**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**ý****   AnnualReport 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**

 

**For thefiscal year ended December 31, 2003**

 

**Commissionfile number 0-13343**

 

**ILLINI CORPORATION**

(Name of small businessissuer in its charter)

 

**Illinois**

(State of Incorporation)

 

**37-1135429**

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

 

**3200West Iles AvenueSpringfield, Illinois 62707**

(Address of principalexecutive offices and zip code)

 

Issuer’s telephone number

**(217)787-5111**

 

Securities registeredpursuant to Section 12(b) ofthe Exchange Act:

**None**

 

Securities registeredpursuant to Section 12(g) ofthe Exchange Act:

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

(Title of Class)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes   ý     No  o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained in this form and no disclosure willbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.  ý

 

The Registrant’s revenues for fiscal year 2003 were $17,184,000.

 

On March 1, 2004, 411,701 shares of common stock were outstanding.  The aggregate market value of such sharesheld by non-affiliates of the registrant was approximately $12,969,000 (basedon the average of the bid and asked prices of securities traded as of March 15,2004).

 

** **

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**TABLE OFCONTENTS**

 
| **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 the 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         |   |
| 8A.          | Controls  and Procedures                                                                      |   |
|         |                                                                                          |   |
| **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                                                             |   |
| 14.          | Principal  Accountant Fees and Services                                                       |   |
|         |                                                                                          |
| Signatures   |                                                                                          |

 

**Information ConcerningForward-Looking Statements**

*Statements contained in this Form 10-KSB which are nothistorical facts are “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. These statements involve important known and unknown risks,uncertainties and other factors and can be identified by phrases using“estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,”“potential,” “future,” “may,” “should” and similar expressions or words.  Such forward-looking statements are subjectto risk and uncertainties, which could cause actual results to differmaterially from those projected.  Suchrisks and uncertainties include potential change in interest rates, competitivefactors in the financial services industry, general economic conditions, the effectof new legislation and other risks detailed in documents filed by IlliniCorporation with the Securities and Exchange Commission from time to time.*

* *

**PART I.**

 

**ITEM 1****. -DESCRIPTION OF BUSINESS**

 

Illini Corporation (or “Corporation”), a bank holdingcompany as defined in the Bank Holding Company Act of 1956, as amended, wasincorporated under the laws of the State of Illinois in 1983.  Illini Corporation presently operates twowholly owned subsidiaries, Illini Bank, with 13 locations throughout four countiesin central Illinois and Farmers State Bank of Camp Point, Camp Point,Illinois.  In addition the Corporationformed, Illini Statutory Trust I (“IST”), which had previously beenconsolidated with the Corporation and, as discussed in Note 1 to the ConsolidatedFinancial Statements, is now reported separately.  Illini Corporation’s executive offices are located at 3200 WestIles Avenue, Springfield, Illinois 62707, and its telephone number is217-787-5111.

The Corporation’s management philosophy is to centralizeoverall corporate policies, procedures, and administrative functions and toprovide operational support for the subsidiary banks.  While each location is allowed flexibility in responding to localmarket conditions and customer and community needs, the Corporation operates asa single business segment.  TheCorporation is committed to being a well managed, 

 

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profitable financialinstitution providing a broad range of financial services and products, as wellas contributing to the economic and social environment of its communities.

Illini Bank (“Illini”) is an Illinois state bank, which had total assets of $228.3million at December 31, 2003.  Illinimaintains 13 banking facilities located in the following Illinois communities:Springfield, Lincoln, Auburn, Danvers, Divernon, Elkhart, Hudson,Mechanicsburg, Sherman, and Stonington. Farmers State Bank of Camp Point (“Camp Point”) is an Illinois statebank, which had total assets of $35.8 million at December 31, 2003.  Camp Point maintains one banking facilitylocated in Camp Point, Illinois.

Each Bank offers their customers a wide variety offinancial services and products. Deposit products include a variety of checking, NOW, money market,savings, investment sweep accounts, and certificates of deposit.  Lending products include short,intermediate, and long-term business and agricultural loans, commercial andresidential real estate loans, personal and consumer purchase loans, homeequity loans, and personal secured and unsecured lines of credit.  Additional product offerings include lettersof credit, credit cards, notary services, safe deposit boxes, and checkimaging.  During 2002, Illini enteredinto an agreement with PRIMEVEST Financial Services, Inc. in order to securethe services of a registered broker-dealer, subject to federal and statesecurities laws and the NASD Conduct Rules, as a convenience and accommodationto Illini’s customers.  The general purposeof the full service brokerage services provided by Illini is to providecustomers of Illini access to professional investment and insurance advice,based on customer suitability.  Theactivity operates as a division of Illini and is called “Illini FinancialServices”.

Illini’s and Camp Point’s deposit accounts are insuredby the Federal Deposit Insurance Corporation (the “FDIC”) under the BankInsurance Fund (“BIF”) to the maximum amount allowed by law.  Illini Corporation is supervised andregulated by the Board of Governors of the Federal Reserve (“FRB”) and Illiniand Camp Point are supervised and regulated by the FDIC and the Office of Banksand Real Estate of the State of Illinois.

 

•                  ***Competition***

 

The activities and geographic markets in which Illiniand Camp Point are engaged are highly competitive.  Competition among financial institutions is based upon interestrates offered on deposit accounts and on loans and other credit and servicecharges, the quality of services rendered, the convenience of bankingfacilities and, in the case of loans to large commercial borrowers, relativelending limits.

 

# ***•***                  Supervision andRegulation - General

# *** ***

Various federal and state banking laws and regulationsaffect the business of Illini Corporation. The Corporation is subject to supervision, regulation, and periodicexamination by the FRB.  TheCorporation’s subsidiary banks are subject to supervision, regulation, andperiodic examinations by the Office of Banks and Real Estate of the State ofIllinois and the FDIC.  The following isa summary of certain statutes and regulations affecting Illini Corporation,Illini and Camp Point.  This summary isqualified in its entirety by such statutes and regulations, which are subjectto change based on pending, and future legislation and action by regulatoryagencies.  Proposals to change the lawsand regulations governing the operation of banks and companies, which controlbanks and other financial institutions, are frequently raised in Congress.  The likelihood of any major legislation andthe impact such legislation might have on the Corporation, Illini or Camp Pointis, however, impossible to predict.

 

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

 

As a bank holding company, Illini Corporation issubject to regulation by the FRB under the Bank Holding Company Act of 1956, asamended (the “BHCA”).  The BHCA requiresa bank holding company to obtain the prior approval of the FRB before acquiringsubstantially all of the assets or direct or indirect ownership or control ofmore than five percent of the voting shares of a bank or a bank holding companyor merging or consolidating with any other bank holding company.

 

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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.

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 a properincident thereto.  The Corporation hasnot elected 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.

 

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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***

 

The Corporation’s principal source of income is thepayment of dividends on the stock of the banks owned by the Corporation.  Illinois law restricts the Banks’ ability topay these dividends.  Under the IllinoisBanking Act, no dividend may be declared by an Illinois state-chartered bank(i) except out of the bank’s net profits and (ii) unless the bank hastransferred to surplus at least one-tenth of its net profits since the date ofthe declaration of the last preceding dividend, until the amount of its surplusis at least equal to its capital.  Netprofits under the Illinois Banking Act must be adjusted for losses and baddebts (i.e. debts owing to the bank on which interest is past due and unpaidfor a period of six months or more unless such debts are well secured and inthe process of collection).

Under the Federal Deposit Insurance CorporationImprovement Act of 1991 (“FDICIA”), no insured depository institution maydeclare any dividend if, following the payment of such dividend, theinstitution 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 the Corporation, oninvestments in the Corporation and its affiliates’ securities, on acceptance ofsuch securities as collateral for loans to any borrower and on leases andservices and other contracts between the banks and the 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 riskof repayment or present other unfavorable features and must, in certain circumstances,be approved in advance by a majority of the entire board of directors of eachbank.  The aggregate amount that can belent to all insiders is limited to each bank’s unimpaired capital and surplus.  There are additional limitations on the amountof loans that can be made to each bank’s executive officers.

 

•                  ***Deposit Insurance***

 

Deposits held by Illini and Camp Point are insured, tothe extent permitted by law, by the Bank Insurance Fund (“BIF”) administered bythe FDIC.

As required under FDICIA, the FDIC has established asystem of risk-based deposit insurance premiums.  Under this system each insured institution’s assessment is basedon the probability that the BIF will incur a loss related to that institution,the likely amount of the loss, and the revenue needs of the BIF.

Under the current risk-based assessment system, adepository institution pays an assessment of between 0 cents and 27 cents per$100 of insured deposits, based on its capital level and riskclassification.  To arrive at a risk-basedassessment for an insured institution, the FDIC places it in one of nine riskcategories using a two-step analysis based first on capital ratios and then onrelevant supervisory information.

In addition, pursuant to the Deposit Insurance FundsAct of 1996, the FDIC imposed a special assessment on bank deposits at a ratenot tied to risk classification in order to service debt on the FinancingCorporation (FICO) bonds issued in connection with the federal government’sbail out of the thrift industry.  Anyfurther significant changes in the deposit insurance assessment rate imposed bythe FDIC could have a material effect on the earnings of the Corporation.

 

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•                  ***Capital Requirements***

 

The FRB has imposed risk-based capital guidelinesapplicable to the Corporation.  Theseguidelines require that bank holding companies maintain capital commensuratewith both on-and off-balance sheet credit and other risks of their operations.  Under the guidelines, a bank holding companymust have a minimum ratio of total capital to risk-weighted assets of 8percent.  In addition, a bank holdingcompany must maintain a minimum ratio of Tier 1 capital equal to 4 percent ofrisk-weighted assets.  Tier 1 capitalincludes common shareholders’ equity, qualifying perpetual preferred stock andminority interests in equity accounts of consolidated subsidiaries, lessgoodwill.  As a supplement to risk-basedcapital requirements, the FRB has also imposed leverage capital ratio requirements.  The leverage ratio requirements establish aminimum required ratio of Tier 1 capital to total assets less goodwill of 3percent for the most highly rated bank holding companies.  All other bank holding companies arerequired to maintain additional Tier 1 capital yielding a leverage ratio of 4percent to 5 percent, depending on the particular circumstances and riskprofile of the institution.  Refer tothe Capital Resources Section of Item 6 and Note 16 included under Item 7 for asummary of the Corporation’s capital ratios as of December 31, 2003 and 2002.

Each bank is also subject to risk-weighted capitalstandards and leverage measures, which are similar, but in some cases notidentical, to the requirements for bank holding companies, which apply to theCorporation.  At December 31, 2003Illini and Camp Point met all applicable capital requirements.

 

•                  ***Safety and Soundness Guidelines***

*** ***

As required by federal law, the federal bankingregulators have adopted interagency guidelines (the “Guidelines”) establishingstandards for safety and soundness for depository institutions on matters suchas internal controls, internal audit systems, loan documentation, creditunderwriting, interest rate risk exposure, asset growth and quality, earnings,and compensation and other benefits.  Ingeneral, the Guidelines prescribe the goals to be achieved in each area, andeach institution will be responsible for establishing its own procedures toachieve these goals.  If an institutionfails to comply with any of the standards set forth in the Guidelines, theinstitution’s primary federal regulator may require the institution to submit aplan for achieving and maintaining compliance. Failure to submit an acceptable compliance plan, or failure to adhere toa compliance plan that has been accepted by the appropriate regulator, wouldconstitute grounds for further enforcement action.

The Federal Deposit Insurance Act generally requiresall depository institutions to be examined annually by the bankingregulators.  Certain combinations ofconditions may extend the examination cycle to eighteen months.

 

•                  ***Monetary Policy and EconomicConditions***

*** ***

The business of commercial banks, such as Illini andCamp Point is affected by monetary and fiscal policies of various regulatoryagencies, including the FRB.  Among theregulatory techniques available to the FRB are open market operations in UnitedStates Government securities, changing the discount rate for member bankborrowings, and imposing and changing the reserve requirements applicable tomember bank deposits and to certain borrowings by member banks and theiraffiliates (including parent companies). These policies influence to a significant extent the overall growth anddistribution of bank loans, investments and deposits and the interest ratescharged on loans, as well as the interest rates paid on savings and timedeposits.

The monetary policies of the FRB have had asignificant effect on the operating results of commercial banks in the past andare expected to continue to do so in the future.  In view of constantly changing conditions in the national economyand the money market, as well as the effect of acts by the monetary and fiscalauthorities, including the FRB, no definitive predictions can be made by theCorporation or the banks as to future changes in interest rates, creditavailability, deposit levels, or the effect of any such changes on theCorporation’s or the banks’ operations and financial condition.

 

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•                  ***Federal Securities Regulation***

 

The Corporation’s common stock is registered with theSEC under the Securities Act of 1933, as amended, and the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). Consequently, the Corporation is subject to the information, proxysolicitation, insider trading and other restrictions and requirements of theSEC under the Exchange Act.

As a registered company with the SEC, the Corporationis subject to certain provisions of the Sarbanes-Oxley Act of 2002.  The Board of Directors and management areaware of the required changes in corporate governance and disclosure and haveacted to adopt the necessary actions for 2003.

 

# ***•***                  Employees

# *** ***

As of December 31, 2003, the Corporation, Illini andCamp Point had 110 total employees and 92 full-time employees.

 

•                  ***Statistical Disclosure***

* *
| Consolidated  Average Balances, Interest  Income/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                                               |   |
| Noninterest Income                                                        |   |
| Noninterest Expense                                                       |   |

 

•                  ***Reports to Security Holders***

 

TheCorporation files reports with the Securities and Exchange Commission (“SEC”)such as Forms 10-KSB, Forms 10-QSB, Forms 8-K and Schedules 14a.

Thepublic may read and copy any materials filed with the SEC at the SEC’s PublicReference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC and their address ishttp://www.sec.gov.  The public may alsogo to Illini Corporation’s web site at http://www.illinibank.com.

 

**ITEM 2****. –DESCRIPTION OF PROPERTIES**

 

Illini Corporation’s corporate offices are located at3200 West Iles Avenue, Springfield, Illinois. Illini owns 11 and leases two of the banking offices at which itoperates. Illini operates four banking offices in Springfield, Illinois and oneeach in the following Illinois communities: Auburn, Danvers, Divernon, Elkhart,Hudson, Lincoln, Mechanicsburg, Sherman, and Stonington.  Illini leases space for the banking officesin Lincoln and 615 W. Jefferson, Springfield. Camp Point owns and operates one office in Camp Point, Illinois, locatedat 206 E. Wood Street.

 

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**ITEM 3****. - LEGALPROCEEDINGS**

 

Various legal claims have arisen against IlliniCorporation in the normal course of business, which, in the opinion of IlliniCorporation management, will not result in any material liability to IlliniCorporation.  Three (3) additional casesremain pending at December 31, 2003.

The first case was filed in 1998 by a shareholder ofIllini Corporation against Illinois Stock Transfer Company, as Rights Agent forIllini Corporation under Illini Corporation’s Shareholder Rights Agreement(“Rights Agreement”), for specific performance of the Rights Agreement, onbehalf of the plaintiff individually and on behalf of a class of IlliniCorporation shareholders.  The complaintalleged that the Rights Agreement was triggered in April of 1998, and theRights Agent had 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 certified. Plaintiff was seeking to recover attorney’s fees from Illini Corporationin addition to other relief.  In Januaryof 2000, the trial court entered summary judgment in favor of IlliniCorporation and Illinois Stock Transfer Company.  Plaintiff appealed this ruling denying Plaintiff’s summaryjudgment motion to the Illinois Appellate Court.  The Appellate Court reversed the Summary Judgment for Defendantsand remanded the case for trial on the issue of whether the Illini CorporationBoard of Directors acted in good faith in determining that a shareholder’sacceptance of a gift of Illini Corporation Stock did not trigger the RightsAgreement, and in Illini Corporation’s later amendment of the RightsAgreement.  The Appellate Court furtherruled the Plaintiff’s attorney’s fees were recoverable under the RightsAgreement.  After a series ofunsuccessful motions filed by the plaintiff’s counsel, Illini Corporationentered a motion to remove the plaintiff’s attorney.  The court removed the attorney for the plaintiff class andappointed new counsel to represent the class. The removed counsel filed a motion for reconsideration, which wasdenied.  The new counsel filed a MotionFor Direction to remove the class representative, which was granted on January15, 2003.  On March 7, 2003 the trialcourt appointed a successor class representative. The Corporation has negotiateda settlement of the suit with the new class representative and classcounsel.  The terms of that settlementhave been agreed upon and are now subject to the court’s approval.  That agreement provides for a completeresolution of the shareholder claims and a portion of the claims for attorneyfees for the class representative. Illini has accrued for this expense and it will have no adverse impacton the Corporation.  The court will alsobe asked to deny the fee request filed by the attorney for the original classrepresentative. That proceeding should be concluded in the trial court by June2004.

The second case was filed in August of 2001 by ashareholder against a former shareholder and several past and present directorsof Illini Corporation.  The complaintpurports to bring a derivative cause of action arising out of the redemption ofthe shares of the former shareholder, which is alleged to have caused thedefendants to breach the Shareholder Rights Agreement.  The complaint seeks rescission of the stockredemption and recovery of plaintiff’s attorney’s fees.  In July 2002 the court ordered thisderivative suit stayed pending a decision in other litigation.  In October 2003, plaintiff moved to dismissthe case without prejudice and for an award of attorney’s fees.  Illini Corporation did not oppose the motionto dismiss the case and that motion was granted.  Illini Corporation did oppose the request for attorney’s feesfiled by plaintiff’s attorney.  Therequest for attorney fees was denied by the Court.  The decision of the trial court denying the request that IlliniCorporation pay plaintiff’s attorney’s fees is being appealed to the FourthDistrict, Illinois Appellate Court. Illini will continue to vigorously oppose that request for attorney’sfees.

In April 2003, Illini Corporation, its directors, andone of its officers were named as defendants in a complaint filed in theCircuit Court of Sangamon County. Plaintiffs seek to rescind the Stock Purchase Agreement entered into bythe Corporation in 2001 to purchase approximately 30% of its common shares froma minority shareholder group.  The StockPurchase Agreement was a normal business transaction beneficial to theCorporation’s shareholders and was entered into after appropriate due diligenceand consultation with the Corporation’s outside financial advisors.  The Corporation has filed motions to dismisson the basis of a prior pending action and a motion for a stay of proceedingsuntil review of the case by its independent directors.  Those motions remain pending.  The Corporation will vigorously defend thelawsuit.

 

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

 

No matters were submitted to a vote of securityholders during the fourth quarter of 2003.

