** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 

**ý****  ****Annual Report Pursuant to Section 13or 15(d)of the Securities Exchange Act of 1934**

 

**o****  ****Transition Report under Section 13or 15(d)of the Securities Exchange Act of 1934**

 

**For thefiscal year ended December 31, 2004Commission file number 0-13343**

 

**ILLINI CORPORATION**

(Name of small business issuerin its charter)

 

**Illinois**

(State of Incorporation)

 

**37-1135429**

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

 

**3200 WestIles AvenueSpringfield, Illinois 62711**

(Address of principal executiveoffices and zip code)

 

Issuer’s telephone number

**(217)787-5111**

 

Securities registered pursuantto Section 12(b) ofthe Exchange Act:

**None**

 

Securities registered pursuantto 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 by Section 13or 15(d) of the Exchange Act during the past 12 months, and (2) has beensubject 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 2004 were $15,054,000.

 

On March 16, 2005, 541,029 shares of common stock were outstanding.  The aggregate market value of such sharesheld by non-affiliates of the registrant was approximately $20,629,000 (basedon the average of the bid and asked prices of securities traded as of March 16,2005).

 

 

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**TABLE OF CONTENTS**

 
| **Part I**   |   |
|--------------|--------|
| 1.           |   | Description of Business |   |
| 2.           |   | Description of Properties |   |
| 3.           |   | Legal Proceedings |   |
| 4.           |   | Submission of Matters to a Vote of Security  Holders |   |
|         |   |   |   |
| **Part II**  |   |
| 5.           |   | Market for the Common Equity, Related  Stockholder Matters and Small Business Issuer Purchases of Equity Securities |   |
| 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 |   |
| 8B.          |   | Other Information |   |
|         |   |   |   |
| **Part III** |   |
| 9.           |   | Directors and Executive Officers of the  Registrant |   |
| 10.          |   | Executive Compensation |   |
| 11.          |   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
| 12.          |   | Certain Relationships and Related  Transactions |   |
| 13.          |   | Exhibits |   |
| 14.          |   | Principal Accountant Fees and Services |   |
|         |   |   |   |
| Signatures   |   |

 

**InformationConcerning Forward-Looking Statements**

 

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

 

**PART I.**

 

**ITEM 1. - DESCRIPTION OF BUSINESS**

 

Illini Corporation (or “Corporation”), a bankholding company as defined in the Bank Holding Company Act of 1956, as amended,was incorporated under the laws of the State of Illinois in 1983.  Illini Corporation presently operates twowholly owned subsidiaries, Illini Bank, with 13 locations throughout fourcounties in central Illinois and Farmers State Bank of Camp Point, Camp Point,Illinois.  In addition, the Corporationformed Illini Statutory Trust I (“IST”), which had previously been consolidatedwith the Corporation and, as discussed in Note 1 to the Consolidated FinancialStatements, is now reported separately. The Corporation’s executive offices are located at 3200 West IlesAvenue, Springfield, Illinois 62711, and its telephone number is 217-787-5111.

 

The Corporation’s management philosophy is tocentralize overall corporate policies, procedures, and

 

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administrative functions and to provide operational support for thesubsidiary banks.  While each location isallowed flexibility in responding to local market conditions and customer andcommunity needs, the Corporation operates as a single business segment.  The Corporation is committed to being a wellmanaged, profitable financial institution providing a broad range of financialservices and products, as well as contributing to the economic and socialenvironment of its communities.

 

Illini Bank (“Illini”) is an Illinois state bank, which had total assets of $198.8million at December 31, 2004. Illini maintains 13 banking facilities located in the following Illinoiscommunities: 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 $36.7 million at December 31, 2004.  Camp Point maintains one banking facilitylocated in Camp Point, Illinois.

 

Each bank offers their customers a widevariety of financial 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 and residential realestate loans, personal and consumer purchase loans, home equity loans, andpersonal secured and unsecured lines of credit. Additional product offerings include letters of credit, credit cards,notary services, safe deposit boxes, and check imaging.  During 2002, Illini entered into an agreementwith PRIMEVEST Financial Services, Inc. in order to secure the services of aregistered broker-dealer, subject to federal and state securities laws and theNASD Conduct Rules, as a convenience and accommodation to Illini’scustomers.  The general purpose of thefull service brokerage services provided by Illini is to provide customers ofIllini access to professional investment and insurance advice, based oncustomer suitability.  The activityoperates as a division of Illini and is called “Illini Financial Services”.

 

Illini’s and Camp Point’s deposit accountsare insured by the Federal Deposit Insurance Corporation (the “FDIC”) under theBank Insurance Fund (“BIF”) to the maximum amount allowed by law.  The Corporation is supervised and regulatedby the Board of Governors of the Federal Reserve (“FRB”), and Illini and CampPoint are supervised and regulated by the FDIC and the Illinois Department ofFinancial and Professional Regulation, Division of Banks and Real Estate (“IllinoisDFPR”).

