman                                        |   | Hudson                              |   |
|                                                                                  |   | *Molly Appelt, Bank Manager II*                |   | *Greg Birky, Corporate Banking*     |   |
|                                                                                  |   |                                           |   |                                |   |
| **Illini Bank**                                                                       |   | 133 Dodds Street                               |   | 100 East Third St                   |   |
|                                                                                  |   | Divernon                                       |   | Stonington                          |   |
| Burnard K. McHone                                                                     |   | *Susan Darling, Bank Manager I*                |   | *Carolyn Winn, Bank Manager I*      |   |
| President                                                                             |   |                                           |   |                                |   |
|                                                                                  |   | Route 4 and Jefferson                          |   |                                |   |
| James L. Adkins                                                                       |   | Auburn                                         |   |                                |   |
| Sr. Vice President /  Chief Operating Officer                                         |   | *Cathy Brackemyer, Bank Manager II*            |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| George A. Rosenbaum,  Jr.                                                             |   |                                           |   |                                |   |
| Sr. Vice President /  Chief Financial Officer                                         |   | **Farmers State Bank of Camp Point  Location** |   |
|                                                                                  |   | 206 E. Wood Street                             |   |                                |   |
| Ronald Wenger                                                                         |   | Camp Point                                     |   |                                |   |
| Sr. Vice President /  Corporate Banking                                               |   | *Jeffrey S. Mefford, President*                |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| Doug F. Finn                                                                          |   |                                           |   |                                |   |
| Vice President / Sales  & Service                                                 |   |                                           |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| Juanita L. Mathis                                                                     |   |                                           |   |                                |   |
| Vice President /  Operations                                                          |   |                                           |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| Nancy Richards                                                                        |   |                                           |   |                                |   |
| Vice President /  Corporate Banking                                                   |   |                                           |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| Terry Lock                                                                            |   |                                           |   |                                |   |
| Vice President /  Corporate Banking                                                   |   |                                           |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| **Farmers  State Bank of Camp Point**                                                 |   | **Stock  Transfer Agent**                      |   |                                |   |
|                                                                                  |   | Illinois Stock Transfer                        |   |                                |   |
| Jeffrey S. Mefford                                                                    |   | 209 West Jackson Blvd.                         |   |                                |   |
| President                                                                             |   | Suite 903                                      |   |                                |   |
|                                                                                  |   | Chicago, IL 60606                              |   |                                |   |
| Terry Reuschel                                                                        |   | 1-800-757-5755                                 |   |                                |   |
| Vice President                                                                        |   |                                           |   |                                |   |
|                                                                                  |   |                                           |   |                                |   |
| Anne Hunsaker                                                                         |   |                                           |   |                                |   |
| Vice President /  Cashier                                                             |   |                                           |   |                                |   |

 

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