 

**PART II****.**

 

**ITEM5**. - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDERMATTERS

 

The common stock of the Corporation is traded over thecounter and listed on the over the counter bulletin board (OTCBB).  The following table sets forth the high andlow bid quotations by calendar quarter of the common stock of theCorporation.  The quotations shownreflect inter-dealer prices, without retail mark-up, mark-down, or commissionand may not represent actual transactions.

 
| **2003**        |   | **High**  |       | **Low**    |       | **Cash  Dividends  Declared** |       |
|-----------------|--------|-----------|------------|------------|------------|-------------------------------|------------|
|            |   |      |       |       |       |                          |       |
| **1st Quarter** |   | **$**     | **27.50**  | ** ** | **$**      | **25.50**                     | ** ** | **$** | **.25** | ** ** |
| **2nd Quarter** |   | **34.00** | ** ** | **25.50**  | ** ** | **.25**                       | ** ** |
| **3rd Quarter** |   | **33.75** | ** ** | **28.00**  | ** ** | **.25**                       | ** ** |
| **4th Quarter** |   | **33.50** | ** ** | **31.50**  | ** ** | **.25**                       | ** ** |
|                 |        |           |            |            |            |                               |            |  |  |  |

 
| **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                           |       |
|             |        |          |            |         |            |                               |            |  |  |  |

 

As of December 31, 2003, there were 1,310 shareholdersof record of Illini Corporation common stock.

The Corporation issued $1.00 per share in dividends, whichtotaled $411,701 in both 2003 and 2002. Due to its status as a bank holding company, the Corporation’s abilityto issue dividends is restricted by regulatory provisions set forth in “Item 1.Description of Business—Supervision and Regulation—Dividend Restrictions” whichis incorporated by reference herein.

 

**ITEM 6****. -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

** **

# ***•***                  Introduction

# *** ***

The following discussion highlights the significantfactors affecting the operations and financial condition of the Corporation forthe two fiscal years ended December 31, 2003 and December 31, 2002.  The discussion should be read in conjunctionwith the consolidated financial statements, accompanying notes, and selectedfinancial data as set forth in “Item 7. Financial Statements” which isincorporated by reference herein.

The Corporation cautions that any forward lookingstatements contained in this report, in a report incorporated by reference tothis report, or made by management involve estimates and uncertainties and aresubject to change based upon various important factors.  Actual results for 2004 and beyond coulddiffer materially from results expressed or implied by forward looking statementsin this report.

 

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•                  ***Summary***

 

The year 2003 was one of challenges for theCorporation.  After several years ofgrowth in assets, total assets declined during 2003, to $264.8 million from$282.7 million at year-end 2002.  Netloans, including loans held for sale, declined $21.2 million during the year,to close the year at $186.1 million, as compared to $207.4 at the end of2002.  This decrease reflectedmanagement’s efforts to identify and remove marginal credits from the books ofIllini and to improve the overall quality of the loan portfolio.  Cash and cash equivalents also decreasedfrom the end of 2002, down $3.9 million. Decreases in total assets were partially offset by a $5.0 millionincrease in investment securities, and an increase of $3.1 million in otherreal estate owned.

As part of the overall contraction in the total assetsof the Corporation, management made a conscious effort to reduce its exposurein out of the area certificates of deposit. This is reflected in a decrease in time deposits of $100,000 and over of$4.5 million, and a decrease in other time deposits of $17.4 million.  These declines were partially mitigated bycontinued growth in low-cost core deposits, represented by noninterest-bearingdemand, NOW, money market and savings deposits, up $3.7 million from year-end2002, and by an increase in long-term debt of $3.0 million.

The decline in total assets of the Corporation,combined with continued low interest rates, had a negative impact on earningsin 2003.  Net income of  $595,000 was down  $927,000 from the $1,522,000 reported for 2002.  Interest income on loans decreased by $2.6million for the year, while interest income on taxable securities decreased by$0.6 million.  These decreases werepartially mitigated by a reduction of $1.7 million in interest expense.  Also negatively affecting earnings was anincrease of $321,000 in the provision for loan losses.  This however, was offset by a reduction of$296,000 in noninterest expense.

Management continues to focus on improving the creditquality of the loan portfolio, reducing overhead costs, increasing revenuesthrough targeted sales efforts, and continued development of our associatesthrough the execution of our business plan.

The following table details changes in theCorporation’s net income per share over the last two fiscal years.

 

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

**for 2003 and 2002**

 
|                                      |   | **2003-02** |       | **2002-01** |   |
|-------------------------------------------|--------|-------------|------------|-------------|--------|
| Per share                                 |   |        | ** ** |        |   |
| Net income prior  period                  |   | **$**       | **3.70**   | ** **  | $      | 2.64 |   |
| Change in EPS  attributable to change in: |   |        | ** ** |        |   |
| Net interest  income                      |   | **(3.68**   | **)**      | 6.01        |   |
| Provision for  loan losses                |   | **(0.78**   | **)**      | (0.60       | )      |
| Noninterest  income                       |   | **0.07**    | ** ** | (0.53       | )      |
| Noninterest  expense                      |   | **0.72**    | ** ** | (3.77       | )      |
| Income tax  (expense) benefit             |   | **1.42**    | ** ** | (0.05       | )      |
| Net increase  (decrease)                  |   | **(2.25**   | **)**      | 1.06        |   |
| Net income current  period                |   | **$**       | **1.45**   | ** **  | $      | 3.70 |   |

 

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

 

Average assetswere $273.0 million in 2003, a decrease of $9.1 million, or 3.2%, from2002.  Average total loans were $197.6million in 2003, a decrease of $13.9 million, or 6.6%, from 2002.  Average deposits were $236.4 million in2003, a decrease of $8.8 million, or 3.6%, from 2002.

 

10

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•                  ***Securities***

 

Total securities as of December 31, 2003 were $47.2million, an increase of $5.0 million, or 11.7%, over the prior year-end.  At December 31, 2003 and 2002, the totalsecurities portfolio comprised 17.8% and 14.9%, respectively, of total assets.

The Corporation’s investment strategy is to maximizeportfolio yields commensurate with credit risk and liquidityconsiderations.  The decision topurchase or sell securities is based upon the current assessment of economicand financial conditions, including the interest rate environment.  Approximately $4.7 million, or 9.8%, of thesecurities portfolio at December 31, 2003 matures within one year.  Scheduled maturities and the prepayment ofmortgage-backed securities represent a source of liquidity for Illini and CampPoint.

Mortgage-backed securities and collateralized mortgageobligations as of December 31, 2003 totaled $9.2 million and represent 19.4% oftotal securities.  The distribution ofmortgage-backed securities includes $7.5 million of U.S. government agencymortgage-backed pass through securities and $1.7 million of private issuecollateralized mortgage obligations.

At December 31, 2003, securities available for saletotaled $47.2 million.  There were nosecurities classified as held to maturity or trading at the end of 2003 or2002.  The securities available for saleportfolio at the end of 2003 included gross unrealized gains of $1,770,000 andgross unrealized losses of $55,000, of which the combined effect, net of tax,is included as an unrealized gain in stockholders’ equity.  For comparative purposes, at December 31,2002, gross unrealized gains of $2,301,000 and gross unrealized losses of$12,000 were included in the securities available for sale portfolio, which isset forth in “Item 7. Financial Statements –Note 3”, and is incorporated byreference herein.

 

•                  ***Maturities and Duration***

 

The maturities and weighted average yields of theinvestment portfolio at the end of 2003 are presented in the followingtable.  Maturities of privatemortgage-backed securities are based on their average expected lives andinclude the effects of anticipated prepayments.  All other securities are listed at their actual maturity orcontractual repricing interval.  Theamounts and yields disclosed reflect the net carrying value, which is the sameas fair value.  Taxable equivalentadjustments, using a 34% tax rate, have been made in calculating yields ontax-exempt obligations.

The securities portfolio at December 31, 2003contained, in the aggregate, securities of the City of Litchfield and theCounty of Sangamon that each had a book or market value in excess of 10% ofshareholders’ equity of the Corporation. Excluding those issued by the United States government, or its agenciesor corporations, there were no other securities of an issuer with an aggregatebook or market value in excess of 10% of shareholders’ equity of theCorporation.

 

11

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**Maturities and Yield of Securities**

** **
|                                                                 |   | **Total**                   |       | **Weighted  Average  Tax Equivalent Yield** |       |
|----------------------------------------------------------------------|--------|-----------------------------|------------|---------------------------------------------|------------|
|                                                                 |   | **(dollars  in thousands)** |       |
| U.S. government  agencies:                                           |   |                        |       |                                        |       |
| 0 to 1 years                                                         |   | $                           | **1,325**  | ** **                                  | **5.08**   | **%** |
| 1 to 5 years                                                         |   | **12,305**                  | ** ** | **3.29**                                    | ** ** |
| 5 to 10 years                                                        |   | **9,157**                   | ** ** | **3.68**                                    | ** ** |
| Total                                                                |   | **$**                       | **22,787** | ** **                                  | **3.55**   | **%** |
|                                                                 |   |                        |       |                                        |       |
| Mortgage-backed  securities and collateralized mortgage obligations: |   |                        |       |                                        |       |
| 0 to 1 year                                                          |   | $                           | **2,649**  | ** **                                  | **4.98**   | **%** |
| 1 to 5 years                                                         |   | **6,385**                   | ** ** | **3.46**                                    | ** ** |
| 5 to 10 years                                                        |   | **36**                      | ** ** | **3.45**                                    | ** ** |
| Over 10 years                                                        |   | **99**                      | ** ** | **5.67**                                    | ** ** |
| Total                                                                |   | **$**                       | **9,169**  | ** **                                  | **3.92**   | **%** |
|                                                                 |   |                        |       |                                        |       |
| States of the  U.S. and political subdivisions:                      |   |                        |       |                                        |       |
| 0 to 1 year                                                          |   | **$**                       | **737**    | ** **                                  | **6.11**   | **%** |
| 1 to 5 years                                                         |   | **4,926**                   | ** ** | **7.39**                                    | ** ** |
| 5 to 10 years                                                        |   | **5,865**                   | ** ** | **8.19**                                    | ** ** |
| Over 10 years                                                        |   | **3,678**                   | ** ** | **8.20**                                    | ** ** |
| Total                                                                |   | **$**                       | **15,206** | ** **                                  | **7.83**   | **%** |
|                                                                 |   |                        |       |                                        |       |
| Other equity  securities, no stated maturity                         |   | **$**                       | **10**     | ** **                                  | **—** | ** ** |
|                                                                 |   |                        |       |                                        |       |
| Total  securities:                                                   |   |                        |       |                                        |       |
| 0 to 1 year                                                          |   | **$**                       | **4,711**  | ** **                                  | **5.19**   | **%** |
| 1 to 5 years                                                         |   | **23,616**                  | ** ** | **4.19**                                    | ** ** |
| 5 to 10 years                                                        |   | **15,058**                  | ** ** | **5.44**                                    | ** ** |
| Over 10 years                                                        |   | **3,777**                   | ** ** | **8.13**                                    | ** ** |
| No stated maturity                                                   |   | **10**                      | ** ** | **—**                                  | ** ** |
| Total                                                                |   | **$**                       | **47,172** | ** **                                  | **5.00**   | **%** |

 

•                  ***Loans***

 

The Corporation’sloan portfolio 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,including loans held for sale, decreased $21.3 million from $207.4 million asof December 31, 2002 to $186.1 million as of December 31, 2003.  Average total loans decreased $13.9 millionfrom $211.5 million in 2002 to $197.6 million in 2003.  As mentioned in the balance sheet reviewsection, this decrease is reflective of management’s efforts during the courseof 2003 to remove marginal credits from the books of Illini and focus onfurther strengthening the remaining loan relationships.

The largestdecrease was in commercial loans, where the average balance decreased $8.1million to $36.9 million in 2003. Consumer loans decreased $4.2 million onaverage to $7.3 million.  While thesetwo categories of loans were decreasing, the continued low interest ratesresulted in a heavy increase in the number of residential real estate loans,either purchase loans or refinancings written during 2003.  This category increased, on average, $3.7million in 2003.

 

12

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All of theCorporation’s loans are domestic.  TheCorporation does not currently engage in foreign loans, or leasefinancing.  Additionally, theCorporation does not have any concentration of loans exceeding 10% of totalloans, which are not otherwise disclosed under “types of loans.”

Each major type ofloan will normally have different risk elements.  Real estate loans and installment loans to individuals can beaffected by 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 by type as of December 31, 2003 and2002 is set forth in “Item 7. Financial Statements—Note 4”, which isincorporated by reference herein.

 

•                  ***Maturities and Interest RateSensitivity of Loans***

 

A significant portion, $70.0 million (37.1%), ofIllini and Camp Point’s loan portfolios reprice or mature within one year,while $150.6 million (79.9%), of the loan portfolios reprice or mature withinfive years.  The relatively shortduration of the loan portfolios requires diligence on the part of management toreplace and/or renew maturing loans more frequently.  However, it benefits Illini and Camp Point by decreasing theirsusceptibility to rising interest rates and by allowing management more frequentopportunities to reassess and adjust loan agreements with borrowers and to exitdeteriorating loan relationships.  Atotal of 63.8% of commercial, financial, and agricultural loans mature withinone year, as referenced 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 |   | **$**                       | **32,092** | ** ** | **$** | **16,311** | ** ** | **$** | **1,920** | ** ** | **$** | **50,323** | ** ** |
| Real estate  construction                |   | **3,839**                   | ** ** | **492** | ** ** | **227** | ** ** | **4,558** | ** ** |
|                                     |   | **$**                       | **35,931** |   | **$** | **16,803** | ** ** | **$** | **2,147** | ** ** | **$** | **54,881** |   |

 
|                                      | ** ** | **Interest  Sensitivity**   | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
|                                      | ** ** | **Fixed  interest  rates**  | ** ** | **Floating  or  adjustable  interest rates** | ** ** | **Total** | ** ** |
|                                      | ** ** | **(dollars  in thousands)** | ** ** |
| Loans due after one but within five years |       | **$**                       | **12,893** | ** ** | **$** | **3,910** | ** ** | **$** | **16,803** |   |
| Loans due after five years                |       | **993**                     | ** ** | **1,154** | ** ** | **2,147** |   |
|                                      |       | **$**                       | **13,886** |   | **$** | **5,064** | ** ** | **$** | **18,950** |   |

 

13

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# ***Deposits***

 

Average deposits decreased $8.8 million, or 3.6%, to$236.4 million in 2003.  Illini and CampPoint’s overall cost of funds related to deposits decreased 58 basis points to2.19% in 2003 due to the declining interest rate environment.  From December 31, 2002 to December 31, 2003NOW and Money Market accounts increased by $2.9 million to $59.5 million andsavings deposits increased by $1.5 million to $21.4 million, while decreaseswere seen in time deposits, down $21.9 million to $111.3 million and innoninterest-bearing demand deposits, down $0.7 million to $34.4 million.  Total deposits decreased $18.2 million, or7.4%, to $226.6 million at December 31, 2003.

 
|                                  |   | **Aver****age Balances of Deposits and  Cost of Funds** |        |
|---------------------------------------|--------|---------------------------------------------------------|-------------|
|                                  |   | **2003  Average**                                       |        | **2002  Average** |   |
|                                  |   | **Balance**                                             | ** **  | **Rate** | ** ** | **Balance** | ** ** | **Rate** |   |
|                                  |   | **(dollars  in thousands)**                             |        |
|                                  |   |                                                    |        |
| Noninterest bearing demand deposits   |   | **$**                                                   | **32,198**  | ** ** | **—** |   | $ | 32,189 |   | — |   |
| NOW and money market deposit accounts |   | **58,108**                                              | ** **  | **0.97** | **%** | 58,983 |   | 1.77 | % |
| Savings deposits                      |   | **21,407**                                              | ** **  | **0.73** | ** ** | 19,608 |   | 1.33 |   |
| Time deposits                         |   | **124,646**                                             | ** **  | **3.****57** | ** ** | 134,387 |   | 4.09 |   |
|                                  |   | **$**                                                   | **236,359** |   | **2.19** | **%** | $ | 245,167 |   | 2.77 | % |

 
|                 | ** ** | **Maturity  of Time Deposits Greater Than $100,000  At December 31, 2003** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------|------------|
|                 | ** ** | **Time  Certificates  of Deposit**                                         | ** ** | **Other  Time  Deposits** | ** ** | **Total** | ** ** |
|                 | ** ** | **(dollars  in thousands)**                                                | ** ** |
|                 |       |                                                                       |       |   |   |   |   |
| Three months or less |       | **$**                                                                      | **3,778**  | ** ** | **$** | **—** | ** ** | **$** | **3,778** |   |
| Three to six months  |       | **4,417**                                                                  | ** ** | **—** | ** ** | **4,417** |   |
| Six to twelve months |       | **5,954**                                                                  | ** ** | **—** | ** ** | **5,954** |   |
| Over twelve months   |       | **4,170**                                                                  | ** ** | **—** | ** ** | **4,170** |   |
|                 |       | **$**                                                                      | **18,319** |   | **$** | **—** | ** ** | **$** | **18,319** |   |

 

•                  ***Critical Accounting Policies***

 

The accounting and reporting policies of theCorporation are in accordance with accounting principles generally accepted inthe United States and conform to general practices within the banking industry.The Corporation’s significant accounting policies are described in detail inthe notes to the Corporation’s consolidated financial statements for the yearended December 31, 2003. The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions. The financial position and results of operations canbe affected by these estimates and assumptions and are integral to theunderstanding of reported results. Significant accounting policies are thosepolicies that management believes are the most important to the portrayal ofthe Corporation’s financial condition and results, and they require managementto make estimates that are difficult, subjective, or complex.

 

14

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Allowance for Loan Losses - The allowance for loanlosses provides coverage for probable incurred losses inherent in theCorporation’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 Corporation determines the amount of the allowancebased on relative risk characteristics of the loan portfolio. The allowancerecorded for commercial loans is based on reviews of individual creditrelationships and an analysis of the migration of commercial loans and actualloss experience. The allowance recorded for homogeneous consumer loans is basedon an analysis of loan mix, risk characteristics of the portfolio, fraud lossand bankruptcy experiences, and historical losses, adjusted for current trends,for each homogeneous category or group of loans. The allowance for loan lossesrelating to impaired loans is based on the loan’s observable market price, thecollateral for certain collateral-dependent loans, or the discounted cash flowsusing the loan’s effective interest rate.

Regardless of the extent of the Corporation’s analysisof customer performance, portfolio trends or risk management processes, certaininherent but undetected losses are probable within the loan portfolio. This isdue to several factors, including inherent delays in obtaining informationregarding a customer’s financial condition or changes in their unique businessconditions, the judgmental nature of individual loan evaluations, collateralassessments and the interpretation of economic trends. Volatility of economicor customer-specific conditions affecting the identification and estimation oflosses for larger non-homogeneous credits and the sensitivity of assumptionsutilized to establish allowances for homogenous groups of loans are among otherfactors. The Corporation estimates a range of losses related to the existenceof these exposures. The estimates are based upon the Corporation’s evaluationof imprecision risk associated with the commercial and consumer allowancelevels and the estimated impact of the current economic environment.