 

•      ***Competition***

 

The activities and geographic markets inwhich Illini and Camp Point are engaged are highly competitive.  Competition among financial institutions isbased upon interest rates offered on deposit accounts and on loans and othercredit and service charges, the quality of services rendered, the convenienceof banking facilities and, in the case of loans to large commercial borrowers,relative lending limits.

 

# ***•***      Supervision and Regulation -General

 

Various federal and state banking laws andregulations affect the business of the Corporation.  The Corporation is subject to supervision,regulation, and periodic examination by the FRB.  The Corporation’s subsidiary banks aresubject to supervision, regulation, and periodic examinations by the IllinoisDFPR and the FDIC.  The following is asummary of certain statutes and regulations affecting the Corporation, Illiniand 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, the 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 abank holding company by circumscribing the types of businesses it may own oracquire.  The BHCA limits a bank holdingcompany to owning and managing banks or companies engaged in activitiesdetermined by the FRB to be closely related to banking.  Among the activities that the FRB hasdetermined are closely related to banking are activities that are usual inconnection with making, acquiring, brokering or servicing loans, leasingpersonal or real property, engaging in trust company functions, acting asinvestment or financial advisor, providing securities brokerage services,certain management consulting and counseling services, engaging in certaininsurance agency activities and providing data processing services.

 

The Gramm-Leach-Bliley Act (“GLB Act”) wasenacted in November 1999.  Under theGLB Act, bank holding companies that meet certain standards are permitted toengage in a wider range of activities, including securities and insuranceactivities.  Specifically, a bank holdingcompany that elects to become a “financial holding company” may engage in manyactivities that are financial in nature, including lending, exchanging,transferring, investing for others, or safeguarding money or securities;underwriting and selling insurance; providing financial, investment, oreconomic advisory services; underwriting, dealing in, or making a market insecurities; and those activities currently permitted for bank holding companiesthat are so closely related to banking, or managing or controlling banks, as tobe a proper incident thereto.  TheCorporation has not 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 andBranching Efficiency Act of 1994 (the “Riegle-Neal Act”), since September 29,1995, the FRB is permitted, under specified circumstances, to approve theacquisition by a bank holding company located in one state of a bank or a bankholding company located in another state, without regard to most prohibitionscontained in state law.

 

The Riegle-Neal Act permits states to requirethat a target bank have been in operation for a minimum period, up to fiveyears, and to impose non-discriminatory limits on the percentage of the total amountof deposits with insured depository institutions in the state which may becontrolled by a single bank or bank holding company.  In addition, the Riegle-Neal Act imposesfederal deposit concentration limits (10% of nationwide total deposits, and 30%of total deposits 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 approveapplications for mergers of depository institutions across state lines withoutregard to whether such activity is contrary to state law.  Any state could, however, by adoption of anon-discriminatory law after September 29, 1994 and before June 1,1997, elect to opt-out of the provision.

 

While Illinois adopted legislation to opt-into the interstate merger provision, unlike some states and as permitted byfederal law, Illinois law does not authorize the establishment of de novobranches or the purchase by an out-of-state bank of one or more branches of abank with its main office in Illinois. Since the laws of the various states which do authorize de novo branchesor branch purchases normally have reciprocity provisions, Illinoisstate-chartered banks generally are not able to establish or acquire branchesin other states except through the merger with a bank in another state.

 

Branches acquired in a host state by both out-of-statestate-chartered and national banks will be subject to community reinvestment,consumer protection, fair lending, and interstate branching laws of the hoststate to the same extent as branches of a national bank having its main officein the host state.  Among other things,the Riegle-Neal Act also preserves state taxation authority, prohibits theoperation by out-of-state banks of interstate branches as deposit productionoffices, imposes additional notice requirements

 

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upon interstate banks proposing to close branch offices in a low ormoderate-income area, and creates new Community Reinvestment Act evaluationrequirements for interstate depository institutions.

 

•      ***Dividend Restrictions***

 

The Corporation’s principal source of incomeis the payment of dividends on the stock of the banks owned by theCorporation.  Illinois law restricts thebanks’ ability to pay these dividends. Under the Illinois Banking Act, no dividend may be declared by an Illinoisstate-chartered bank (i) except out of the bank’s net profits and (ii) unlessthe bank has transferred to surplus at least one-tenth of its net profits sincethe date of the declaration of the last preceding dividend, until the amount ofits surplus is at least equal to its capital. Net profits under the Illinois Banking Act must be adjusted for lossesand bad debts (i.e. debts owing to the bank on which interest is past due andunpaid for a period of six months or more unless such debts are well securedand in the process of collection).

 

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

 

•      ***Transactions with Affiliates and Insiders***

 

The Corporation, Illini Bank, and Camp Pointare affiliates of each other and, as such, are subject to certain federalrestrictions on loans and extensions of credit by the banks to the Corporation,on investments in the Corporation and its affiliates’ securities, on acceptanceof such securities as collateral for loans to any borrower, and on leases,services 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 certaincircumstances, be approved in advance by a majority of the entire board ofdirectors of each bank.  The aggregateamount that can be lent to all insiders is limited to each bank’s unimpairedcapital and surplus.  There areadditional limitations on the amount of loans that can be made to each bank’sexecutive officers.

 

•      ***Deposit Insurance***

 

Deposits held by Illini and Camp Point areinsured, to the extent permitted by law, by the Bank Insurance Fund (“BIF”)administered by the FDIC.

 

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

 

Under the current risk-based assessmentsystem, a depository institution pays an assessment of between 0 cents and 27cents per $100 of insured deposits, based on its capital level and riskclassification.  To arrive at arisk-based assessment for an insured institution, the FDIC places it in one ofnine risk categories using a two-step analysis based first on capital ratiosand then on relevant supervisory information.

 

In addition, pursuant to the DepositInsurance Funds Act of 1996, the FDIC imposed a special assessment on bankdeposits at a rate not tied to risk classification in order to service debt onthe Financing Corporation (FICO) bonds issued in connection with the federalgovernment’s bail out of the thrift industry. Any further significant changes in the deposit insurance assessment rateimposed by the FDIC could have a material effect on the earnings of theCorporation.

 

•      ***Capital Requirements***

 

The FRB has imposed risk-based capitalguidelines applicable to the Corporation. These guidelines require that bank holding companies maintain capitalcommensurate with both on-and off-balance sheet credit and other risks of theiroperations.  Under the guidelines, a bankholding company must have a minimum ratio of total capital to risk-weighted assetsof 8 percent.  In addition, a bank holdingcompany

 

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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 ratiorequirements.  The leverage ratiorequirements establish a minimum required ratio of Tier 1 capital to totalassets less goodwill of 3 percent for the most highly rated bank holdingcompanies.  All other bank holdingcompanies are required to maintain additional Tier 1 capital yielding a leverageratio of 4 percent to 5 percent, depending on the particular circumstances andrisk profile of the institution.  Referto the Capital Resources Section of Item 6 and Note 16 included under Item7 for a summary of the Corporation’s capital ratios as of December 31,2004 and 2003.

 

Each bank is also subject to risk-weightedcapital standards and leverage measures, which are similar, but in some casesnot identical, to the requirements for bank holding companies, which apply tothe Corporation.  At December 31,2004 Illini and Camp Point met all applicable capital requirements.

 

•      ***Safety and Soundness Guidelines***

 

As required by federal law, the federalbanking regulators have adopted interagency guidelines (the “Guidelines”)establishing standards for safety and soundness for depository institutions onmatters such as internal controls, internal audit systems, loan documentation,credit underwriting, interest rate risk exposure, asset growth and quality,earnings, and compensation and other benefits. In general, the Guidelines prescribe the goals to be achieved in eacharea, and each institution will be responsible for establishing its ownprocedures to achieve these goals.  If aninstitution fails to comply with any of the standards set forth in the Guidelines,the institution’s primary federal regulator may require the institution tosubmit a plan for achieving and maintaining compliance.  Failure to submit an acceptable complianceplan, or failure to adhere to a compliance plan that has been accepted by theappropriate regulator, would constitute grounds for further enforcement action.

 

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

 

•      ***Monetary Policy and Economic Conditions***

 

The business of commercial banks, such asIllini and Camp Point, is affected by monetary and fiscal policies of variousregulatory agencies, including the FRB. Among the regulatory techniques available to the FRB are open marketoperations in United States Government securities, changing the discount ratefor member bank borrowings, and imposing and changing the reserve requirementsapplicable to member bank deposits and to certain borrowings by member banksand their affiliates (including parent companies).  These policies influence to a significantextent the overall growth and distribution of bank loans, investments anddeposits and the interest rates charged on loans, as well as the interest ratespaid on savings and time deposits.

 

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 inthe national economy and the money market, as well as the effect of acts by themonetary and fiscal authorities, including the FRB, no definitive predictionscan be made by the Corporation or the banks as to future changes in interestrates, credit availability, deposit levels, or the effect of any such changeson the Corporation’s or the banks’ operations and financial condition.

 

•      ***Federal Securities Regulation***

 

The Corporation’s common stock is registeredwith the SEC under the Securities Act of 1933, as amended, and the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  Consequently, the Corporation is subject tothe information, proxy solicitation, insider trading and other restrictions andrequirements of the SEC under the Exchange Act.

 

As a registered company with the SEC, theCorporation is subject to certain provisions of the Sarbanes-Oxley Act of2002.  The Board of Directors andmanagement are aware of the required changes in corporate governance anddisclosure and have acted to adopt the necessary actions for 2004.

 

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# ***•***      Employees

 

As of December 31,2004, the Corporation, Illini and Camp Point had 105 total employees and 81full-time employees.