Mortgage Servicing Rights - Mortgage servicing rights(“MSRs”) associated with loans originated and sold, where servicing isretained, are capitalized and included in the consolidated balance sheet. Thevalue of the capitalized servicing rights represents the present value of thefuture servicing fees arising from the right to service loans in the portfolio.Significant accounting policies for MSRs relate to the initial valuation andsubsequent impairment tests. The methodology used to determine the valuation ofMSRs requires the development and use of a number of estimates, includinganticipated principal amortization and prepayments of that principal balance.Events that may significantly affect the estimates used are changes in interestrates, mortgage loan prepayment speeds and the payment performance of theunderlying loans. The carrying value of the MSRs is periodically reviewed forimpairment based on a determination of the fair value. Impairment is evaluatedbased on the fair value of the assets, using groupings of the underlying loansas to interest rates and then, secondarily, as to geographic and prepaymentcharacteristics.  Fair value isdetermined using prices for similar assets with similar characteristics, whenavailable, or based upon discounted cash flows using market-basedassumptions.  Any impairment of agrouping is reported as a valuation allowance, to the extent that fair value isless than the capitalized amount for a grouping.

Other Real Estate Owned - OREO is recorded on anindividual asset basis at the lower of fair value less estimated disposal costsor cost.  The Corporation obtains thirdparty appraisals on these properties and if the fair value declines subsequentto foreclosure the deficiency is recorded as a valuation allowance and is recordedthrough expense.

 

15

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# ***•***                  Liquidity

# *** ***

Liquidity represents the availability of funding tomeet obligations to depositors, borrowers, and creditors at a reasonable costwithout adverse consequences.  Accordingly,the liquidity position is influenced by the funding base and asset mix.

The Corporation requires adequate liquidity to pay itsexpenses and pay stockholder dividends. Liquidity is provided to the Corporation in the form of dividends fromthe subsidiary banks.  Dividends fromIllini totaled $1.9 million in 2003, compared to $1.1 million in 2002.  In both 2003 and 2002, dividends from CampPoint totaled $0.2 million.  Illini andCamp Point’s liquidity is provided by bank cash balances, liquidation of short-terminvestments, loan payments, an overnight federal funds line of credit, andborrowings from the Federal Home Loan Bank of Chicago.  While the banks are limited in the amount ofdividends they pay, as of December 31, 2003, a combined $4.7 million wasavailable for payment to the Corporation in the form of dividends without priorregulatory approval.

Cash and cash equivalents, which include federal fundssold and interest bearing deposits with banks, decreased $4.0 million to $15.9million at December 31, 2003, compared to $19.9 million at December 31, 2002.

The asset portion of the balance sheet providesliquidity primarily through loan principal repayments, maturities of investmentsecurities, the sale of available for sale investment securities, and the saleof 1-4 family mortgage loans to the secondary mortgage market through theFederal National Mortgage Association.

The liability portion of the balance sheet providesliquidity through federal funds purchased, securities sold under agreements to repurchase,other short-term debt, and long-term debt. As of December 31, 2003, Illini had an overnight federal funds line ofcredit with an unaffiliated financial institution in the amount of $0.7million, all of which was available for borrowing.  Illini is also a member of the Federal Home Loan Bank of Chicago(“FHLB”) and can borrow up to $19.3 million. As of December 31, 2003, Illini had advances through the FHLB of $4.0million maturing in 2004, $2.0 million maturing in 2005, and $3.0 millionmaturing in 2006.  The Corporation alsohad a note payable in the amount of $2.3 million, maturing in 2005.

 

•                  ***Capital Resources***

 

Total shareholders’ equity decreased from $15.2million at December 31, 2002 to $15.0 million at December 31, 2003.  This slight decrease in capital is composedof a decrease in accumulated other comprehensive income of $0.4 million anddividends paid to shareholders in the amount of $0.4 million, offset by netincome of $0.6 million.  The primarysource of capital of the Corporation is retained earnings.  Cash dividends per share were $1.00 for 2003and 2002.  The Corporation retained30.9% of its net income for 2003 and 73.0% for 2002.

The capital is supplemented by a preferred securityissued by the trust subsidiary, Illini Statutory Trust I (“IST”), which wascompleted February 22, 2001.  TwentyFive (25) percent of the Tier I capital ratio can be comprised of the trustpreferred issue.

Regulatory guidelines require bank holding companies,commercial banks, and thrifts to maintain certain minimum ratios and definecompanies as “well capitalized” that sufficiently exceed the minimumratios.  The banking regulators mayalter minimum capital requirements as a result of revising their internal policiesand their ratings of individual institutions. To be “well capitalized,” the Corporation and the banks must maintain aTier 1 leverage ratio of no less than 5.0%, a Tier 1 risk based ratio of noless than 6.0%, and a total risk based ratio of no less than 10.0%. Illini’sratios as of December 31, 2003 were 8.06%, 10.36%, and 11.53%, respectively,which meet the criteria for “well capitalized.” Camp Point’s ratios as ofDecember 31, 2003 were 8.99%, 14.45%, and 15.70%, respectively, which meet thecriteria for “well capitalized.”  TheCorporation’s ratios as of December 31, 2003 were 6.29%, 8.30%, and 11.68%,respectively.

As of December 31, 2003, management is not aware ofany current recommendations by banking regulatory authorities, which if theywere to be implemented, would have or are reasonably likely to have a materialadverse impact on the Corporation’s liquidity, capital resources, oroperations.

 

16

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**RESULTSOF OPERATIONS**

** **
|                                    |   | **Key Ratios  For the years ended December 31,** |   |
|-----------------------------------------|--------|--------------------------------------------------|--------|
|                                    |   | **2003**                                         |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Return on  average assets               |   | **0.22**                                         | **%**  | 0.54 | % | 0.49 | % | 0.75 | % | 0.39 | % |
| Return on  average equity               |   | **3****.83**                                     |   | 10.83 |   | 8.00 |   | 9.42 |   | 4.31 |   |
| Dividend payout  ratio                  |   | **69.24**                                        |   | 27.05 |   | 37.88 |   | 33.74 |   | 71.30 |   |
| Average equity  to average assets ratio |   | **5.****69**                                     |   | 4.98 |   | 6.16 |   | 7.92 |   | 9.00 |   |

 

•                  ***Net Interest Income***

 

Net interest income is the principal component of theCorporation’s net income stream and represents the difference between interestand fee income generated from earning assets and interest expense paid ondeposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes inearning assets and interest bearing liabilities, can materially impact netinterest income.  The discussion of netinterest income is presented on a taxable equivalent basis to facilitateperformance comparisons among various taxable and tax-exempt assets.

Interest income decreased $3.2 million from 2002 to2003.  Interest expense decreased $1.7million from 2002 to 2003, resulting in a decrease in net interest income of$1.5 million.  The net interest marginfell from 3.62% in 2002 to 3.53% in 2003. The decline in the interest margin is due to loans repricing into lowerinterest rates, and the increase in nonperforming loans.  The securities portfolio has a weightedaverage tax equivalent yield of 5.45%, while the loan portfolio has an averageyield of 6.57% for 2003.  With thedecrease in the loan balances, total earning assets decreased to $250.6million.

The $1.7 million decrease in interest expense was primarilyattributable to a $0.5 million decline in NOW and money market accountsinterest expense, and another $1.0 million decline in time deposit interestexpense.  Average interest bearingliabilities decreased $8.4 million, while experiencing a 61 basis pointdecrease in the overall cost of funds.

The decrease in the average yield and cost of fundswas the result of the Federal Reserve System’s effort to stimulate the economyby the lowering of interest rates.  Theinterest rates that the Corporation charges to borrowers and pays to depositorsare greatly influenced by these rates.

 

17

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**Net Interest Income - Rate/VolumeVariance Analysis**

 
|                                          |   | **2003-02**                    |       | **2002-01**        |       |
|-----------------------------------------------|--------|--------------------------------|------------|--------------------|------------|
|                                          |   | **Changes in  Income/Expense** |       | **Volume  Effect** |       | **Rate  Effect** |   | **Changes in  Income/Expense** |   | **Volume  Effect** |   | **Rate  Effect** |   |
|                                          |   | **(dollars  in thousands)**    |       |
|                                          |   |                           |       |               |       |   | ** ** |   |   |   |   |   |   |
| Short-term  investments                       |   | **$**                          | **23**     | ** **         | **$**      | **95** | ** ** | **$** | **(72** | **)** | $ | (213 | ) | $ | 19 |   | $ | (232 | ) |
| Investment  securities:                       |   |                           |       |               |       |   | ** ** |   |   |   |   |   |   |
| Taxable                                       |   | **(597**                       | **)**      | **(190**           | **)**      | **(407** | **)** | (710 | ) | (490 | ) | (220 | ) |
| Nontaxable (*)                                |   | **44**                         | ** ** | **38**             | ** ** | **6** | ** ** | 136 |   | 150 |   | (14 | ) |
| Loans (*)                                     |   | **(2,688**                     | **)**      | **(1,057**         | **)**      | **(1,631** | **)** | 177 |   | 2,322 |   | (2,145 | ) |
| Total interest  income                        |   | **$**                          | **(3,218** | **)**              | **$**      | **(1,114** | **)** | **$** | **(2,104** | **)** | $ | (610 | ) | $ | 2,001 |   | $ | (2,611 | ) |
| Savings and  interest bearing demand accounts |   | **(587**                       | **)**      | **9**              | ** ** | **(596** | **)** | (915 | ) | 30 |   | (945 | ) |
| Time deposits                                 |   | **(1,034**                     | **)**      | **(400**           | **)**      | **(634** | **)** | (859 | ) | 911 |   | (1,770 | ) |
| Short-term debt                               |   | **(12**                        | **)**      | **(13**            | **)**      | **1** | ** ** | (47 | ) | (49 | ) | 2 |   |
| Long-term debt                                |   | **(43**                        | **)**      | **46**             | ** ** | **(89** | **)** | (183 | ) | 249 |   | (432 | ) |
| Subordinated  debentures                      |   | **7**                          | ** ** | **—**         | ** ** | **7** | ** ** | 154 |   | 71 |   | 83 |   |
| Total interest  expense                       |   | **$**                          | **(1,669** | **)**              | **$**      | **(358** | **)** | **$** | **(1,311** | **)** | $ | (1,850 | ) | $ | 1,212 |   | $ | (3,062 | ) |
|                                          |   |                           |       |               |       |   | ** ** |   |   |   |   |   |   |
| Net interest  income                          |   | **$**                          | **(1,549** | **)**              | **$**      | **(756** | **)** | **$** | **(793** | **)** | $ | 1,240 |   | $ | 789 |   | $ | 451 |   |

 

----

(*) Fully taxable equivalent basis using the federal statutory rate of34% for all years presented.

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

 

18

----

 

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

 
|                                                 |   | **Year ended  December 31,** |        |
|------------------------------------------------------|--------|------------------------------|-------------|
|                                                 |   | **2003**                     |        | **2002** |   |
|                                                 |   | **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                               |   | **$**                        | **13,874**  | ** ** | **5.1** | **%** | **$** | **141** | ** ** | **1.02 ** | **%** | $ | 7,698 |   | 2.7 | % | $ | 118 |   | 1.54 | % |
| Investment securities (3)                            |   |                         |        |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Taxable                                              |   | **26,125**                   | ** **  | **9.6** | ** ** | **983** | ** ** | **3.76** | ** ** | 29,698 |   | 10.5 |   | 1,580 |   | 5.32 |   |
| Tax-exempt (1)                                       |   | **15,125**                   | ** **  | **5.5** | ** ** | **1,267** | ** ** | **8.37** | ** ** | 14,671 |   | 5.2 |   | 1,223 |   | 8.34 |   |
| Total securities                                     |   | **41,250**                   | ** **  | **15.1** | ** ** | **2,250** | ** ** | **5.45** | ** ** | 44,369 |   | 15.7 |   | 2,803 |   | 6.32 |   |
| Loans                                                |   |                         |        |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Commercial (1)                                       |   | **36,943**                   | ** **  | **13.5** | ** ** | **2,386** | ** ** | **6.46** | ** ** | 44,989 |   | 16.0 |   | 3,199 |   | 7.11 |   |
| Agriculture                                          |   | **14,632**                   | ** **  | **5.3** | ** ** | **797** | ** ** | **5.45** | ** ** | 15,800 |   | 5.6 |   | 1,012 |   | 6.40 |   |
| Real estate                                          |   |                         |        |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Commercial                                           |   | **96,672**                   | ** **  | **35.4** | ** ** | **6,220** | ** ** | **6.43** | ** ** | 100,104 |   | 35.5 |   | 7,378 |   | 7.37 |   |
| Agriculture                                          |   | **5,888**                    | ** **  | **2.2** | ** ** | **450** | ** ** | **7.63** | ** ** | 6,604 |   | 2.3 |   | 520 |   | 7.88 |   |
| Residential                                          |   | **35,409**                   | ** **  | **13.0** | ** ** | **2,353** | ** ** | **6.65** | ** ** | 31,677 |   | 11.2 |   | 2,411 |   | 7.61 |   |
| Consumer, net                                        |   | **7,325**                    | ** **  | **2.7** | ** ** | **653** | ** ** | **8.92** | ** ** | 11,526 |   | 4.1 |   | 1,019 |   | 8.84 |   |
| Credit card                                          |   | **759**                      | ** **  | **0.3** | ** ** | **133** | ** ** | **17.50** | ** ** | 839 |   | 0.3 |   | 141 |   | 16.86 |   |
| Total loans                                          |   | **197,628**                  | ** **  | **72.4** | ** ** | **12,992** | ** ** | **6.57** | ** ** | 211,539 |   | 75.0 |   | 15,680 |   | 7.41 |   |
| Allowance for loan losses                            |   | **(2,149**                   | **)**       | **(0.8** | **)** |   |   |   |   | (2,226 | ) | (0.8 | ) |   |   |   |   |
| Net loans (1) (2)                                    |   | **195,479**                  | ** **  | **71.6** | ** ** | **12,992** | ** ** | **6.65** | ** ** | 209,313 |   | 74.2 |   | 15,680 |   | 7.49 |   |
| Total interest earning assets                        |   | **250,603**                  | ** **  | **91.8** | ** ** | **15,383** | ** ** | **6.14** | ** ** | 261,380 |   | 92.6 |   | 18,601 |   | 7.12 |   |
| Cash and due from banks                              |   | **5,806**                    | ** **  | **2.1** | ** ** |   |   |   |   | 5,899 |   | 2.1 |   |   |   |   |   |
| Premises and equipment                               |   | **6,521**                    | ** **  | **2.4** | ** ** |   |   |   |   | 6,940 |   | 2.5 |   |   |   |   |   |
| Other real estate owned                              |   | **3,218**                    | ** **  | **1.2** | ** ** |   |   |   |   | 753 |   | 0.3 |   |   |   |   |   |
| Other assets (3)                                     |   | **6,872**                    | ** **  | **2.5** | ** ** |   |   |   |   | 7,183 |   | 2.5 |   |   |   |   |   |
| **Total  assets**                                    |   | **$**                        | **273,020** | ** ** | **100.0** | **%** |   |   |   |   | $ | 282,155 |   | 100.0 | % |   |   |   |   |
|                                                 |   |                         |        |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                      |   |                         |        |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Deposits:                                            |   |                         |        |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Noninterest bearing deposits                         |   | **$**                        | **32,198**  | ** ** | **11.8** | **%** |   |   |   |   | 32,189 |   | 11.4 | % |   |   |   |   |
| Interest bearing demand                              |   | **58,108**                   | ** **  | **21.3** | ** ** | **$** | **562** | ** ** | **0.97** | **%** | 58,983 |   | 20.9 |   | $ | 1,044 |   | 1.77 | % |
| Savings                                              |   | **21,407**                   | ** **  | **7.8** | ** ** | **156** | ** ** | **0.73** | ** ** | 19,608 |   | 6.9 |   | 261 |   | 1.33 |   |
| Time deposits less than $100,000                     |   | **102,921**                  | ** **  | **37.7** | ** ** | **3,707** | ** ** | **3.60** | ** ** | 109,594 |   | 38.8 |   | 4,444 |   | 4.06 |   |
| Total core deposits                                  |   | **214,634**                  | ** **  | **78.6** | ** ** | **4,425** | ** ** | **2.06** | ** ** | 220,374 |   | 78.0 |   | 5,749 |   | 2.61 |   |
| Time deposits $100,000 and over                      |   | **21,725**                   | ** **  | **8.0** | ** ** | **749** | ** ** | **3.45** | ** ** | 24,793 |   | 8.8 |   | 1,046 |   | 4.22 |   |
| Total deposits                                       |   | **236,359**                  | ** **  | **86.6** | ** ** | **5,174** | ** ** | **2.19** | ** ** | 245,167 |   | 86.8 |   | 6,795 |   | 2.77 |   |
| Short-term debt                                      |   | **660**                      | ** **  | **0.2** | ** ** | **18** | ** ** | **2.76** | ** ** | 1,135 |   | 0.4 |   | 30 |   | 2.67 |   |
| Long-term debt                                       |   | **9,****305**                | ** **  | **3.4** | ** ** | **393** | ** ** | **4.23** | ** ** | 8,410 |   | 3.0 |   | 436 |   | 5.19 |   |
| Subordinated debentures (4)                          |   | **9,000**                    | ** **  | **3.3** | ** ** | **947** | ** ** | **10.52** | ** ** | 9,000 |   | 3.2 |   | 940 |   | 10.44 |   |
| Total interest bearing liabilities                   |   | **223,126**                  | ** **  | **81.7** | ** ** | **6,532** | ** ** | **2.93** | ** ** | 231,523 |   | 82.0 |   | 8,201 |   | 3.54 |   |
| Other liabilities                                    |   | **2,157**                    | ** **  | **0.8** | ** ** |   |   |   |   | 4,389 |   | 1.6 |   |   |   |   |   |
| Total liabilities                                    |   | **257,481**                  | ** **  | **94.3** | ** ** |   |   |   |   | 268,101 |   | 95.0 |   |   |   |   |   |
| Shareholders’ Equity                            |   | **15,539**                   | ** **  | **5.7** | ** ** |   |   |   |   | 14,054 |   | 5.0 |   |   |   |   |   |
| **Total  liabilities and shareholders’ equity** |   | **$**                        | **273,020** | ** ** | **100.0** | **%** |   |   |   |   | $ | 282,155 |   | 100.0 | % |   |   |   |   |
| **Net  interest margin**                             |   |                         |        |   |   | **$** | **8,851** | ** ** | **3.53** | **%** |   |   |   |   | $ | 10,400 |   | 3.62 | % |

 

----

(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 $406,000 in 2003 and$351,000 in 2002.