 

•      ***Statistical Disclosure***

 
| ** **                                                               | **Page(s)** |
|--------------------------------------------------------------------------|-------------|
| Investment Securities Available for Sale                                 | 10          |
| Investment Securities Available for Sale  Maturity Schedule              | 11          |
| Loan Portfolio                                                           | 11          |
| Selected Loan Maturity and Interest Rate  Sensitivity                    | 12          |
| Maturities of Time Deposits                                              | 13          |
| Rate/Volume Variance Analysis                                            | 16          |
| Consolidated Average Balances, Interest  Income/Expense and Yields/Rates | 17 & 18 |
| Summary of Loan Loss Experience                                          | 20          |
| Allocation of Allowance for Loan Losses                                  | 20          |
| Nonperforming Assets                                                     | 21          |
| Noninterest Income                                                       | 22          |
| Noninterest Expense                                                      | 22          |

 

•      ***Reports to Security Holders***

 

The Corporation files reports with the Securities and ExchangeCommission (“SEC”) such as Forms 10-KSB, Forms 10-QSB, Forms 8-K and Schedules14a.

 

The public may read and copy any materials filed with the SEC at theSEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.20549.  The public may obtain informationon the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330.  The SEC maintains anInternet site that contains reports, proxy and information statements, and otherinformation regarding issuers that file electronically with the SEC and theiraddress is http://www.sec.gov.  Thepublic may also go to Illini Corporation’s web site athttp://www.illinibank.com.

 

**ITEM 2. – DESCRIPTION OF PROPERTIES**

 

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

 

**ITEM 3. - LEGAL PROCEEDINGS**

 

Various legal claims have arisen against theCorporation in the normal course of business, which, in the opinion ofmanagement, will not result in any material liability, other than what isdisclosed below, to the Corporation.  Two(2) cases remain pending at December 31, 2004.

 

The first case was filed in 1998 by ashareholder of the Corporation against Illinois Stock Transfer Company, asRights Agent for the Corporation under the Corporation’s Shareholder RightsAgreement (“Rights Agreement”), for specific performance of the RightsAgreement, on behalf of the plaintiff individually and on behalf of a class ofshareholders.  The complaint alleged thatthe Rights Agreement was triggered in April of 1998, and that the RightsAgent had a duty under the Rights Agreement to distribute Rights Certificatesto the Corporation’s shareholders.  TheCorporation was named as a

 

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defendant in 1999 and the class was certified.  Plaintiff was seeking to recover attorney’sfees from the Corporation in addition to other relief.  In January of 2000, the trial courtentered summary judgment in favor of the Corporation and the Rights Agent.  Plaintiff appealed this ruling to theIllinois Appellate Court.  The AppellateCourt reversed the order granting summary judgment for defendants and remandedthe case for trial on the issue of whether the Corporation’s Board of Directorsacted in good faith in determining that a shareholder’s acceptance of a gift ofthe Corporation’s Stock did not trigger the Rights Agreement, and in theCorporation’s later amendment of the Rights Agreement.  The Appellate Court further ruled thatplaintiff’s attorney’s fees were recoverable under the Rights Agreement.  After a series of unsuccessful motions filedby the Plaintiff’s counsel, the Corporation filed a motion to remove thePlaintiff’s attorney.  The court removedthe attorney for the Plaintiff class and appointed new counsel to represent theclass.  The removed counsel filed amotion for reconsideration, which was denied. The new counsel filed a motion for direction to remove the classrepresentative, which was granted on January 15, 2003.  On March 7, 2003 the trial court appointeda successor class representative. The Corporation has negotiated a settlementof the suit with the new class representative and class counsel.  The terms of that settlement have been agreedupon and approved by the court following a fairness hearing.  That agreement provides for a completeresolution of the shareholder claims and a portion of the claims for attorneyfees for the class representative.  As ofDecember 31, 2004 and 2003 the Corporation has an accrual of  $200,000 for this settlement and believes itwill have no further adverse impact on the Corporation. This accrual isincluded in other liabilities in the Consolidated Balance Sheet.  The removed attorney, representing theremoved class representative, has appealed various rulings of the trial courtand that appeal is now pending in the Appellate Court of Illinois, FourthDistrict.  The removed attorney is alsopetitioning the trial court for fees. The court will also be asked to deny the fee request filed by theattorney for the original class representative. That proceeding should beconcluded in the trial court after the decision is rendered in the appeal.

 

In April 2003, the Corporation, itsdirectors, and one of its officers were named as defendants in a complaintfiled in the Circuit Court of Sangamon County, Illinois.  Plaintiffs seek to rescind the Stock PurchaseAgreement entered into by the Corporation in 2001 to purchase approximately 30%of its common shares from a minority shareholder group.  Management believes that the Stock PurchaseAgreement was a routine business transaction beneficial to the Corporation’sshareholders and was entered into after appropriate due diligence andconsultation with the Corporation’s outside financial advisors.  The Corporation has filed motions to dismisson the basis of a prior pending action. The Corporation has completed its independent directors’ review.  The Corporation has also filed motions todismiss on the basis of a prior pending action and to realign the parties,naming the Corporation as the party plaintiff, and for leave of court todismiss the action.  Those motions arepending.  Management is contesting theclaim vigorously.  The range of potentialloss to the Corporation, if the case is decided contrary to its interests, hasnot been measured in a dollar amount because the claim of the plaintiff is notfor a monetary judgment.