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

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

 

19

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|                                                 |   | **Year ended  December 31,  2001** |       |
|------------------------------------------------------|--------|------------------------------------|------------|
|                                                 |   | **Average  Balance**               |       | **Percent  of Total  Assets** |   | **Interest  Income/  Expense** |   | **Average  Yield/  Rate** |   |
|                                                 |   | **(dollars in thousands)**         |       |
| **ASSETS**                                           |   |                               |       |
| Interest-earning  assets:                            |   |                               |       |   |   |   |   |   |   |
| Short-term  investments                              |   | $                                  | 7,283      |   | 2.8 | % | $ | 331 |   | 4.55 | % |
| Investment  securities (3)                           |   |                               |       |   |   |   |   |   |   |
| Taxable                                              |   | 37,791                             |       | 14.5 |   | 2,290 |   | 6.06 |   |
| Tax-exempt (1)                                       |   | 12,890                             |       | 5.0 |   | 1,087 |   | 8.43 |   |
| Total securities                                     |   | 50,681                             |       | 19.5 |   | 3,377 |   | 6.66 |   |
| Loans                                                |   |                               |       |   |   |   |   |   |   |
| Commercial (1)                                       |   | 33,739                             |       | 13.0 |   | 2,829 |   | 8.39 |   |
| Agriculture                                          |   | 12,985                             |       | 5.0 |   | 970 |   | 7.47 |   |
| Real estate                                          |   |                               |       |   |   |   |   |   |   |
| Commercial                                           |   | 83,258                             |       | 32.1 |   | 7,074 |   | 8.50 |   |
| Agriculture                                          |   | 7,420                              |       | 2.9 |   | 629 |   | 8.47 |   |
| Residential                                          |   | 32,513                             |       | 12.5 |   | 2,715 |   | 8.35 |   |
| Consumer, net                                        |   | 13,019                             |       | 5.0 |   | 1,138 |   | 8.74 |   |
| Credit card                                          |   | 808                                |       | 0.3 |   | 148 |   | 18.29 |   |
| Total loans                                          |   | 183,742                            |       | 70.8 |   | 15,503 |   | 8.44 |   |
| Allowance for  loan losses                           |   | (2,241                             | )          | (0.9 | ) |   |   |   |   |
| Net loans (1)  (2)                                   |   | 181,501                            |       | 69.9 |   | 15,503 |   | 8.54 |   |
| Total interest  earning assets                       |   | 239,465                            |       | 92.2 |   | 19,211 |   | 8.02 |   |
| Cash and due  from banks                             |   | 5,847                              |       | 2.2 |   |   |   |   |   |
| Premises and  equipment                              |   | 6,961                              |       | 2.7 |   |   |   |   |   |
| Other real  estate owned                             |   | 444                                |       | 0.2 |   |   |   |   |   |
| Other assets (3)                                     |   | 6,883                              |       | 2.7 |   |   |   |   |   |
| **Total  assets**                                    |   | $                                  | 259,600    |   | 100 | % |   |   |   |   |
|                                                 |   |                               |       |   |   |   |   |   |   |
| **LIABILITIES**                                      |   |                               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Deposits:                                            |   |                               |       |   |   |   |   |   |   |
| Noninterest  bearing deposits                        |   | $                                  | 28,724     |   | 11.1 | % |   |   |   |   |
| Interest bearing  demand                             |   | 59,356                             |       | 22.9 |   | $ | 1,906 |   | 3.21 | % |
| Savings                                              |   | 17,288                             |       | 6.7 |   | 314 |   | 1.82 |   |
| Time deposits  less than $100,000                    |   | 89,199                             |       | 34.3 |   | 4,866 |   | 5.45 |   |
| Total core  deposits                                 |   | 194,567                            |       | 75.0 |   | 7,086 |   | 3.64 |   |
| Time deposits  $100,000 and over                     |   | 28,676                             |       | 11.0 |   | 1,483 |   | 5.17 |   |
| Total deposits                                       |   | 223,243                            |       | 86.0 |   | 8,569 |   | 3.84 |   |
| Short-term debt                                      |   | 3,098                              |       | 1.2 |   | 77 |   | 2.49 |   |
| Long-term debt                                       |   | 6,000                              |       | 2.3 |   | 619 |   | 10.31 |   |
| Subordinated  debentures (4)                         |   | 8,250                              |       | 3.2 |   | 786 |   | 9.53 |   |
| Total interest  bearing liabilities                  |   | 211,867                            |       | 81.6 |   | 10,051 |   | 4.74 |   |
| Other  liabilities                                   |   | 3,025                              |       | 1.2 |   |   |   |   |   |
| Total  liabilities                                   |   | 243,616                            |       | 93.9 |   |   |   |   |   |
| Shareholders’  Equity                           |   | 15,984                             |       | 6.1 |   |   |   |   |   |
| **Total liabilities and shareholders’  equity** |   | $                                  | 259,600    |   | 100.0 | % |   |   |   |   |
| **Net interest margin**                              |   |                               |       |   |   | $ | 9,160 |   | 3.83 | % |

 

----

(1)          Income amounts arepresented on a fully taxable equivalent basis (FTE), which is defined as incomeon earning assets that is subject to either a reduced rate or zero rate ofincome tax, adjusted to give effect to the appropriate incremental federalincome tax rate and adjusted for non-deductible carrying costs, whereapplicable.  Where appropriate, yieldcalculations include these adjustments. The federal statutory rate was 34% for all years presented.

(2)          Nonaccrual loans areincluded in the loan balances.  Interestincome includes related fee income of $388,000 in 2001.

(3)          Average securitiesbalances are based on amortized historical cost, excluding SFAS 115 adjustmentsto fair value, which are included in other assets.

(4)          The average balance forthe Corporation is based on a monthly average balance versus a daily averagebalance.

 

20

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

 

The provision for loan losses charged to earnings was$1,081,000 for 2003, an increase of $321,000, or 42.3%, from the $760,000 in2002.  During 2001, the provision forloan losses was $605,000.  The ratio ofnet charge-offs to average loans outstanding has increased from 0.38% to 0.19%to 0.60% for the years ended December 31, 2001, 2002 and 2003,respectively.  The provision for loanloss expense increased to $1,081,000 for 2003 from $760,000 in 2002, primarilydue to an increase in nonperforming loans. Nonaccrual loans increased to $5,505,000 at December 31, 2003, comparedto $4,901,000 at December 31, 2002.

The management of the Corporation considers a numberof factors in determining the amount of the allowance for loan losses.  These factors include, but are not limitedto, the following:

 

•                  Historicaldata and trends relating to net charge-offs, delinquency rates, averageoutstanding loans, and the level of 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, including loans held for sale, increasedfrom 1.18% at December 31, 2002, to 1.25% at December 31, 2003.  Excluding loans held for sale the ratio was1.21% and 1.36%, respectively.  In thefourth quarter of 2003 Illini charged off $473,000 of loans, with two loanscomprising $324,000 of that total. Illini adjusted its regular provision to maintain its reserve for loanlosses at a level estimated to be sufficient to cover probable incurred lossesin its loan portfolio.

 

21

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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, 2003, 2002, and 2001:

 
|                                                                     |   | **2003**                    |        | **2002**   |   | **2001** |   |
|--------------------------------------------------------------------------|--------|-----------------------------|-------------|------------|--------|----------|--------|
|                                                                     |   | **(dollars  in thousands)** |        |
|                                                                     |   |                        |        |       |   |     |   |
| Average loans  outstanding                                               |   | **$**                       | **197,628** | ** ** | $      | 211,539  |   | $ | 183,742 |   |
|                                                                     |   |                        | ** **  |       |   |     |   |
| Allowance for  loan losses:                                              |   |                        | ** **  |       |   |     |   |
| Balance at  beginning of year                                            |   | **$**                       | **2,468**   | ** ** | $      | 2,103    |   | $ | 2,188 |   |
| Loans  charged-off:                                                      |   |                        | ** **  |       |   |     |   |
| Commercial,  financial, and agricultural                                 |   | **(737**                    | **)**       | (157       | )      | (581     | )      |
| Real estate                                                              |   | **(382**                    | **)**       | (246       | )      | (108     | )      |
| Consumer                                                                 |   | **(148**                    | **)**       | (108       | )      | (51      | )      |
| Total                                                                    |   | **(1,267**                  | **)**       | (511       | )      | (740     | )      |
| Recoveries of  loans previously charged-off:                             |   |                        | ** **  |       |   |     |   |
| Commercial,  financial, and agricultural                                 |   | **60**                      | ** **  | 11         |   | 16       |   |
| Real estate                                                              |   | **3**                       | ** **  | 89         |   | 19       |   |
| Consumer                                                                 |   | **14**                      | ** **  | 16         |   | 15       |   |
| Total                                                                    |   | **77**                      | ** **  | 116        |   | 50       |   |
| Net charge-offs                                                          |   | **(1,190**                  | **)**       | (395       | )      | (690     | )      |
| Provision  charged to expense                                            |   | **1,081**                   | ** **  | 760        |   | 605      |   |
| Balance at end  of year                                                  |   | **$**                       | **2,359**   | ** ** | $      | 2,468    |   | $ | 2,103 |   |
|                                                                     |   |                        | ** **  |       |   |     |   |
| Ratio of net  charge-offs to average loans outstanding during the period |   | **0.60**                    | **%**       | 0.19       | %      | 0.38     | %      |

 

In 2003, as illustratedin the preceding chart, loan losses increased in all areas of the portfolio,compared to loan losses incurred in 2002 and 2001.  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 in the loan portfolio is notprecisely attributable to a particular loan or category of loans.  There were no changes in estimation methodsor assumptions that affected the methodology for assessing the appropriatenessof the allowance for loan losses from December 31, 2002 through December 31,2003.  The change in allocation amongthe various loan categories related primarily to an increase in the specificallowance allocation due to individual credit exposure as identified bymanagement.  Based on its review foradequacy, management has estimated those portions of the allowance that couldbe attributable to major categories of loans as follows:

 

22

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|                                    |   | **2003**                    |       | **2002**              |
|-----------------------------------------|--------|-----------------------------|------------|-----------------------|
|                                    |   | **Amount**                  |       | **% of Total  Loans** |   | **Amount** |   | **% of Total  Loans** |   |
|                                    |   | **(dollars  in thousands)** |       |
|                                    |   |                        |       |                  |   |   |   |   |   |
| Commercial,  financial, and agriculture |   | **$**                       | **1,471**  | ** **            | **29.05** | **%** | $ | 1,369 |   | 26.53 | % |
| Real estate                             |   | **806**                     | ** ** | **67.39**             | ** ** | 930 |   | 68.58 |   |
| Consumer                                |   | **82**                      | ** ** | **3.56**              | ** ** | 169 |   | 4.89 |   |
| Total allowance  for loan losses        |   | **$**                       | **2,359**  | ** **            | **100.00** | **%** | $ | 2,468 |   | 100.00 | % |

 

These allocation estimates do not specificallyrepresent that loan charge-offs of that magnitude will be incurred, nor dothese allocations restrict future loan losses attributable to a particularcategory from being absorbed by the allowance attributable to othercategories.  The risk factors consideredwhen estimating the allocations for major loan categories are the same as thefactors considered when determining the adequacy of the overall allowance asspecified in the allowance summary.

 

•      ***Nonperforming Assets***

 

Nonperforming assetsconsist of loans greater than 90 days past due, which are primarily commercialand commercial real estate loans on nonaccrual status, and other real estateowned.  Loans are generally classifiedas nonaccrual when there are reasonable doubts as to the collectibility ofprincipal and interest or when payment becomes 90 days past due, except loanswhich are well secured and in the process of collection.  Interest collection on nonaccrual loans forwhich the ultimate collectibility of principal is uncertain is applied asprincipal reduction.  Otherwise, suchcollections are applied to interest when received.  If a loan is impaired, a portion of the allowance is allocated sothat the loan is reported, net, at the present value of estimated future cashflows using the loan’s existing rate or at the fair value of collateral ifrepayment is expected solely from the collateral.  The following table presents information concerning the aggregateamount of nonperforming assets.
|                                                               |   | **December  31,**          |      |
|--------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                               |   | **2003**                   |      | **2002** |   |
|                                                               |   | **(dollars in thousands)** |      |
| Nonaccrual                                                         |   | **$**                      | **5,505** |   | $ | 4,901 |   |
| Accruing loans  past due 90 days                                   |   | **9**                      |      | 23 |   |
| Other real  estate owned                                           |   | **3,918**                  |      | 787 |   |
| Nonperforming  assets                                              |   | **$**                      | **9,432** |   | $ | 5,711 |   |
|                                                               |   |                       |      |   |   |
| Nonperforming  loans to total loans, including loans held for sale |   | **2.93**                   | **%**     | 2.35 | % |
| Nonperforming  assets to total assets                              |   | **3.56**                   | **%**     | 2.02 | % |

 

Nonperforming assets totaled$9.4 million as of year-end 2003, an increase of $3.7 million from the $5.7million at year-end 2002.  Totalnonperforming assets represent 3.56% of total assets at December 31, 2003,compared to 2.02% at December 31, 2002. Impaired loans as of December 31, 2003 and 2002 were $5.5 million and$4.9 million respectively, and include all nonaccrual loans.

 

23

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Nonaccrual loansincreased $0.6 million, to a total of $5.5 million at year-end 2003. The majorityof the nonaccrual loans are attributed to five borrowers.  As of December 31, 2003, nonaccrual loans tototal loans, including loans held for sale, were 2.93% compared to 2.35% foryear ended 2002.  In addition to theincrease in nonaccrual loans, other real estate owned also increased during thecourse of the year, increasing $3.1 million to $3.9 million at December 31,2003.  This increase can be attributedto three properties, included in nonaccrual loans on Illini’s books as ofDecember 31, 2002, that were transferred to other real estate owned during thecourse of 2003.  These properties, agolf course, a restaurant, and a retail building, have a carrying value of $1.5million, $1.1 million and $0.9 million, respectively at December 31, 2003.  Management is actively working on marketingthese properties for sale.

 

•      ***Noninterest Income***

 

The following table depicts the amount of and annualchanges in noninterest income categories:

 
|                                                |   | **Year Ended  December 31,** |      | **Percent  Change** |   |
|-----------------------------------------------------|--------|------------------------------|-----------|---------------------|--------|
|                                                |   | **2003**                     |      | **2002**            |   | **2001** |   | **2003/2002** |   | **2002/2001** |   |
|                                                |   | **(dollars  in thousands)**  |      |
| Service charges  on deposit accounts                |   | **$**                        | **1,379** |                | $      | 1,333 |   | $ | 1,367 | ** ** | **3.5** | **%** | (2.5 | )% |
| Other fee income                                    |   | **457**                      |      | 374                 |   | 290 | ** ** | **22.2** | ** ** | 29.0 |   |
| Mortgage loan  servicing fees, net                  |   | **1**                        |      | 108                 |   | 265 | ** ** | **(99.1** | **)** | (59.2 | ) |
| Gains on sales  of mortgage loans                   |   | **202**                      |      | 261                 |   | 569 | ** ** | **(22.6** | **)** | (54.1 | ) |
| Gains (losses)  on sale of fixed assets             |   | —                       |      | (1                  | )      | (13 | ) | **100.0** | ** ** | 92.3 |   |
| Gains (losses)  on sales of securities, net         |   | —                       |      | —              |   | 136 | ** ** | **N/A** | ** ** | (100.0 | ) |
| Gains (losses)  on sales of other real estate owned |   | **21**                       |      | (18                 | )      | 29 | ** ** | **216.7** | ** ** | (162.1 | ) |
| Other                                               |   | **161**                      |      | 132                 |   | 189 | ** ** | **22.0** | ** ** | (30.2 | ) |
|                                                |   | **$**                        | **2,221** |                | $      | 2,189 |   | $ | 2,832 | ** ** | **1.5** | ** ** | (22.7 | ) |

 

Total noninterest incomeincreased $32,000 from 2002 to 2003. Continued improvement was seen in the collection of service charges ondeposit accounts, up 3.5% from 2002, and in other fee income (up 22.2%).  The largest growth area for noninterestincome in 2003 was the other fee income category.  This category includes fees related to merchant processing anddebit card activity, which increased $55,000 over 2002 levels.  In addition, during 2002, Illini initiated aresidential mortgage loan application fee, which generated approximately$41,000 in fees during 2003.  During2003, the gain on sales of mortgage loans and servicing fees were adverselyimpacted by continued low interest rates and historically high prepaymentspeeds.  This caused a significantdecrease in the size of the mortgage servicing portfolio and a substantialincrease in the amount of mortgage servicing rights amortization.  The net affect of this was a decrease of$107,000 in mortgage loan servicing fees and a decrease of $59,000 in gain onsales of mortgage loans.  As of December31, 2003, Illini had a servicing portfolio of approximately $53.9 million, downfrom approximately $70.7 million at year-end 2002.

 

24

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•                  ***Noninterest Expense***

 

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

 
|                                                   |   | **Year Ended  December 31,** |      | **Percent  Change** |   |
|--------------------------------------------------------|--------|------------------------------|-----------|---------------------|--------|
|                                                   |   | **2003**                     |      | **2002**            |   | **2001** |   | **2003/2002** |   | **2002/2001** |   |
|                                                   |   | **(dollars  in thousands)**  |      |
| Salaries and  employee benefits                        |   | **$**                        | **4,474** |                | $      | 4,932 |   | $ | 4,358 | ** ** | **(9.3** | **)%** | 13.2 | % |
| Net occupancy  expense                                 |   | **760**                      |      | 767                 |   | 780 | ** ** | **(0.9** | **)** | (1.7 | ) |
| Equipment  expense                                     |   | **230**                      |      | 290                 |   | 359 | ** ** | **(20.7** | **)** | (19.2 | ) |
| Data processing                                        |   | **782**                      |      | 680                 |   | 807 | ** ** | **15.0** | ** ** | (15.7 | ) |
| Supplies                                               |   | **166**                      |      | 157                 |   | 199 | ** ** | **5.7** | ** ** | (21.1 | ) |
| Communication  and transportation                      |   | **464**                      |      | 457                 |   | 451 | ** ** | **1.5** | ** ** | 1.3 |   |
| Marketing and  advertising                             |   | **146**                      |      | 214                 |   | 195 | ** ** | **(31.8** | **)** | 9.7 |   |
| Correspondent  bank fees                               |   | **300**                      |      | 355                 |   | 311 | ** ** | **(15.5** | **)** | 14.1 |   |
| Loan foreclosure  and other real estate owned expenses |   | **316**                      |      | 154                 |   | 102 | ** ** | **105.2** | ** ** | 51.0 |   |
| Professional  fees                                     |   | **585**                      |      | 819                 |   | 914 | ** ** | **(28.6** | **)** | (10.4 | ) |
| Regulatory fees                                        |   | **103**                      |      | 111                 |   | 123 | ** ** | **(7.2** | **)** | (9.8 | ) |
| Other                                                  |   | **811**                      |      | 497                 |   | 659 | ** ** | **63.2** | ** ** | (24.6 | ) |
| Total  noninterest expense                             |   | **$**                        | **9,137** |                | $      | 9,433 |   | $ | 9,258 | ** ** | **(3.1** | **)** | 1.9 |   |

 

Total noninterest expensedecreased $295,000 in 2003, as compared to year ended 2002.  Salaries and benefits decreased $458,000 in2003, primarily the result of a decrease in performance based incentives.  In addition, professional fees decreased by$234,000 in 2003, as compared to 2002, the result of decreased expenditures forconsulting services and legal fees. These decreases were partially offset by increases in loan and other realestate owned expenses of $162,000, the result of expenses related to theoperation of a golf course currently in other real estate owned, and anincrease in other expenses of $314,000.

 

•                  ***Income Tax Expense***

 

Total income taxbenefit was $161,000 in 2003, compared to a tax expense of $419,000 in2002.  The tax benefit is primarilyrelated to the Corporation being in an Alternative Minimum Tax position atDecember 31, 2003, as a result of the tax exempt income.  The effective tax rates for the years ended December31, 2003 and 2002 were (37.1)% and 21.6%.

 

•                  ***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 expenditures,which 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.

 

25

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**ITEM 7****.- FINANCIAL STATEMENTS**

 

Index to IlliniCorporation’s Consolidated Financial Statements.

 
| Report of Independent  Auditors                                                                            |   |
|------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                         |   |
| Consolidated Statements  of Income for the years ended December 31, 2003 and 2002                     |   |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2003  and 2002 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003 and 2002                 |   |
| Notes to  Consolidated Financial Statements                                                                |   |

 

26

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REPORT OF INDEPENDENTAUDITORS

 

To the Shareholders andBoard of Directors

Illini Corporation

 

 

We have audited theaccompanying consolidated balance sheet of Illini Corporation and Subsidiariesas of December 31, 2003 and the related consolidated statements of income,shareholders’ equity, and cash flows for the year then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Illini Corporations andSubsidiaries as of December 31, 2003 and the results of their operationsand their cash flows for the year then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 
|                   | Crowe Chizek and  Company LLC |
|------------------------|-------------------------------|
|                   |                          |
| Oak Brook, Illinois    |                          |
| February 20, 2004 |                          |

 

27

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IndependentAccountants’ Report

 

To the Stockholders and

Board of Directors

Illini Corporation

Springfield, Illinois

 

We have audited theaccompanying consolidated balance sheet of Illini Corporation and subsidiariesas of December 31, 2002, and the related consolidated statements ofincome, shareholders’ equity, and cash flows for the year then ended. Theseconsolidated financial statements are the responsibility of the Corporation’s management.Our responsibility is to express an opinion on these consolidated financialstatements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements described above present fairly, in allmaterial respects, the consolidated financial position of Illini Corporationand subsidiaries as of December 31, 2002, and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

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

 

28

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**ILLINICORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

**December 31,2003 and 2002**

 
|                                                                                                 |   | **2003**                   |        | **2002** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------------------|-------------|----------|--------|
|                                                                                                 |   | **(dollars in thousands)** | ** **  |
|                                                                                                 |   |                       |        |     |   |
| ASSETS:                                                                                              |   |                       |        |     |   |
| Cash  and due from banks                                                                             |   | **$**                      | **8,623**   |     | $      | 7,654 |   |
| Interest-bearing  deposits in other banks                                                            |   | **31**                     |        | 33       |   |
| Federal  funds sold                                                                                  |   | **7,262**                  |        | 12,166   |   |
| Cash  and cash equivalents                                                                           |   | **15,916**                 |        | 19,853   |   |
| Investment  securities available for sale, at fair value                                             |   | **47,172**                 |        | 42,216   |   |
| Loans  held for sale                                                                                 |   | **15,287**                 |        | 5,800    |   |
| Loans,  net of allowance for loan losses of $2,359 and $2,468                                        |   | **170,846**                |        | 201,566  |   |
| Federal  Home Loan Bank stock                                                                        |   | **813**                    |        | 753      |   |
| Premises  and equipment                                                                              |   | **6,255**                  |        | 6,681    |   |
| Accrued  interest receivable                                                                         |   | **1,838**                  |        | 2,346    |   |
| Other  real estate owned                                                                             |   | **3,918**                  |        | 787      |   |
| Goodwill                                                                                             |   | **1,856**                  |        | 1,856    |   |
| Other  assets                                                                                        |   | **858**                    |        | 801      |   |
| Total  Assets                                                                                        |   | **$**                      | **264,759** |     | $      | 282,659 |   |
|                                                                                                 |   |                       |        |     |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY:                                                          |   |                       |        |     |   |
| Noninterest-bearing  demand deposits                                                                 |   | **$**                      | **34,400**  |     | $      | 35,110 |   |
| Interest-bearing  deposits:                                                                          |   |                       |        |     |   |
| NOW  and money market accounts                                                                       |   | **59,490**                 |        | 56,595   |   |
| Savings  deposits                                                                                    |   | **21,408**                 |        | 19,938   |   |
| Time  deposits, $100,000 and over                                                                    |   | **18,319**                 |        | 22,794   |   |
| Other  time deposits                                                                                 |   | **92,998**                 |        | 110,397  |   |
| Total  Deposits                                                                                      |   | **226,615**                |        | 244,834  |   |
|                                                                                                 |   |                       |        |     |   |
| Securities  sold under agreements to repurchase                                                      |   | **528**                    |        | 656      |   |
| Borrowings                                                                                           |   | **11,347**                 |        | 8,395    |   |
| Subordinated  debentures                                                                             |   | **9,000**                  |        | 9,000    |   |
| Accrued  interest payable                                                                            |   | **1,082**                  |        | 1,332    |   |
| Other  liabilities                                                                                   |   | **1,146**                  |        | 3,221    |   |
| Total  Liabilities                                                                                   |   | **249,718**                |        | 267,438  |   |
|                                                                                                 |   |                       |        |     |   |
| COMMITMENTS  AND CONTINGENT LIABILITIES                                                              |   |                       |        |     |   |
|                                                                                                 |   |                       |        |     |   |
| Shareholders’  equity:                                                                          |   |                       |        |     |   |
| Preferred  stock, $0.01 par value, authorized and unissued 10,000,000 shares                         |   | **—**                 |        | —   |   |
| Common  stock, $0.01 par value, authorized 45,000,000 shares;  571,789 shares issued and outstanding |   | **6**                      |        | 6        |   |
| Capital  surplus                                                                                     |   | **9,070**                  |        | 9,070    |   |
| Retained  earnings                                                                                   |   | **12,068**                 |        | 11,885   |   |
| Accumulated  other comprehensive income                                                              |   | **1,101**                  |        | 1,464    |   |
| Less:  Treasury shares, at cost, 160,088 shares                                                 |   | **(7,204**                 | )           | (7,204   | )      |
| Total  Shareholders’ Equity                                                                     |   | **15,041**                 |        | 15,221   |   |
| Total  Liabilities and Shareholders’ Equity                                                     |   | **$**                      | **264,759** |     | $      | 282,659 |   |

 

See accompanying notes toconsolidated financial statements.

 

29

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**ILLINICORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**YearsEnded December 31, 2003 and 2002**

 
|                                                                                                                     |   | **2003**                                             |       | **2002**   |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|------------|--------|
|                                                                                                                     |   | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                     |   |                                                 |       |       |   |
| Interest  income:                                                                                                        |   |                                                 |       |       |   |
| Loans,  including fees                                                                                                   |   | **$**                                                | **12,965** | ** ** | $      | 15,604 |   |
| Investment  securities:                                                                                                  |   |                                                 | ** ** |       |   |
| Taxable                                                                                                                  |   | **983**                                              | ** ** | 1,580      |   |
| Exempt  from federal income taxes                                                                                        |   | **874**                                              | ** ** | 844        |   |
| Federal  Funds sold and interest-bearing deposits                                                                        |   | **141**                                              | ** ** | 118        |   |
| Total  interest income                                                                                                   |   | **14,963**                                           | ** ** | 18,146     |   |
| Interest  expense:                                                                                                       |   |                                                 | ** ** |       |   |
| Deposits:                                                                                                                |   |                                                 | ** ** |       |   |
| NOW  and money market accounts                                                                                           |   | **562**                                              | ** ** | 1,044      |   |
| Savings  deposits                                                                                                        |   | **156**                                              | ** ** | 261        |   |
| Time  deposits, $100,000 and over                                                                                        |   | **749**                                              | ** ** | 1,046      |   |
| Other  time deposits                                                                                                     |   | **3,707**                                            | ** ** | 4,444      |   |
| Securities  sold under agreements to repurchase                                                                          |   | **18**                                               | ** ** | 30         |   |
| Borrowings                                                                                                               |   | **393**                                              | ** ** | 436        |   |
| Subordinated  debentures                                                                                                 |   | **947**                                              | ** ** | 940        |   |
| Total  interest expense                                                                                                  |   | **6,532**                                            | ** ** | 8,201      |   |
|                                                                                                                     |   |                                                 |       |       |   |
| Net  interest income                                                                                                     |   | **8,431**                                            | ** ** | 9,945      |   |
| Provision  for loan losses                                                                                               |   | **1,081**                                            | ** ** | 760        |   |
| Net  interest income after provision for loan losses                                                                     |   | **7,350**                                            | ** ** | 9,185      |   |
| Noninterest  income:                                                                                                     |   |                                                 | ** ** |       |   |
| Service  charges on deposit accounts                                                                                     |   | **1,379**                                            | ** ** | 1,333      |   |
| Other  fee income                                                                                                        |   | **457**                                              | ** ** | 374        |   |
| Mortgage  loan servicing fees, net                                                                                       |   | **1**                                                | ** ** | 108        |   |
| Gains  on sales of mortgage loans                                                                                        |   | **202**                                              | ** ** | 261        |   |
| Losses  on sales of premises and equipment                                                                               |   | **—**                                           | ** ** | (1         | )      |
| Gains  (losses) on sales of other real estate owned                                                                      |   | **21**                                               | ** ** | (18        | )      |
| Other                                                                                                                    |   | **161**                                              | ** ** | 132        |   |
| Total  noninterest income                                                                                                |   | **2,221**                                            | ** ** | 2,189      |   |
| Noninterest  expense:                                                                                                    |   |                                                 | ** ** |       |   |
| Salaries  and employee benefits                                                                                          |   | **4,474**                                            | ** ** | 4,932      |   |
| Net  occupancy expense                                                                                                   |   | **760**                                              | ** ** | 767        |   |
| Equipment  expense                                                                                                       |   | **230**                                              | ** ** | 290        |   |
| Data  processing fees                                                                                                    |   | **782**                                              | ** ** | 680        |   |
| Supplies  expense                                                                                                        |   | **166**                                              | ** ** | 157        |   |
| Communication  and transportation expense                                                                                |   | **464**                                              | ** ** | 457        |   |
| Marketing  and advertising expense                                                                                       |   | **146**                                              | ** ** | 214        |   |
| Correspondent  bank fees                                                                                                 |   | **300**                                              | ** ** | 355        |   |
| Loan  foreclosure and other real estate owned expense                                                                    |   | **316**                                              | ** ** | 154        |   |
| Professional  fees                                                                                                       |   | **585**                                              | ** ** | 819        |   |
| Regulatory  fees                                                                                                         |   | **103**                                              | ** ** | 111        |   |
| Other                                                                                                                    |   | **811**                                              | ** ** | 497        |   |
| Total  noninterest expense                                                                                               |   | **9,137**                                            | ** ** | 9,433      |   |
| Income  before income tax expense (benefit)                                                                              |   | **434**                                              | ** ** | 1,941      |   |
| Income  tax expense (benefit)                                                                                            |   | **(161**                                             | **)**      | 419        |   |
| Net  income                                                                                                              |   | **$**                                                | **595**    | ** ** | $      | 1,522 |   |
| Basic  and diluted earnings per share (based on weighted average common shares  outstanding of 411,701 in 2003 and 2002) |   | **$**                                                | **1.45**   | ** ** | $      | 3.70 |   |

 

See accompanying notes toconsolidated financial statements.

 

30

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**ILLINICORPORATION AND SUBSIDIARIES**

 

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

#### **Years EndedDecember 31, 2003 and 2002**

 
|                                                                     |   | **Common  stock**           |   | **Capital  surplus** |   | **Retained  earnings** |   | **Treasury  stock** |   | **Accumulated  other  comprehensive  income** |   | **Total** |   |
|--------------------------------------------------------------------------|--------|-----------------------------|--------|----------------------|--------|------------------------|--------|---------------------|--------|-----------------------------------------------|--------|-----------|--------|
|                                                                     |   | **(dollars  in thousands)** |   |
|                                                                     |   |                        |   |                 |   |                   |   |                |   |                                          |   |      |   |
| Balance  at January 1, 2002                                         |   | $                           | 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 |   | —                      |   | —               |   | —                 |   | —              |   | 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    |   |
|                                                                     |   |                        |   |                 |   |                   |   |                |   |                                          |   |      |   |
| Comprehensive  income:                                                   |   |                        |   |                 |   |                   |   |                |   |                                          |   |      |   |
| Net  income                                                              |   | —                      |   | —               |   | 595                    |   | —              |   | —                                        |   | 595       |   |
| Change  in unrealized gains on securities available for sale, net of tax |   | —                      |   | —               |   | —                 |   | —              |   | (363                                          | )      | (363      | )      |
| Total  comprehensive income                                              |   |                        |   |                 |   |                   |   |                |   |                                          |   | 232       |   |
| Cash  dividends paid, $1.00 per share                                    |   | —                      |   | —               |   | (412                   | )      | —              |   | —                                        |   | (412      | )      |
|                                                                     |   |                        |   |                 |   |                   |   |                |   |                                          |   |      |   |
| Balance  at December 31, 2003                                       |   | $                           | 6      |                 | $      | 9,070                  |   | $                   | 12,068 |                                          | $      | (7,204    | )      | $ | 1,101 |   | $ | 15,041 |   |

 

See accompanying notes toconsolidated financial statements.

 

31

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**ILLINICORPORATION AND SUBSIDIARIES**

 

#### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YearsEnded December 31, 2003 and 2002**

 
|                                                                               |   | **2003**                   |       | **2002**   |   |
|------------------------------------------------------------------------------------|--------|----------------------------|------------|------------|--------|
|                                                                               |   | **(dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                             |   |                       |       |       |   |
| Net  income                                                                        |   | **$**                      | **595**    | ** ** | $      | 1,522 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                       | ** ** |       |   |
| Depreciation                                                                       |   | **774**                    | ** ** | 821        |   |
| Provision  for loan losses                                                         |   | **1,081**                  | ** ** | 760        |   |
| Investment  security amortization (accretion), net                                 |   | **155**                    | ** ** | 52         |   |
| Federal  Home Loan Bank stock dividend                                             |   | **(60**                    | **)**      | (38        | )      |
| Gains  on sales of mortgage loans                                                  |   | **(202**                   | **)**      | (261       | )      |
| Losses  on sale of premises and equipment                                          |   | **—**                 | ** ** | 1          |   |
| Deferred  tax expense (benefit)                                                    |   | **(21**                    | **)**      | 44         |   |
| (Gains)  losses on sales of other real estate owned                                |   | **(21**                    | **)**      | 18         |   |
| Decrease  in accrued interest receivable                                           |   | **508**                    | ** ** | 203        |   |
| Decrease  in accrued interest payable                                              |   | **(250**                   | **)**      | (82        | )      |
| Origination  of secondary market mortgage loans                                    |   | **(26,003**                | **)**      | (19,192    | )      |
| Proceeds  from the sales of secondary market mortgage loans                        |   | **16,718**                 | ** ** | 19,157     |   |
| Other,  net                                                                        |   | **(1,900**                 | **)**      | 1,633      |   |
| Net  cash provided by (used in) operating activities                               |   | **(8,626**                 | **)**      | 4,638      |   |
| Cash  flows from investing activities:                                             |   |                       | ** ** |       |   |
| Proceeds  from sales of investment securities available for sale                   |   | **—**                 | ** ** | —     |   |
| Proceeds  from maturities and paydowns of investment securities available for sale |   | **25,552**                 | ** ** | 22,648     |   |
| Purchases  of investment securities available for sale                             |   | **(31,237**                | **)**      | (15,671    | )      |
| Net  (increase) decrease in loans                                                  |   | **26,046**                 | ** ** | (11,545    | )      |
| Purchases  of premises and equipment                                               |   | **(348**                   | **)**      | (557       | )      |
| Proceeds  from sales of other real estate owned                                    |   | **483**                    | ** ** | 193        |   |
| Net  cash provided by (used in) investing activities                               |   | **20,496**                 | ** ** | (4,932     | )      |
| Cash  flows from financing activities:                                             |   |                       | ** ** |       |   |
| Net  increase (decrease) in noninterest bearing deposit accounts                   |   | **(710**                   | **)**      | 970        |   |
| Net  increase (decrease) in NOW, money market accounts and savings deposits        |   | **4,365**                  | ** ** | (1,519     | )      |
| Net  decrease in time deposits, $100,000 and over                                  |   | **(4,475**                 | **)**      | (9,048     | )      |
| Net  increase (decrease) in other time deposits                                    |   | **(17,399**                | **)**      | 15,604     |   |
| Net  decrease in securities sold under agreements to repurchase                    |   | **(128**                   | **)**      | (957       | )      |
| Proceeds  of borrowings                                                            |   | **3,000**                  | ** ** | 2,400      |   |
| Repayment  of borrowings                                                           |   | **(48**                    | **)**      | (2,476     | )      |
| Cash  dividends paid                                                               |   | **(412**                   | **)**      | (412       | )      |
| Net  cash provided by (used in) financing activities                               |   | **(15,807**                | **)**      | 4,562      |   |
|                                                                               |   |                       |       |       |   |
| Net  increase (decrease) in cash and cash equivalents                              |   | **(3,937**                 | **)**      | 4,268      |   |
|                                                                               |   |                       |       |       |   |
| Cash  and cash equivalents at beginning of period                                  |   | **19,853**                 | ** ** | 15,585     |   |
|                                                                               |   |                       |       |       |   |
| Cash  and cash equivalents at end of period                                        |   | **$**                      | **15,916** | ** ** | $      | 19,853 |   |
|                                                                               |   |                       |       |       |   |
| Supplemental  information:                                                         |   |                       | ** ** |       |   |
| Interest  paid                                                                     |   | **$**                      | **6,782**  | ** ** | $      | 8,283 |   |
| Income  taxes paid                                                                 |   | **407**                    | ** ** | 608        |   |
| Other  non-cash investing activities:                                              |   |                       | ** ** |       |   |
| Transfer  of loans to other real estate owned                                      |   | **3,593**                  | ** ** | 628        |   |

 

See accompanying notes toconsolidated financial statements.

 

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**ILLINICORPORATION AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

December 31, 2003and 2002

 

**(1)****         Summary of SignificantAccounting 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. The Corporation and its wholly-owned subsidiaries, Illini Bank(“Illini”), Farmers State Bank of Camp Point (“Camp Point”) are subject tocompetition from other financial and nonfinancial institutions providingfinancial products in central Illinois. Additionally, the Corporation, Illini,and Camp Point are subject to the regulations of certain federal and stateagencies and undergo periodic examinations by those regulatoryauthorities.  As further discussed belowIllini Statutory Trust I (“IST”), which had previously been consolidated withthe company, is now reported separately.