 

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

 

No matters were submitted to a vote ofsecurity holders during the fourth quarter of 2004.

 

**PART II.**

 

**ITEM5. - MARKET FOR THE COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALLBUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**

** **

The common stock of theCorporation is traded over the counter and listed on the over the counterbulletin board (OTCBB).  The followingtable sets forth the high and low bid quotations by calendar quarter of thecommon stock of the Corporation.  Thequotations shown reflect inter-dealer prices, without retail mark-up,mark-down, or commission and may not represent actual transactions.

 

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| **2004**         | ** ** | **High**  | ** ** | **Low**    | ** ** | **Cash   Dividends   Declared** | ** ** |
|------------------|------------|-----------|------------|------------|------------|---------------------------------|------------|
|             |       |      |       |       |       |                            |       |
| **1st  Quarter** | ** ** | **$**     | **36.50**  | ** ** | **$**      | **32.50**                       | ** ** | **$** | **.25** | ** ** |
| **2nd  Quarter** | ** ** | **36.37** | ** ** | **33.60**  | ** ** | **.10**                         | ** ** |
| **3rd  Quarter** | ** ** | **37.75** | ** ** | **34.05**  | ** ** | **.10**                         | ** ** |
| **4th  Quarter** | ** ** | **35.00** | ** ** | **34.00**  | ** ** | **.11**                         | ** ** |
|                  |            |           |            |            |            |                                 |            |  |  |  |

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

 

As of December 31,2004, there were 1,251 shareholders of record of the Corporation’s commonstock.

 

The Corporation issued$0.56 per share in dividends, which totaled $232,136 in 2004 and $1.00 pershare, which totaled $411,701 in 2003. 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 CONDITIONAND RESULTS OF OPERATIONS**

 

# ***•***      Introduction

 

The following discussion highlights thesignificant factors affecting the operations and financial condition of theCorporation for the two fiscal years ended December 31, 2004 and December 31,2003.  The discussion should be read inconjunction with the consolidated financial statements, accompanying notes, andselected financial data as set forth in “Item 7. Financial Statements” which isincorporated by reference herein.

 

The Corporation cautions that any forwardlooking statements contained in this report, in a report incorporated byreference to this report, or made by management involve estimates anduncertainties and are subject to change based upon various important factors.  Actual results for 2005 and beyond coulddiffer materially from results expressed or implied by forward lookingstatements in this report.

 

•      ***Summary***

 

The full impact of thechallenges first identified in 2003 were experienced during the course of 2004.  Total assets declined in 2004 to $237.5million, down $27.3 million from the $264.8 million reported at year-end2003.  Management continued the processof identifying and removing marginal credits from the loan portfolio during2004, a process that commenced in the latter part of 2003.  The result was a further reduction in theloan portfolio, with net loans, including loans held for sale, decreasing by$29.5 million to $156.2 million at December 31, 2004, as compared to$186.1 million at December 31, 2003. In addition, other real estate owned declined from the end of 2003, down$2.9 million.  These decreases werepartially offset by an increase of  $9.0million in investment securities.

 

Management continued itsefforts to reduce its exposure to out of the area certificates of deposit.  This is reflected in a decrease in timedeposits of $100,000 and over of  $5.1million, and a decrease in other time deposits of $24.8 million from year-end2003.  The Corporation continued toexperience growth in

 

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low-cost core deposits, as noninterest-bearing demandincreased $3.2 million from year-end 2003. Additionally, the decrease in time deposits were partially offset by anincrease of $2.0 million borrowings.

 

The decline in totalassets, the identification and removal of various loan relationships, and thecosts associated with reducing the levels of other real estate owned had anegative impact on earnings in 2004.  Anet loss of $1.2 million for the year was caused by four major contributors:loan foreclosure and other real estate owned expense; salaries and employeebenefits; losses on sales/transfers of mortgage loans; and provision for loanlosses.  The reduction in carrying valuesand the losses on sales of other real estate owned resulted in an increase inexpenses of $1.7 million from year-end 2003 expenses.  As part of the restructuring of staff during2004, the elimination of several positions and the termination provisions inrelated management contracts for those positions, cost of living increases, andthe appointment of a new president at Illini, salaries and employee benefitsincreased $0.7 million in 2004.  Losseson sales/transfers of mortgage loans of $101,000, of which $82,000 of loss wasrelated to the transfer of loans held for sale back to portfolio, in 2004,compared to income of $202,000 in 2003, and an increase of $300,000 from 2003in provision for loan losses were the other major contributors to the net lossreported.