IST is a wholly ownedsubsidiary, which was formed on January 31, 2001, to issue cumulativetrust preferred securities.  TheCorporation 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. ISTissued 9,279 shares of the preferred securities bearing a dividend rate of10.2% for net proceeds of $9 million, after deducting underwriting commissionsand other costs. IST invested the proceeds in Illinois Corporation juniorsubordinated debentures, which also have an interest rate of 10.2%. The juniorsubordinated debentures mature on February 22, 2031, which date may beshortened to a date not earlier than February 22, 2011, if certainconditions are met. IST’s sole asset is the holding company’s juniorsubordinated debt. Considered together, the Corporation’s obligations withrespect to the issuance of the preferred securities constitute a full andunconditional guarantee of IST’s obligations with respect to the preferredsecurities.  The Corporation used $3million of the proceeds from the junior subordinated debt to increase theequity capital of Illini.  Interest onthe junior subordinated debentures and distributions on the preferredsecurities are payable semi-annually in arrears.  Distributions on the preferred securities are cumulative andbased upon the liquidation value of $1,000 per preferred security.  The Corporation has the right, at any time,so long as no event of default has occurred and is continuing, to deferpayments of interest on the junior subordinated debentures, which will requiredeferral of distribution on the preferred securities, for a period notexceeding 10 consecutive semi-annual periods, provided, that such deferral maynot extend beyond the stated maturity of the junior subordinateddebentures.  The preferred securitiesare subject to mandatory redemption, in whole or in part, upon repayment of thejunior subordinated debentures at maturity or their earlier redemption.

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

Following is adescription of the more significant of these policies:

 

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

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

 

***(b)******         CashFlows***

Cashand cash equivalents includes cash and due from banks, interest-bearingdeposits in other banks, and federal funds sold, all of which are considered tobe highly liquid assets.  Net cash flowsare reported for loan and deposit transactions.

 

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

Investmentsecurities designated as available for sale, which include any security whichthe Corporation has no immediate plan to sell but which may be sold in the nearfuture 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.  Securities are written down to fair valuewhen a decline in fair value is not temporary.

 

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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 principalbalances adjusted for any charge-offs, the allowance for loan losses and anydeferred fees or costs on originated loans.

It isthe policy of the 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 loanwhen performance is in accordance with the contract, and the borrowerdemonstrates the ability to pay 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 a valuation allowance for probable incurred creditlosses, increased by the provision for loan losses and decreased by charge-offsless recoveries.  Loan losses arecharged against the allowance when management believes the uncollectibility ofa loan balance is confirmed.  Subsequentrecoveries, if any, are credited to the allowance. Management estimates theallowance balance required using past loan loss experience, the nature andvolume of the portfolio, information about specific borrower situations andestimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made forspecific loans, but the entire allowance is available for any loan that, inmanagement’s judgment, should be charged-off.

Theallowance consists of specific and general components.  The specific component relates to loans thatare individually classified as impaired or loans otherwise classified assubstandard or doubtful.  The generalcomponent covers non-classified loans and is based on historical lossexperience adjusted for current factors.

A loanis impaired when full payment under the loan terms is not expected.  Commercial and commercial real estate loansare individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so thatthe loan is reported, net, at the present value of estimated future cash flowsusing the loan’s existing rate or at the fair value of collateral if repaymentis expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer andresidential real estate loans, are collectively evaluated for impairment, andaccordingly, they are not separately identified for impairment disclosures.

 

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

Mortgageloans held for sale are recorded at the lower of cost or market value on anaggregate basis.  Net unrealized losses,if any, are reported as a valuation allowance are charged to earnings.  Deferred fees on loans held for sale are notamortized.  Gains and losses on the saleof these loans and loan origination fees are recognized upon sale of therelated loans and included in the consolidated statements of income as noninterestincome.

 

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

Servicingrights represent the allocated value of retained servicing rights on loanssold.  Servicing assets are expensed inproportion to, and over the period of, estimated net servicing revenues.  Impairment is evaluated based on the fairvalue of the assets, using groupings of the underlying loans as to interestrates and then, secondarily, as to geographic and prepaymentcharacteristics.  Fair value isdetermined using prices for similar assets with similar characteristics, whenavailable, or based upon discounted cash flows using market-basedassumptions.  Any impairment of agrouping is reported as a valuation allowance, to the extent that fair value isless than the capitalized amount for a grouping.

 

34

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***(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***

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

Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates.

 

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

TheCorporation recognized goodwill with the purchase of banks in Camp Point,Auburn and McLean County and represents the excess of the purchase price overthe fair value of acquired tangible assets and liabilities.  Upon adopting new accounting guidance in2002, the Company ceased amortizing goodwill. Goodwill is assessed at least annually for impairment and any suchimpairment will be recognized in the period identified.

 

***(l)******            OtherReal Estate Owned***

Otherreal estate owned (“OREO”) represents property acquired through foreclosure ordeeded to Illini in lieu of foreclosure on loans on which the borrowers havedefaulted.  They are initially recordedat fair value when acquired, establishing a new cost basis.

OREOis recorded on an individual asset basis at the lower of fair value lessestimated disposal costs or cost.  Ifthe fair value declines subsequent to foreclosure the deficiency is recorded asa valuation allowance and is recorded through expense.  Costs after acquisition are expensed.

 

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

Basicearnings per share is computed by dividing net income available to commonshareholders by the weighted-average number of common shares outstanding forthe period.  Diluted earnings per sharewould give the effect to potential common stock, such as stock options.  The Corporation has not issued instruments,which are dilutive.

 

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

Financialinstruments include off-balance sheet credit instruments, such as commitmentsto make loans and commercial letters of credit, issued to meet customerfinancing needs.  The face amount forthese items represents the exposure to loss, before considering customercollateral or ability to repay.  Suchfinancial instruments are recorded when they are funded.

 

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

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

 

***(p)******         Reclassifications***

Certainamounts in the 2002 consolidated financial statements have been reclassified toconform to the 2003 presentation.  Suchreclassifications have no effect on previously reported consolidated net incomeor shareholders’ equity.

 

35

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

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reported period.  Actual resultscould differ from those estimates.

Materialestimates that are particularly susceptible to significant change relate to thedetermination of the allowance for loan losses, the valuation of real estateacquired in connection with foreclosures or in satisfaction of loans, andmortgage servicing rights.

 

***(r)******           ComprehensiveIncome***

Comprehensiveincome consists of net income and other comprehensive income.  Other comprehensive income includesunrealized gains and losses on securities available for sale, which are alsorecognized as separate components of equity.

 

***(s)******           Adoptionof New Accounting Standards:***

During2003, the Company adopted FASB Statement 143, *Accountingfor Asset Retirement Obligations*, FASB Statement 145, *Rescission of FAS Statement 4, 44 and 64, Amendmentof FAS Statement 13, and Technical Corrections*, FASB Statement 146, *Accounting for Costs Associated with Exit or DisposalActivities*, FASB Statement 149, *Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*,FASB Statement 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equities*,FASB Statement 132 (revised 2003), *Employers’Disclosures about Pensions and Other Postretirement Benefits* andFASB Interpretation 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees*. Adoption ofthe new standards did not materially affect the Corporation’s operating resultsor financial condition.

Inaddition to these, the Corporation adopted FASB Interpretation 46, *Consolidation of Variable Interest Entities*,as revised *in* December 2003,changes the accounting model for consolidation from one based on considerationof control through voting interests. Whether to consolidate an entity will now also consider whether thatentity has sufficient equity at risk to enable it to operate without additionalfinancial support, whether the equity owners in that entity lack the obligationto absorb expected losses or the right to receive residual returns of theentity, or whether voting rights in the entity are not proportional to theequity interest and substantially all the entity’s activities are conducted foran investor with few voting rights.  Asa result of this IST is no longer consolidated.  Adoption of Interpretation 46 did not have a material effect onthe financial statements.

 

***(t)******            FairValue of Financial instruments***

Fairvalues of financial instruments are estimated using relevant market informationand other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertaintiesand matters of significant judgment regarding interest rates, credit risk,prepayments, and other factors, especially in the absence of broad markets forparticular items.  Changes inassumptions or in market conditions could significantly affect the estimates.

 

***(u)******         OperatingSegments***

Whilethe chief decision-makers monitor the revenue streams of the various productsand services, the identifiable segments are not material and operations aremanaged and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial serviceoperations are considered by management to be aggregated in one reportableoperating segment.

 

***(v)******          LossContingencies***

Losscontingencies, including claims and legal actions arising in the ordinarycourse of business, are recorded as liabilities when the likelihood of loss isprobable and an amount or range of loss can be reasonably estimated.  Management does not believe there now aresuch matters that will have a material effect on the financial statements.

 

36

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**(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)****         Investment Securities**

The fair value of investmentsecurities available for sale and the related gross unrealized gains and lossesrecognized in accumulated other comprehensive income (loss) were as follows atDecember 31, 2003 and 2002:

 
|                                               |   | **Fair value**             |       | **Gross  unrealized  gains** |       | **Gross  unrealized  losses** |       |
|----------------------------------------------------|--------|----------------------------|------------|------------------------------|------------|-------------------------------|------------|
|                                               |   | **(dollars in thousands)** | ** ** |
| **December 31,  2003**                        |   |                       |       |                         |       |                          |       |
|                                               |   |                       |       |                         |       |                          |       |
| United  States Treasury and United States agencies |   | **$**                      | **22,787** | ** **                   | **$**      | **69**                        | ** ** | **$** | **(38** | **)** |
| Mortgage-backed  securities                        |   | **7,529**                  | ** ** | **161**                      | ** ** | **(9**                        | **)**      |
| Collateralized  mortgage obligations               |   | **1,640**                  | ** ** | **22**                       | ** ** | **—**                    | ** ** |
| Obligations  of state and political subdivisions   |   | **15,206**                 | ** ** | **1,517**                    | ** ** | **(8**                        | **)**      |
| Equity  securities                                 |   | **10**                     | ** ** | **1**                        | ** ** | **—**                    | ** ** |
|                                               |   | **$**                      | **47,172** | ** **                   | **$**      | **1,770**                     | ** ** | **$** | **(55** | **)** |
| December 31,  2002                            |   |                       |       |                         |       |                          |       |
|                                               |   |                       |       |                         |       |                          |       |
| United  States Treasury and United States agencies |   | $                          | 6,233      |                         | $          | 101                           |       | $ | — |   |
| Mortgage-backed  securities                        |   | 9,307                      |       | 312                          |       | —                        |       |
| Collateralized  mortgage obligations               |   | 8,310                      |       | 95                           |       | (12                           | )          |
| Obligations  of state and political subdivisions   |   | 18,357                     |       | 1,793                        |       | —                        |       |
| Equity  securities                                 |   | 9                          |       | —                       |       | —                        |       |
|                                               |   | $                          | 42,216     |                         | $          | 2,301                         |       | $ | (12 | ) |

 

The fair value ofsecurities classified as available for sale at December 31, 2003, bycontractual maturity, are shown below. Expected maturities may differ fromcontractual maturities because certain issuers have the right to call or prepayobligations with or without call or prepayment penalties.  Securities not due at a single maturitydate, primarily mortgage-backed securities, are shown separately.

 
|                                    |   | **Fair  value**             |       |
|-----------------------------------------|--------|-----------------------------|------------|
|                                    |   | **(dollars  in thousands)** |       |
| Due  in one year or less                |   | **$**                       | **2,062**  | ** ** |
| Due  after one year through five years  |   | **17,231**                  | ** ** |
| Due  after five years through ten years |   | **15,022**                  | ** ** |
| Due  after ten years                    |   | **3,678**                   | ** ** |
|                                    |   | **37,993**                  |       |
| Mortgage-backed  securities             |   | **7,529**                   | ** ** |
| Collateralized  mortgage obligations    |   | **1,640**                   | ** ** |
| Equity  Securities                      |   | **10**                      | ** ** |
|                                    |   | **$**                       | **47,172** |   |

 

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Securities withunrealized losses at year end 2003 not recognized in income are as follows:

 
|                                                                |   | **Less than  12 Months**    |   | **12 Months  or More** |   | **Total**       |   |
|---------------------------------------------------------------------|--------|-----------------------------|--------|------------------------|--------|-----------------|--------|
|                                                                |   | **Fair  Value**             |   | **Unrealized  Loss**   |   | **Fair  Value** |   | **Unrealized  Loss** |   | **Fair  Value** |   | **Unrealized  Loss** |   |
|                                                                |   | **(dollars  in thousands)** |   |
| United  States Treasury and United States agencies and corporations |   | $                           | 4,462  |                   | $      | (38             | )      | $ | — |   | $ | — |   | $ | 4,462 |   | $ | (38 | ) |
| Mortgage-backed  securities                                         |   | 691                         |   | (9                     | )      | —          |   | — |   | 691 |   | (9 | ) |
| Collateralized  mortgage obligations                                |   | —                      |   | —                 |   | —          |   | — |   | — |   | — |   |
| Obligations  of state and Political subdivisions                    |   | 585                         |   | (8                     | )      | —          |   | — |   | 585 |   | (8 | ) |
| Total  temporarily impaired                                         |   | $                           | 5,738  |                   | $      | (55             | )      | $ | — |   | $ | — |   | $ | 5,738 |   | $ | (55 | ) |

 

There were no sales ofinvestment securities during 2003 and 2002.

The fair 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 $11.2 million and $19.2 millionat December 31, 2003 and 2002, respectively.

 

Other comprehensiveincome (loss) is as follows:

 
|                                                                      |   | **2003**                    |       | **2002** |   |
|---------------------------------------------------------------------------|--------|-----------------------------|------------|----------|--------|
|                                                                      |   | **(dollars  in thousands)** |       |
| Unrealized  holding gains arising during the period                       |   | **$**                       | **(574**   | **)**    | $      | 804 |   |
| Less:  Reclassification adjustment for gains  realized in net income |   | **—**                  | ** ** | —   |   |
| Net  unrealized gains (losses), before tax expense                        |   | **(574**                    | **)**      | 804      |   |
| Tax  benefit (expense)                                                    |   | **211**                     | ** ** | (283     | )      |
| Other  comprehensive income (loss)                                        |   | **$**                       | **(363**   | **)**    | $      | 521 |   |

 

**(4)****         Loans**

The loan portfolio atDecember 31, 2003 and 2002 is composed of the following loan types:

 
|                                     |   | **2003**                    |        | **2002**   |   |
|------------------------------------------|--------|-----------------------------|-------------|------------|--------|
|                                     |   | **(dollars  in thousands)** |        |
| Commercial,  financial, and agricultural |   | **$**                       | **50,323**  | ** ** | $      | 54,126 |   |
| Real  estate:                            |   |                        | ** **  |       |   |
| Construction                             |   | **4,558**                   | ** **  | 11,906     |   |
| Mortgage  loans held for investment      |   | **112,168**                 | ** **  | 128,018    |   |
| Consumer                                 |   | **6,156**                   | ** **  | 9,984      |   |
| Total  loans                             |   | **173,205**                 | ** **  | 204,034    |   |
| Allowance  for loan losses               |   | **(2,359**                  | **)**       | (2,468     | )      |
| Net  loans                               |   | **$**                       | **170,846** | ** ** | $      | 201,566 |   |

 

The Corporation grantsagricultural, commercial, industrial, residential, and consumer loans tocustomers in central Illinois through its network of banking offices.  As such, the Corporation is susceptible tochanges in the economic environment in the central Illinois area.

 

38

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A summary of impairedloans at December 31, 2003 and 2002 is as follows:

 
|                                                               |   | **2003**                    |       | **2002**   |   |
|--------------------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                               |   | **(dollars  in thousands)** |       |
| Nonaccrual  loans                                                  |   | **$**                       | **5,505**  | ** ** | $      | 4,901 |   |
| Impaired  loans continuing to accrue interest                      |   | **—**                  | ** ** | —     |   |
| Total  impaired loans                                              |   | **$**                       | **5,505**  | ** ** | $      | 4,901 |   |
|                                                               |   |                        |       |       |   |
| Allowance  for losses on specific impaired loans                   |   | **$**                       | **500**    | ** ** | $      | 527 |   |
| Impaired  loans with no specific related allowance for loan losses |   | **4,081**                   | ** ** | 3,493      |   |
| Average  balance of impaired loans during the year                 |   | **4,511**                   | ** ** | 4,820      |   |
| Accruing  loans delinquent 90 days or more                         |   | **9**                       | ** ** | 23         |   |

 

Interest income of$401,000 in 2003 and $579,000 in 2002 would have been recognized had nonaccrualloans remained current.  The amountrecognized as interest income on nonaccrual loans was $203,159 and $95,568 forthe years ended December 31, 2003 and 2002, respectively.

A summary of changes inthe allowance for loan losses for the years ended December 31, 2003 and2002 is as follows:

 
|                                        |   | **2003**                    |       | **2002**   |   |
|---------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                        |   | **(dollars  in thousands)** |       |
| Balance  at beginning of year               |   | **$**                       | **2,468**  | ** ** | $      | 2,103 |   |
| Provision  charged to operating expense     |   | **1,081**                   | ** ** | 760        |   |
|                                        |   |                        |       |       |   |
| Loans  charged off                          |   | **(1,267**                  | **)**      | (511       | )      |
| Recoveries  of loans previously charged off |   | **77**                      | ** ** | 116        |   |
| Net  loan charge-offs                       |   | **(1,190**                  | **)**      | (395       | )      |
| Balance  at end of year                     |   | **$**                       | **2,359**  | ** ** | $      | 2,468 |   |

 

The following tablesummarizes the 2003 activity for loans made by Illini and Camp Point toexecutive officers, directors, and principal shareholders (insiders) of theCorporation and subsidiaries and/or their related interests.

 
|                               |   | **Insider  loans**          |       |
|------------------------------------|--------|-----------------------------|------------|
|                               |   | **(dollars  in thousands)** |       |
| Balance  at December 31, 2002 |   | **$**                       | **531**    | ** ** |
| Advances  on existing loans        |   | **2,047**                   | ** ** |
| Payments  received                 |   | **(2,099**                  | **)**      |
| Balance  at December 31, 2003 |   | **$**                       | **479**    | ** ** |

 

**(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  $53.9 million and $70.7 million atDecember 31, 2003 and 2002, respectively.

Mortgage servicing rightsof $93,626 and $108,428 were capitalized in 2003 and 2002, respectively.  The carrying value of capitalized mortgageservicing rights was $278,496 and $371,073 at December 31, 2003 and 2002,respectively.  Amortization of mortgageservicing rights was $186,203 and $166,904 in 2003 and 2002, respectively.  There was no valuation allowance at orduring the years ended December 31, 2003 and 2002.

 

39

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**(6)****         Premises and Equipment**

A summary ofpremises and equipment at December 31, 2003 and 2002 by major category isas follows:

 
|                           |   | **2003**                    |       | **2002**   |   |
|--------------------------------|--------|-----------------------------|------------|------------|--------|
|                           |   | **(dollars  in thousands)** |       |
| Land                           |   | **$**                       | **1,013**  | ** ** | $      | 1,013 |   |
| Bank  premises                 |   | **7,316**                   | ** ** | 7,277      |   |
| Furniture  and equipment       |   | **6,260**                   | ** ** | 5,951      |   |
|                           |   | **14,589**                  |       | 14,241     |   |
| Less  accumulated depreciation |   | **8,334**                   | ** ** | 7,560      |   |
|                           |   | **$**                       | **6,255**  |       | $      | 6,681 |   |

 

**(7)****         Deposits**

AtDecember 31, 2003, the scheduled maturities of time deposits are asfollows:

 

| **Year**   |   | **Amount**                  |    |
|------------|--------|-----------------------------|---------|
|       |   | **(dollars  in thousands)** |    |
| 2004       |   | $                           | 76,499  |   |
| 2005       |   | 28,561                      |    |
| 2006       |   | 3,772                       |    |
| 2007       |   | 1,676                       |    |
| 2008       |   | 809                         |    |
| Thereafter |   | —                      |    |
|       |   | $                           | 111,317 |   |

 

**(8)****         Securities Sold UnderAgreements to Repurchase**

Securities soldunder agreements to repurchase consist of obligations of the Corporation toother parties.  The obligations aresecured by various securities and such collateral is held by Commerce Bank asafekeeping agent.  The maximum amountof outstanding agreements at any month end during 2003 and 2002 totaled$661,000 and $656,000 and the monthly average of such agreements totaled$603,000 and $479,000, respectively. The agreements at December 31, 2003 mature within 24 months.

 

**(9)****         Borrowings**

The followingsummarizes borrowings at December 31, 2003 and 2002.

 
|                                                                                                                            |   | **2003**                    |       | **2002**   |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                                                                                            |   | **(dollars  in thousands)** |       |
| Note  payable                                                                                                                   |   | **$**                       | **2,347**  | ** ** | $      | 2,395 |   |
| Federal  Home Loan Bank advances, due at various dates through September 4, 2006,  fixed rates ranging from 2.40% to 3.45% |   | **$**                       | **9,000**  | ** ** | $      | 6,000 |   |
| Total  long-term debt                                                                                                           |   | **$**                       | **11,347** | ** ** | $      | 8,395 |   |

 

On March 27, 2002,the Corporation borrowed $2,400,000 from Marine Bank.  The floating rate note is indexed to the Wall Street JournalPrime Rate plus 1.00% (5.00% at December 31, 2003).  The note requires 11 quarterly payments ofapproximately $42,600, with a final payment of all unpaid principal andinterest on April 15, 2005.  Thenote is secured by 100% of the common stock of Illini Bank, and the FarmersState Bank of Camp Point.  The notecontains various operating and reporting covenants.  On February 20, 2004 the Corporation received a debtcovenant waiver on the return on assets covenant.

 

40

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The Federal Home LoanBank advances are secured by first-mortgage loans totaling $29.2 million.  Advances are subject to restrictions orpenalties in the event of prepayment.

At December 31,2003, the scheduled maturities of advances are as follows:

 

| **Year** |   | **Amount**                 |   |
|----------|--------|----------------------------|--------|
|     |   | **(dollars in thousands)** |   |
| 2004     |   | $                          | 4,000  |   |
| 2005     |   | 4,347                      |   |
| 2006     |   | 3,000                      |   |
|     |   | $                          | 11,347 |   |

 

**(10)****  Income Taxes**

The components of incometax expense (benefit) for the years ended December 31, 2003 and 2002 areas follows:

 
|                   |   | **2003**                    |     | **2002** |   |
|------------------------|--------|-----------------------------|----------|----------|--------|
|                   |   | **(dollars  in thousands)** |     |
| Current  income taxes: |   |                        |     |     |   |
| Federal                |   | **$**                       | **(90**  | **)**    | $      | 281 |   |
| State                  |   | **(50**                     | **)**    | 94       |   |
| Deferred  income taxes |   | **(21**                     | **)**    | 44       |   |
|                   |   | **$**                       | **(161** | **)**    | $      | 419 |   |

 

A reconciliation ofexpected income tax expense to federal income tax expense (benefit), computedby applying the federal statutory rate of 34% to income before income taxexpense for the years ended December 31, 2003 and 2002 is as follows:

 
|                                                 |   | **2003**                    |       | **2002**   |   |
|------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                 |   | **(dollars  in thousands)** |       |
| Income  tax expense at statutory rate                |   | **$**                       | **147**    | ** ** | $      | 660 |   |
| Increase  (decrease) in income taxes resulting from: |   |                        | ** ** |       |   |
| Tax-exempt  income                                   |   | **(294**                    | **)**      | (312       | )      |
| State  income taxes                                  |   | **(14**                     | **)**      | 52         |   |
| Other,  net                                          |   | **—**                  | ** ** | 19         |   |
| Income  tax expense                                  |   | **$**                       | **(161**   | **)**      | $      | 419 |   |

 

41

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The tax effect oftemporary differences that give rise to significant portions of the deferredtax assets and deferred tax liabilities at December 31, 2003 and 2002 arepresented below:

 
|                                                   |   | **2003**                    |       | **2002**   |   |
|--------------------------------------------------------|--------|-----------------------------|------------|------------|--------|
|                                                   |   | **(dollars  in thousands)** |       |
| Deferred tax assets:                                   |   |                        |       |
| Allowance  for loan losses                             |   | **$**                       | **493**    | ** ** | $      | 538 |   |
| Nonaccrual  loan interest                              |   | **254**                     | ** ** | 215        |   |
| Other  real estate owned                               |   | **94**                      | ** ** | —     |   |
| Intangible  assets                                     |   | **60**                      | ** ** | 77         |   |
| Legal  fees                                            |   | **94**                      | ** ** | 117        |   |
| Other                                                  |   | **80**                      | ** ** | —     |   |
|                                                   |   | **1,075**                   |       | 947        |   |
| Deferred  tax liabilities:                             |   |                        | ** ** |       |   |
| Net  unrealized gains on securities available for sale |   | **614**                     | ** ** | 825        |   |
| Investment  securities, basis differences              |   | **—**                  | ** ** | 2          |   |
| Mortgage  servicing rights                             |   | **107**                     | ** ** | 144        |   |
| Depreciation                                           |   | **428**                     | ** ** | 259        |   |
| Federal  Home Loan Bank stock                          |   | **68**                      | ** ** | 49         |   |
|                                                   |   | **1,217**                   |       | 1,279      |   |
| Net  deferred tax liability                            |   | **$**                       | **(142**   | **)**      | $      | (332 | ) |

 

**(11)****  Employee Benefits**

The Corporation has adefined contribution 401(k) plan that covers substantially all employees.  Employees may contribute up to 100% ofeligible compensation to the plan. The 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 $74,000 and $67,000 in 2003 and 2002,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 theCorporation.  At December 31, 2003and 2002 there were no stock options awarded.

 

**(12)****  Condensed Financial Informationof Parent Company**

Following are condensedbalance sheets as of December 31, 2003 and 2002 and the related condensedstatements of income and cash flows for each of the years in the two-yearperiod ended December 31, 2003 of the Corporation (parent company only):

 

42

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**CondensedBalance Sheets**

**December 31,2003 and 2002**

 
|                                                     |   | **2003**                    |       | **2002** |   |
|----------------------------------------------------------|--------|-----------------------------|------------|----------|--------|
|                                                     |   | **(dollars  in thousands)** |       |
| ASSETS:                                                  |   |                        |       |     |   |
| Cash                                                     |   | **$**                       | **1,985**  |     | $      | 383 |   |
| Investment  securities available for sale, at fair value |   | **10**                      |       | 9        |   |
| Investment  in subsidiaries                              |   | **24,309**                  |       | 25,807   |   |
| Loans                                                    |   | **—**                  |       | 482      |   |
| Other  assets                                            |   | **816**                     |       | 709      |   |
|                                                     |   | **$**                       | **27,120** |     | $      | 27,390 |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY:              |   |                        |       |     |   |
| Subordinated  debentures                                 |   | **$**                       | **9,000**  |     | $      | 9,000 |   |
| Borrowings                                               |   | **2,347**                   |       | 2,395    |   |
| Other  liabilities                                       |   | **732**                     |       | 774      |   |
| Shareholders’  equity                               |   | **15,041**                  |       | 15,221   |   |
|                                                     |   | **$**                       | **27,120** |     | $      | 27,390 |   |

 

**CondensedStatements of Income**

**YearsEnded December 31, 2003 and 2002**

 
|                                                                                         |   | **2003**                    |      | **2002** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|----------|--------|
|                                                                                         |   | **(dollars  in thousands)** |      |
| REVENUE:                                                                                     |   |                        |      |     |   |
| Dividends  received from subsidiaries                                                        |   | **$**                       | **2,033** |     | $      | 1,258 |   |
| Other                                                                                        |   | **44**                      |      | 73       |   |
|                                                                                         |   | **2,077**                   |      | 1,331    |   |
| EXPENSES:                                                                                    |   |                        |      |     |   |
| Interest  expense                                                                            |   | **1,070**                   |      | 1,087    |   |
| Professional  fees                                                                           |   | **319**                     |      | 504      |   |
| Other                                                                                        |   | **644**                     |      | 303      |   |
|                                                                                         |   | **2,033**                   |      | 1,894    |   |
| Income  (loss) before income tax benefit and equity in undistributed income of  subsidiaries |   | **44**                      |      | (563     | )      |
| Income  tax benefit                                                                          |   | **785**                     |      | 724      |   |
| Equity  in undistributed (overdistributed) income of subsidiaries                            |   | **(234**                    | **)**     | 1,361    |   |
| Net  income                                                                                  |   | $                           | **595**   |     | $      | 1,522 |   |

 

43

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**CondensedStatements of Cash Flows**

**YearsEnded December 31, 2003 and 2002**

 
|                                                                               |   | **2003**                    |       | **2002**   |       |
|------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|------------|
|                                                                               |   | **(dollars  in thousands)** |       |
| Cash  flows from operating activities:                                             |   |                        |       |       |       |
| Net  income                                                                        |   | **$**                       | **595**    |       | $          | 1,522 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                        |       |       |       |
| Depreciation  and amortization                                                     |   | **40**                      |       | 31         |       |
| Equity  in (undistributed) overdistributed income of subsidiaries                  |   | **234**                     |       | (1,361     | )          |
| Other,  net                                                                        |   | **(162**                    | **)**      | 13         |       |
| Net  cash provided by operating activities                                         |   | **707**                     |       | 205        |       |
| Cash  flows from investing activities:                                             |   |                        |       |       |       |
| Subsidiary  return of capital                                                      |   | **900**                     | ** ** | **—** | ** ** |
| Purchase  of investment securities available for sale                              |   | —                      |       | (9         | )          |
| Purchase  of premises and equipment                                                |   | **(27**                     | **)**      | —     |       |
| Net  (increase) decrease in loans                                                  |   | **482**                     |       | (85        | )          |
| Net  cash (used in) provided by investing activities                               |   | **1,355**                   |       | (94        | )          |
| Cash  flows from financing activities:                                             |   |                        |       |       |       |
| Proceeds  from issuance of borrowings                                              |   | —                      |       | 2,400      |       |
| Repayment  of borrowings                                                           |   | **(48**                     | )          | (2,476     | )          |
| Cash  dividends paid                                                               |   | **(412**                    | **)**      | (412       | )          |
| Net  cash used in financing activities                                             |   | **(460**                    | **)**      | (488       | )          |
| Net  increase (decrease) in cash                                                   |   | **1,602**                   |       | (377       | )          |
|                                                                               |   |                        |       |       |       |
| Cash  at beginning of year                                                         |   | **383**                     |       | 760        |       |
| Cash  at end of year                                                               |   | **$**                       | **1,985**  |       | $          | 383 |   |

 

**(13)  Commitments andCredit Risk**

The Corporation is partyto financial instruments with off-balance-sheet risk in the normal course ofbusiness 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 the Corporation has in particular classes offinancial instruments.

The 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.  The 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 the Corporation at December 31, 2003 and 2002 are presented below:

 
|                                                                    |   | **2003**                    |       | **2002** |   |
|-------------------------------------------------------------------------|--------|-----------------------------|------------|----------|--------|
|                                                                    |   | **(dollars  in thousands)** |       |
| Financial  instruments whose contractual amounts represent credit risk: |   |                        |       |     |   |
| Commitments  to extend credit                                           |   | **$**                       | **18,037** |     | $      | 19,034 |   |
| Standby  letters of credit                                              |   | **2,632**                   |       | 2,447    |   |
|                                                                    |   | **$**                       | **20,669** |     | $      | 21,481 |   |

 

44

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Commitments to extendcredit, which include lines of credits, are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Of the total commitments toextend credit at December 31, 2003 and 2002, approximately $9.4 millionand $11.1 million, respectively, represent fixed-rate loan commitments.  Commitments generally have fixed expirationdates or 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.  The Corporation evaluates each customer’s creditworthiness on acase-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 orincome-producing commercial property, inventory, accounts receivable, and/orequipment.

Standby letters of creditare considered financial guarantees under FASB Interpretation 45.  These instruments are carried at fair value,which approximates the contract amount. Standby letters of credit are conditional commitments issued by theCorporation to guarantee the performance of a customer to a third party.  The credit risk involved in issuing suchletters of credit is essentially the same as that involved in extending otherfinancing arrangements with customers. The Corporation holds collateral to support such commitments for whichcollateral is deemed necessary.

 

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

Following is a summary ofthe carrying amounts and fair values of the Corporation’s financial instrumentsat December 31, 2003 and 2002:

 
| **December 31, 2003**                         |   | **Carrying****amount**     |        | **Fair****value** |       |
|----------------------------------------------------|--------|----------------------------|-------------|-------------------|------------|
|                                               |   | **(dollars in thousands)** |        |
| **Balance sheet assets:**                          |   |                       |        |              |       |
| **Cash and cash equivalents**                      |   | **$**                      | **15,916**  | ** **        | **$**      | **15,916** | ** ** |
| **Investment securities available for sale**       |   | **47,172**                 | ** **  | **47,172**        | ** ** |
| **Loans held for sale**                            |   | **15,287**                 | ** **  | **15,325**        | ** ** |
| **Loans, net**                                     |   | **170,846**                | ** **  | **171,075**       | ** ** |
| **Federal Home Loan Bank stock**                   |   | **813**                    | ** **  | **813**           | ** ** |
| **Accrued interest receivable**                    |   | **1,838**                  | ** **  | **1,838**         | ** ** |
|                                               |   |                       |        |              |       |
| **Balance sheet liabilities:**                     |   |                       |        |              |       |
| **Deposits**                                       |   | **$**                      | **226,615** | ** **        | **$**      | **227,541** | ** ** |
| **Securities sold under agreements to repurchase** |   | **528**                    | ** **  | **528**           | ** ** |
| **Borrowings**                                     |   | **11,347**                 | ** **  | **11,364**        | ** ** |
| **Subordinated debentures**                        |   | **9,000**                  | ** **  | **11,071**        | ** ** |
| **Accrued interest payable**                       |   | **1,082**                  | ** **  | **1,082**         | ** ** |

 

 
| **December 31, 2002**                      |   | **Carrying  amount** |    | **Fair  value** |   |
|-------------------------------------------------|--------|----------------------|---------|-----------------|--------|
|                                            |   |                 |    |            |   |
| Balance  sheet assets:                          |   |                 |    |            |   |
| Cash  and cash equivalents                      |   | $                    | 19,853  |            | $      | 19,853 |   |
| Investment  securities available for sale       |   | 42,216               |    | 42,216          |   |
| Loans  held for sale                            |   | 5,800                |    | 5,800           |   |
| Loans,  net                                     |   | 201,566              |    | 202,731         |   |
| Federal  Home Loan Bank stock                   |   | 753                  |    | 753             |   |
| Accrued  interest receivable                    |   | 2,346                |    | 2,346           |   |
|                                            |   |                 |    |            |   |
| Balance  sheet liabilities:                     |   |                 |    |            |   |
| Deposits                                        |   | $                    | 244,834 |            | $      | 246,157 |   |
| Securities  sold under agreements to repurchase |   | 656                  |    | 656             |   |
| Borrowings                                      |   | 8,395                |    | 8,431           |   |
| Subordinated  debentures                        |   | 9,000                |    | 10,633          |   |
| Accrued  interest payable                       |   | 1,332                |    | 1,332           |   |

 

45

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The methods andassumptions used to estimate the fair value are described as follows.

 

Carrying amount is theestimated fair value for cash and cash equivalents, interest bearing deposits,Federal Home Loan Bank stock, accrued interest receivable and payable,noninterest-bearing demand deposits, securities sold under agreements torepurchase, borrowings, and variable rate loans or deposits that repricefrequently and fully.  InvestmentSecurity fair values are based on market prices or dealer quotes, and if nosuch information is available, on the rate and term of the security andinformation about the issuer.  For fixedrate loans, deposits or borrowings and for variable rate loans or deposits withinfrequent repricing or repricing limits, fair value is based on discountedcash flows using current market rates applied to the estimated life and creditrisk.  Fair values for impaired loansare estimated using discounted cash flow analysis or underlying collateralvalues.  Fair value of loans held forsale is based on market quotes.  Fairvalue of subordinated debt is based on current rates for similar financing.  The fair value of off-balance-sheet items isbased on the current fees or cost that would be charged to enter into orterminate such arrangements and was not considered material.

 

**(15)Litigation**

Three 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.  As ofDecember 31, 2003 the Corporation has negotiated a settlement of one ofthe claims.  The terms of thatsettlement have been agreed upon and are now subject to the court’sapproval.  That agreement provides for acomplete resolution of the shareholder claims and a portion of the claims forattorney fees for the class representative. At December 31, 2003 the Corporation has accrued $200,000 for thisexpense.

 

**(16)Regulatory Restrictions**

The 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 the Corporation’sconsolidated financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Corporation, Illini, and Camp Point must meetspecific capital guidelines that involve quantitative measures of theCorporation’s, Illini’s, and Camp Point’s assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accountingprinciples.  The Corporation, Illini,and Camp Point capital amounts and classifications are also subject toqualitative judgments by the regulators about components, risk-weightings, andother factors.

Quantitative measuresestablished by regulations to ensure capital adequacy require the Corporation,Illini, and Camp Point to maintain minimum amounts and ratios (set forth in thetable below) of total and Tier I capital (as defined in the regulations) torisk-weighted assets (as defined), and of Tier I capital to average assets (asdefined).  Management believes, as ofDecember 31, 2003, the Corporation, Illini, and Camp Point meet allcapital adequacy requirements to which they are subject.

As of December 31,2003, the Corporation’s subsidiary banks were “well capitalized” underregulatory prompt corrective action provisions.  To be categorized as adequately or well capitalized, each bankmust maintain minimum total risk-based, Tier I risk-based, and Tier I leverageratios as set forth in the table.  Thereare no conditions or events since that notification that management believeshave changed Illini’s or Camp Point’s category.