 

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

 

Average assets were $245.7 million in 2004, adecrease of $27.3 million, or 10.0%, from 2003. Average total loans were $173.4 million in 2004, a decrease of $24.2million, or 12.2%, from 2003.  Averagedeposits were $206.4 million in 2004, a decrease of $30.0 million, or 12.7%,from 2003.

 

•      ***Securities***

 

Total securities as of December 31, 2004were $56.2 million, an increase of $9.0 million, or 19.1%, over the prioryear-end.  At December 31, 2004 and2003, the total securities portfolio comprised 23.7% and 17.8%, respectively,of total assets.

 

The Corporation’s investment strategy is tomaximize portfolio yields commensurate with credit risk and liquidityconsiderations.  The decision to purchaseor sell securities is based upon the current assessment of economic andfinancial conditions, including the interest rate environment.  Approximately $2.1 million, or 3.7%, of thesecurities portfolio at December 31, 2004 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 collateralizedmortgage obligations as of December 31, 2004 totaled $16.8 million andrepresent 30.0% of total securities.  Thedistribution of mortgage-backed securities includes $15.8 million of U.S.government agency and government sponsored entities mortgage-backed passthrough securities and $1.0 million of private issue collateralized mortgageobligations.

 

At December 31, 2004, securities availablefor sale totaled $56.2 million.  Therewere no securities classified as held to maturity or trading at the end of 2004or 2003.  The securities available forsale portfolio at the end of 2004 included gross unrealized gains of $1,539,000and gross unrealized losses of $224,000, of which the combined effect, net oftax, is included as an unrealized gain in stockholders’ equity.  For comparative purposes, at December 31,2003, gross unrealized gains of $1,770,000 and gross unrealized losses of$55,000 were included in the securities available for sale portfolio, which isset forth in “Item 7. Financial Statements –Note 2”, and is incorporated byreference herein.

 

•      ***Maturities and Duration***

 

The maturities andweighted average yields of the investment portfolio at the end of 2004 arepresented in the following table. Maturities of private mortgage-backed securities are based on theiraverage expected lives and include the effects of anticipated prepayments.  All other securities are listed at theiractual maturity or contractual repricing interval.  The amounts and yields disclosed reflect thenet carrying value, which is the same as fair value.  Taxable equivalent adjustments, using a 34%tax rate, have been made in calculating yields on tax-exempt obligations.

 

The securities portfolio at December 31,2004 contained, in the aggregate, securities of the City of Litchfield, Villageof Sherman and the County of Sangamon that each had a book or market value inexcess of 10% of shareholders’ equity of the Corporation.  Excluding those issued by the United States

 

10

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government, or its agencies or sponsored entities or corporations,there were no other securities of an issuer with an aggregate book or marketvalue in excess of 10% of shareholders’ equity of the Corporation.

 

**Maturitiesand Yield of Securities**

 
| ** **                                                           | ** ** | **Total**                  | ** ** | **Weighted Average Tax Equivalent  Yield** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **(dollars in thousands)** | ** ** |
| U.S.  Treasury securities:                                           |       |                       |       |                                       |       |
| 1 to 5 years                                                         | ** ** | **$**                      | **993**    | ** **                                 | **2.47**   | **%** |
|                                                                 |       |                       |       |                                       |       |
| U.S. government  sponsored entities:                                 |       |                       |       |                                       |       |
| 0 to 1 years                                                         | ** ** | **$**                      | **1,192**  | ** **                                 | **2.80**   | **%** |
| 1 to 5 years                                                         | ** ** | **18,796**                 | ** ** | **3.08**                                   | ** ** |
| 5 to 10  years                                                       | ** ** | **2,309**                  | ** ** | **4.34**                                   | ** ** |
| Total                                                                | ** ** | **$**                      | **22,297** | ** **                                 | **3.06**   | **%** |
|                                                                 |       |                       |       |                                       |       |
| Mortgage-backed  securities and collateralized mortgage obligations: |       |                       |       |                                       |       |
| 0 to 1 year                                                          | ** ** | **$**                      | **32**     | ** **                                 | **3.18**   | **%** |
| 1 to 5 years                                                         | ** ** | **10****,792**             | ** ** | **3.88**                                   | ** ** |
| 5 to 10  years                                                       | ** ** | **5,024**                  | ** ** | **2.70**                                   | ** ** |
| Over 10  years                                                       | ** ** | **999**                    | ** ** | **3.36**                                   | ** ** |
| Total                                                                | ** ** | **$**                      | **16,847** | ** **                                 | **3.50**   | **%** |
|                                                                 |       |                       |       |                                       |       |
| States of  the U.S. and political subdivisions:                      |       |                       |       |                                       |       |
| 0 to 1 year                                                          | ** ** | **$**                      | **855**    | ** **                                 | **5.96**   | **%** |
| 1 to 5 years                                                         | ** ** | **5,130**                  | ** ** | **7.89**                                   | ** ** |
| 5 to 10  years                                                       | ** ** | **5,343**                  | ** ** | **8.18**                                   | ** ** |
| Over 10  years                                                       | ** ** | **4,683**                  | ** ** | **7.95**                                   | ** ** |
| Total                                                                | ** ** | **$**                      | **16,011** | ** **                                 | **7.90**   | **%** |
|                                                                 |       |                       |       |                                       |       |
| Other equity  securities, no stated maturity                         | ** ** | **$**                      | **13**     |                                       | —     |   |
|                                                                 | ** ** | ** **                 |       |                                       |       |
| Total  securities:                                                   |       |                       |       |                                       |       |
| 0 to 1 year                                                          | ** ** | **$**                      | **2,079**  | ** **                                 | **2.66**   | **%** |
| 1 to 5 years                                                         | ** ** | **35,711**                 | ** ** | **4.00**                                   | ** ** |
| 5 to 10  years                                                       | ** ** | **12,676**                 | ** ** | **5.31**                                   | ** ** |
| Over 10  years                                                       | ** ** | **5,682**                  | ** ** | **7.14**                                   | ** ** |
| No stated  maturity                                                  | ** ** | **13**                     | ** ** | **—**                                 | ** ** |
| Total                                                                | ** ** | **$**                      | **56,161** | ** **                                 | **4.56**   | **%** |