 

46

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The Corporation’s,Illini’s, and Camp Point’s actual and required capital amounts and ratios as ofDecember 31, 2003 and 2002 are as follows:

 
|                                           |   | **December 31, 2003**  |       |
|------------------------------------------------|--------|-----------------------------|------------|
|                                           |   | **Actual**                  |       | **Capital requirements** |   | **To be well capitalized  under prompt corrective  action provisions** |   |
|                                           |   | **Amount**                  |       | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                           |   | **(dollars  in thousands)** |       |
| Total  capital (to risk-weighted assets):      |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | **$**                       | **23,169** | ** ** | **11.68** | **%** | **$** | **15,867** | ** ** | **8.00** | **%** | **$** | **19,834** | ** ** | **10.00** | **%** |
| Illini                                         |   | **20,446**                  | ** ** | **11.53** | ** ** | **14,188** | ** ** | **8.00** | ** ** | **17,735** | ** ** | **10.00** | ** ** |
| Camp  Point                                    |   | **3,280**                   | ** ** | **15.70** | ** ** | **1,672** | ** ** | **8.00** | ** ** | **2,089** | ** ** | **10.00** | ** ** |
| Tier  I capital (to risk-weighted assets):     |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | **16,457**                  | ** ** | **8.30** | ** ** | **7,934** | ** ** | **4.00** | ** ** | **11,900** | ** ** | **6.00** | ** ** |
| Illini                                         |   | **18,369**                  | ** ** | **10.36** | ** ** | **7,094** | ** ** | **4.00** | ** ** | **10,641** | ** ** | **6.00** | ** ** |
| Camp  Point                                    |   | **3,018**                   | ** ** | **14.45** | ** ** | **836** | ** ** | **4.00** | ** ** | **1,254** | ** ** | **6.00** | ** ** |
| Tier  I capital (to quarterly average assets): |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Illini  Corporation                            |   | **16,457**                  | ** ** | **6.29** | ** ** | **10,460** | ** ** | **4.00** | ** ** | **13,075** | ** ** | **5.00** | ** ** |
| Illini                                         |   | **18,369**                  | ** ** | **8.06** | ** ** | **9,113** | ** ** | **4.00** | ** ** | **11,391** | ** ** | **5.00** | ** ** |
| Camp  Point                                    |   | **3,018**                   | ** ** | **8.99** | ** ** | **1,343** | ** ** | **4.00** | ** ** | **1,679** | ** ** | **5.00** | ** ** |
|                                                |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                           |   | **December 31,  2002** |   |
|------------------------------------------------|--------|-----------------------------|--------|
|                                           |   | **Actual**                  |   | **Capital  requirements** |   | **To be well  capitalized  under prompt corrective  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 | % | $ | 21,835 |   | 10.00 | % |
| 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 |   | 13,101 |   | 6.00 |   |
| 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 |   | 13,887 |   | 5.00 |   |
| 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 |   |
|                                                |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Dividends from itssubsidiaries are the principal source of funds for payment of dividends by theCorporation 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, 2003, Illini had $4.1 million of retained earnings availablefor dividends without prior regulatory approval.  At December 31, 2003, Camp Point had $590,000 of retainedearnings available for dividends without prior regulatory approval.

At December 31, 2003and 2002, approximately $1,797,000 and $1,549,000, respectively, of cash anddue from banks represented required reserves on deposits maintained by theCorporation in accordance with Federal Reserve Bank requirements.

 

47

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**(17)****                          Terminationof Proposed Acquisition**

In November 2001 theCorporation executed a definitive agreement and plan of merger to acquire allof the outstanding stock of Illinois Community Bancorp, Inc (“ICBI”) throughthe merger of ICBI with a wholly owned subsidiary of the Corporation.  In conjunction with the merger, ICBIrequested that the Corporation provide funds to pay certain liabilities of ICBIand expenses related to the transaction. The Corporation provided a direct loanto ICBI for these items.  OnDecember 23, 2002 the Federal Reserve Board of Governors denied the mergerapplication.  The Corporationsubsequently filed an appeal with the Board of Governors forreconsideration.  The Corporation wasnotified the appeal was denied.  OnJune 13, 2003, the Corporation entered into an agreement with ICBI toterminate the merger by mutual consent. The termination agreement reaffirmed certain provisions of the originalmerger agreement including payment of expenses by each party, the dispositionof the loan, and general release between all parties in the merger.  The Corporation collected all principal andinterest on the note, approximately $532,000 and received approximately $50,000as payment in full on the account receivable from ICBI.  The account receivable represented fundspaid by the Corporation for professional services related to the merger.  The balance of the account, approximately$75,000, was written off during the second quarter in conjunction with thetermination agreement.  These fees werefor accountants, lawyers and filing fees used to prepare the merger agreementand filing with the U.S. Securities and Exchange Commission.  The termination agreement ended the mergeragreement and released both parties from continuing performance under the termsof the merger agreement.

 

**ITEM8. - CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On April 1, 2003,the Audit Committee of the Board of Directors of Illini Corporation determinedthat it would change its certifying accountants for the year endingDecember 31, 2003.  The AuditCommittee dismissed BKD LLP on April 1, 2003.  The firm of BKD LLP, had provided external audit services for thepast three years under a service proposal accepted for the year endedDecember 31, 2000.  The AuditCommittee solicited audit proposals from BKD LLP and other firms upon thecompletion of the three-year arrangement. The Audit Committee selected Crowe Chizek and Company LLC to provide externalaudit services in 2003 and the shareholders ratified the appointment of CroweChizek and Company LLC as its independent auditors with respect to IlliniCorporation for the fiscal year ending December 31, 2003.

No report of BKD LLP onthe financial statements of Illini Corporation for the past two fiscal yearscontained an adverse opinion or a disclaimer of opinion, or was qualified ormodified as to uncertainty, audit scope or accounting principles.  During Illini Corporation’s two most recentfiscal years, there were no disagreements with BKD LLP on any matter ofaccounting principles or practices, financial statement disclosure or auditingscope or procedure which, if not resolved to the satisfaction of BKD LLP, wouldhave caused it to make reference to the subject matter of the disagreements inconnection with its reports on the financial statements for such years.  A copy of a letter from BKD LLP to theSecurities and Exchange Commission, dated April 4, 2003, stating whetherit agrees or does not agree with the above statements, is included as Exhibit16 to this report.

During its two mostrecent fiscal years and through April 1, 2003, Illini Corporation has notconsulted with Crowe Chizek and Company LLC on any items regarding theapplication of accounting principles, the type of audit opinion that might berendered on Illini Corporation’s financial statements, or the subject matter ofa disagreement or reportable event (as described in Regulation S-B Item304(a)(2)).

 

**ITEM 8A****. – CONTROLS AND PROCEDURES**

 

An evaluation wasperformed under the supervision and with the participation of the Corporation’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Corporation’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) promulgated under theSecurities and Exchange Act of 1934, as amended) as of December 31, 2003.Based on that evaluation, the Corporation’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Corporation’sdisclosure controls and procedures were effective. There have been nosignificant changes in the Corporation’s internal controls or in other factorsthat could significantly affect internal controls.

 

48

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**PART III****.**

 

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

 

Information required bythis Item is incorporated by reference from the sections entitled “Election ofDirectors,” “Directors and Executive Officers,” “Executive Officers,” “BusinessExperience of Non-Director Executive Officers” and “Section 16(a)Beneficial Ownership Reporting Compliance” in the Corporation’s definitiveProxy Statement, to be filed pursuant to Section 14(a) of the Exchange Actand anticipated to be distributed to shareholders on or before April 29,2004.

 

**ITEM 10****. - EXECUTIVE COMPENSATION**

 

Information required bythis Item is incorporated by reference from the sections entitled “ExecutiveCompensation,” “Employment Agreement” and “Compensation of Directors” in theCorporation’s definitive Proxy Statement, to be filed pursuant toSection 14(a) of the Exchange Act and anticipated to be distributed toshareholders on or before April 29, 2004.

 

**ITEM 11****. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Information required bythis Item is incorporated by reference from the section entitled “SecurityOwnership of Certain Beneficial Owners and Management” in the Corporation’sdefinitive Proxy Statement, to be filed pursuant to Section 14(a) of theExchange Act and anticipated to be distributed to shareholders on or beforeApril 29, 2004.

 

**ITEM 12.****- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required bythis Item is incorporated by reference from the section entitled“Transactions with Directors, Executive Officers and Associates” in theCorporation’s definitive Proxy Statement, to be filed pursuant toSection 14(a) of the Exchange Act and anticipated to be distributed toshareholders on or before April 29, 2004.

 

**ITEM 13****. - EXHIBITS LIST 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) Amendment 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  (incorporated by reference to Illini Corporation’s Form 10-KSB filed on  March 28,2003).          |
| (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).                         |
|    |   | (5) Fourth Amendment to  Rights Agreement dated June 19, 2003 (incorporated by reference to  Illini Corporation’s Form 8-K filed on June 26, 2003).                                |
| (9)     |   | Not applicable.                                                                                                                                                                                   |

 

49

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| (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). |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   | (2) Termination  Agreement between Illini Corporation and Illini Community Bancorp, Inc. dated  June 26, 2003 (incorporated by reference to Illini Corporation’s Form  8-K filed on June 26, 2003).                                          |
| (10)(ii) |   | (1) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Burnard K. McHone, dated December 16, 1999 (incorporated by  reference to Illini Corporation’s Form 10-KSB filed on March 28, 2003).         |
|     |   | (2) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and James L. Adkins, dated December 16, 1999 (incorporated by reference  to Illini Corporation’s Form 10-KSB filed on March 28, 2003).           |
|     |   | (3) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Ronald Wenger, dated December 16 1999 (incorporated by reference to  Illini Corporation’s Form 10-KSB filed on March 28, 2003).              |
|     |   | (4) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Doug F. Finn, dated December 16, 1999 (incorporated by reference to  Illini Corporation’s Form 10-KSB filed on March 28, 2003).              |
|     |   | (5) Illini Corporation  Directors’ Stock Option Plan, approved March 21, 2002 (incorporated by  reference to Illini Corporation’s Form 10-KSB filed on March 28, 2003).                                                                 |
|     |   | (6) Illini Corporation  Incentive Stock Option Plan, approved March 21, 2002 (incorporated by  reference to Illini Corporation’s Form 10-KSB filed on March 28, 2003).                                                                       |
|     |   | (7) Management  Continuity Agreements by and between Illini Bank and Lori L. Griffin, dated  July 1, 2003.                                                                                                                                             |
|     |   | (8) Management  Continuity Agreements by and between Illini Corporation and Donald L. Deters,  dated August 4, 2003.                                                                                                                                   |
|     |   | (9) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Dennis B. Guthrie, dated August 4, 2003.                                                                                                               |
|     |   | (10) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Gaylon Martin, dated January 15, 2004.                                                                                                                |
| (11)     |   | Statement regarding  computation of earnings per share is included in “Item 7. Financial  Statements-Note 1(*m*)” which is  incorporated by reference herein.                                                                                     |
| (13)     |   | This document (Form  10-KSB) will be distributed within 30 days as the annual report to security  holders.                                                                                                                                                  |
| (16)     |   | Letter from BKD, LLP to  the SEC dated April 4, 2003 (incorporated by reference to Illini  Corporation’s Form 8-K filed on April 22, 2003).                                                                                                  |
| (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.                                                                                                                                                                                                                                             |
| (31.1)   |   | Certification of CEO  pursuant to rule 13a-14(a)/15d-14(a).                                                                                                                                                                                                 |
| (31.2)   |   | Certification of CFO  pursuant to rule 13a-14(a)/15d-14(a).                                                                                                                                                                                                 |
| (32.1)   |   | CEO Certification  pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                               |
| (32.2)   |   | CFO Certification  pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                               |
| (99)     |   | Not applicable.                                                                                                                                                                                                                                             |

 

(b)              There were noreports on Form-8K filed for the quarter ended December 31, 2003.

 

**ITEM 14****. – PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Information required bythis Item is incorporated by reference from the section entitled “Paymentof Fees to Auditors” in the Corporation’s definitive Proxy Statement, to befiled pursuant to Section 14(a) of the Exchange Act and anticipated to bedistributed to shareholders on or before April 29, 2004.

 

50

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant has caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Dated:                              |   March 26,  2004 |   |   |
|-------------------------------------|----------------------------------|--------|--------|
|                                |                             |
| Illini Corporation,  Registrant, by |                             |
|                                |                             |
| /s/ Burnard K. McHone               |                             |   |
| Burnard K. McHone,  President       |                             |

 

In accordance with theExchange 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 26,  2004** |   | **/s/  Burnard K. McHone**                    | **March 26,  2004** |
|----------------------------------|--------------------------|--------|-----------------------------------------------|--------------------------|
| Thomas A. Black,  Chairman       | Date                     |   | Burnard K. McHone,  Director & Pres.      | Date                     |
|                             |                     |   | (Principal Executive  Officer)                |                     |
|                             |                     |   |                                          |                     |
| **/s/  Lawrence B. Curtin**      | **March 26,  2004** |   | **/s/  Robert F. Olson**                      | **March 26,  2004** |
| Lawrence B. Curtin,  Director    | Date                     |   | Robert F. Olson,  Director                    | Date                     |
|                             |                     |   |                                          |                     |
| **/s/  William N. Etherton**     | **March 26,  2004** |   | **/s/  John H. Pickrell**                     | **March 26,  2004** |
| William N. Etherton,  Director   | Date                     |   | John H. Pickrell,  Director                   | Date                     |
|                             |                     |   |                                          |                     |
| **/s/  William B. McCubbin**     | **March 26,  2004** |   | **/s/ N.  Ronald Thunman**                    | **March 26,  2004** |
| William B. McCubbin,  Director   | Date                     |   | N. Ronald Thunman,  Director                  | Date                     |
|                             |                     |   |                                          |                     |
| **/s/  Anthony F. Liberatore**   | **March 26,  2004** |   | **/s/  Dennis B. Guthrie**                    | **March 26,  2004** |
| Anthony F. Liberatore,  Director | Date                     |   | Dennis B. Guthrie, CFO                        | Date                     |
|                             |                     |   | (Principal Financial  and Accounting Officer) |
| **/s/  Jane A. Schachtsiek**     | **March 26,  2004** |   |                                          |                     |
| Jane A. Schachtsiek,  Director   | Date                     |   |                                          |                     |
|                             |                     |   |                                          |                     |
| **/s/  Jesse A. Werner, Jr.**    | **March 26,  2004** |   |                                          |                     |
| Jesse A. Werner, Jr.,  Director  | Date                     |   |                                          |                     |

 

51

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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                                    |   |   |   |
| Burnard K. McHone                                                                          |   | *Stephanie  Lyon, Bank Manager I*              |   |   |   |
| President                                                                                  |   | *Vickie  Bly, Corporate Banker*                |   |   |   |
|                                                                                       |   | *Jim  McGuire, Corporate Banker*               |   |   |   |
| Donald L. Deters                                                                           |   |                                           |   |   |   |
| Sr. Vice President                                                                         |   | 120 South Chatham Road                         |   | 2201 Woodlawn, Ste. 100 |   |
|                                                                                       |   | Springfield                                    |   | Lincoln |   |
| James L. Adkins                                                                            |   | *Ann  Cowhick, Bank Manager I*                 |   | *Sharon  Awe, Bank Manager I* |   |
| Sr. Vice President /  Chief Operating Officer                                              |   |                                           |   |   |   |
|                                                                                       |   | 615 West Jefferson St.                         |   | 120 Governor Oglesby |   |
| Dennis B. Guthrie                                                                          |   | Springfield                                    |   | Elkhart |   |
| Sr. Vice President /  Chief Financial Officer                                              |   | *Dottie  Bellm, Bank Manager I*                |   | *Sharon  Awe, Bank Manager I* |   |
|                                                                                       |   |                                           |   |   |   |
| Ronald E. Wenger                                                                           |   | 2120 Peoria Road                               |   | 116 East Exchange |   |
| Sr. Vice President /  Corporate Banking                                                    |   | Springfield                                    |   | Danvers |   |
|                                                                                       |   | *Steve  Tate, Bank Manager I*                  |   | *Tom  Caisley, Regional Manager* |   |
| Douglas F. Finn                                                                            |   |                                           |   |   |   |
| Vice President / Sales  & Service                                                      |   | 375 West Andrew Road                           |   | 103 Franklin |   |
|                                                                                       |   | Sherman                                        |   | Hudson |   |
| Juanita L. Mathis                                                                          |   | *Molly  Appelt, Regional Manager*              |   | *Greg  Birky, Corporate Banker* |   |
| Vice President /  Operations                                                               |   |                                           |   |   |   |
|                                                                                       |   | 133 Dodds Street                               |   | 100 East Third St |   |
| Jane A. Locascio                                                                           |   | Divernon                                       |   | Stonington |   |
| Internal Auditor                                                                           |   | *Susan  Darling, Bank Manager I*               |   | *Drew  Pounds, Bank Manager I* |   |
|                                                                                       |   |                                           |   |   |   |
| **Illini  Bank**                                                                           |   | Route 4 and Jefferson                          |   | West Main St. |   |
|                                                                                       |   | Auburn                                         |   | Mechanicsburg |   |
| Burnard K. McHone                                                                          |   | *Cathy  Brackemyer, Regional Manager*          |   | *Cathy  Brackemyer, Regional Manager* |   |
| President                                                                                  |   |                                           |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| James L. Adkins                                                                            |   |                                           |   |   |   |
| Sr. Vice President /  Chief Operating Officer                                              |   |                                           |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| Dennis B. Guthrie                                                                          |   |                                           |   |   |   |
| Sr. Vice President /  Chief Financial Officer                                              |   | **Farmers  State Bank of Camp Point Location** |   |   |
|                                                                                       |   | 206 E. Wood Street                             |   |   |   |
| Ronald E. Wenger                                                                           |   | Camp Point                                     |   |   |   |
| Sr. Vice President /  Corporate Banking                                                    |   | *Donald  L. Deters, President*                 |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| Douglas F. Finn                                                                            |   |                                           |   |   |   |
| Vice President / Sales  & Service                                                      |   |                                           |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| Juanita L. Mathis                                                                          |   |                                           |   |   |   |
| Vice President /  Operations                                                               |   |                                           |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| Terry D. Lock                                                                              |   |                                           |   |   |   |
| Vice President /  Corporate Banking                                                        |   |                                           |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| **Farmers  State Bank of Camp Point**                                                      |   | **Stock  Transfer Agent**                      |   |   |
|                                                                                       |   | Illinois Stock Transfer                        |   |   |   |
| Donald L. Deters                                                                           |   | 209 West Jackson Blvd.                         |   |   |   |
| President                                                                                  |   | Suite 903                                      |   |   |   |
|                                                                                       |   | Chicago, IL 60606                              |   |   |   |
| Terry D. Reuschel                                                                          |   | 1-800-757-5755                                 |   |   |   |
| Vice President / C.E.O.                                                                    |   |                                           |   |   |   |
|                                                                                       |   |                                           |   |   |   |
| Jerelyn S. Douglas                                                                         |   |                                           |   |   |   |
| Asst. Vice President /  Cashier                                                            |   |                                           |   |   |   |
|                                                                                            |        |                                                |        |  |  |  |

 

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