 

•      ***Loans***

 

The Corporation’s loan portfolio consists ofa diverse variety of loan types within the following major categories:commercial real estate, residential real estate, consumer, commercial, andagricultural loans.

 

Net loans, including loans held for sale,decreased $29.9 million from $186.1 million as of December 31, 2003 to$156.2 million as of December 31, 2004. Average total loans decreased $24.2 million from $197.6 million in 2003to $173.4 million in 2004.  This decreaseis reflective of management’s efforts during the course of 2004 to eliminatecertain loan relationships and reduce the concentration of credits in thecommercial real estate sector.

 

The largest decrease was in commercial realestate loans, where the average balance decreased $6.7 million

 

11

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to $90.0 million in 2004. Residential real estate loans decreased $6.4million on average to $29.0 million.

 

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

 

Each major type of loan will normally havedifferent risk elements.  Real estateloans and installment loans to individuals can be affected by the generalstrength 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 31,2004 and 2003 is set forth in “Item 7. Financial Statements—Note 3”, which isincorporated by reference herein.

 

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

 

A significant portion,$66.0 million (41.5%), of Illini and Camp Point’s loan portfolios reprice ormature within one year, while $136.0 million (85.5%), of the loan portfoliosreprice or mature within five years.  Therelatively short duration of the loan portfolios requires diligence on the partof management to replace and/or renew maturing loans more frequently.  However, it benefits Illini and Camp Point bydecreasing their susceptibility to rising interest rates and by allowing managementmore frequent opportunities to reassess and adjust loan agreements withborrowers and to exit deteriorating loan relationships.  A total of 60.7% of commercial, financial,and agricultural loans mature within one 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 | ** ** | **$**                      | **20,750** | ** ** | **$** | **12,172** | ** ** | **$** | **1,289** | ** ** | **$** | **34,211** | ** ** |
| Real estate  construction                | ** ** | **4,281**                  | ** ** | **4,745** | ** ** | **205** | ** ** | **9,231** | ** ** |
| ** **                               | ** ** | **$**                      | **25,031** | ** ** | **$** | **16,917** | ** ** | **$** | **1,494** | ** ** | **$** | **43,442** |   |

 
| ** **                                 | ** ** | **Interest  Sensitivity**  | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Fixed  interest  rates** | ** ** | **Floating or  adjustable  interest rates** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Loans due  after one but within five years | ** ** | **$**                      | **9,205**  | ** ** | **$** | **7,712** | ** ** | **$** | **16,917** | ** ** |
| Loans due  after five years                | ** ** | **691**                    | ** ** | **803** | ** ** | **1,494** | ** ** |
| ** **                                 | ** ** | **$**                      | **9,896**  | ** ** | **$** | **8,515** | ** ** | **$** | **18,411** |   |

 

# ***Deposits***

# *** ***

Average deposits decreased $30.0 million, or12.7%, to $206.4 million in 2004.  Illiniand Camp Point’s overall cost of funds related to deposits decreased 61 basispoints to 1.58% in 2004 due to the declining interest rate environment.  From December 31, 2003 to December 31,2004 noninterest bearing demand deposits increased by $3.2 million to $37.6million and savings deposits increased by $0.5 million

 

12

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to $21.9 million, while decreases were seen in time deposits, down$29.9 million to $81.4 million and in NOW and Money Market accounts, down $1.7million to $57.8 million.  Total depositsdecreased $27.9 million, or 12.3%, to $198.7 million at December 31, 2004.

 
| ** **                             | ** ** | **Aver****age  Balances of Deposits and  Cost of Funds** | ** **  |
|----------------------------------------|------------|----------------------------------------------------------|-------------|
| ** **                             | ** ** | **2004  Average**                                        | ** **  | **2003  Average** | ** ** |
| ** **                             | ** ** | **Balance**                                              | ** **  | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)**                               | ** **  |
| Noninterest  bearing demand deposits   | ** ** | **$**                                                    | **34,270**  | ** ** | **—** |   | $ | 32,198 |   | — |   |
| NOW and  money market deposit accounts | ** ** | **58,048**                                               | ** **  | **0.90** | **%** | 58,108 |   | 0.97 | % |
| Savings  deposits                      | ** ** | **22,046**                                               | ** **  | **0.60** |   | 21,407 |   | 0.73 |   |
| Time  deposits                         | ** ** | **91,982**                                               | ** **  | **2.83** |   | 124,646 |   | 3.57 |   |
| ** **                             | ** ** | **$**                                                    | **206,346** | ** ** | **1.58** | **%** | $ | 236,359 |   | 2.19 | % |
|                                        |            |                                                          |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **            | ** ** | **Maturity of Time Deposits  Greater Than $100,000  At December 31, 2004** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **            | ** ** | **Time  Certificates  of Deposit**                                              | ** ** |
| ** **            | ** ** | **(dollars in thousands)**                                                      | ** ** |
| Three months  or less | ** ** | **$**                                                                           | **950**    | ** ** |
| Three to six  months  | ** ** | **1,825**                                                                       | ** ** |
| Six to  twelve months | ** ** | **6,479**                                                                       | ** ** |
| Over twelve  months   | ** ** | **3,955**                                                                       | ** ** |
| ** **            |       | **$**                                                                           | **13,209** | ** ** |

 

•      ***Critical Accounting Policies***

 

The accounting and reporting policies of theCorporation are in accordance with U.S. generally accepted accountingprinciples and conform to general practices within the banking industry. TheCorporation’s significant accounting policies are described in detail in thenotes to the Corporation’s consolidated financial statements for the year endedDecember 31, 2004. The preparation of financial statements in conformitywith U.S. 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.

 

Allowance for Loan Losses - The allowance for loanlosses provides coverage for probable incurred losses in the Corporation’s loanportfolio. Management evaluates the adequacy of the allowance for credit losseseach quarter based on changes, if any, in underwriting activities, the loanportfolio composition (including product mix and geographic, industry orcustomer-specific concentrations), trends in loan performance, regulatoryguidance and economic factors. This evaluation is inherently subjective, as itrequires the use of significant management estimates. Many factors can affectmanagement’s estimates of specific and expected losses, including volatility ofdefault probabilities, rating migrations, loss severity and economic andpolitical conditions. The allowance is increased through provisions charged tooperating

 

13

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earnings and reduced by net 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 credit relationshipsand an analysis of the migration of commercial loans and actual lossexperience. The allowance recorded for homogeneous consumer loans is based onan analysis of loan mix, risk characteristics of the portfolio, fraud loss andbankruptcy experiences, and historical losses, adjusted for current trends, foreach homogeneous category or group of loans. The allowance for loan lossesrelating to impaired loans is based on the collateral for certaincollateral-dependent loans, or the discounted cash flows using the loan’seffective interest rate.

 

Regardless of the extent of the Corporation’s analysisof customer performance, portfolio trends or risk management processes, certainundetected losses are probable within the loan portfolio. This is due to severalfactors, including delays in obtaining information regarding a customer’sfinancial condition or changes in their unique business conditions, thejudgmental nature of individual loan evaluations, collateral assessments andthe interpretation of economic trends. Volatility of economic orcustomer-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 losses related to the existence of theseexposures. The estimates are based upon the Corporation’s evaluation ofimprecision risk associated with the commercial and consumer allowance levelsand the estimated impact of the current economic environment.

 

Other Real Estate Owned (“OREO”) - OREO is recorded onan individual asset basis at the lower of fair value less estimated disposalcosts or cost.  The Corporation obtainsthird party appraisals on these properties and if the fair value declinessubsequent to foreclosure the deficiency is recorded as a direct writedown orvaluation allowance which is recorded through expense.

 

# ***•***      Liquidity

 

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

 

The Corporation requires adequate liquidityto pay its expenses and pay stockholder dividends.  Liquidity is provided to the Corporation inthe form of dividends from the subsidiary banks.  Dividends from Illini totaled $0.7 million in2004, compared to $1.9 million in 2003. In 2004, dividends from Camp Point totaled $0.3 million, compared to$0.2 million in 2003.  Illini and CampPoint’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, 2004, $3.3 million was availablefor payment to the Corporation in the form of dividends from Illini with priorregulatory approval and $636,000 from Camp Point without prior regulatoryapproval.

 

Cash and cash equivalents, which includefederal funds sold and interest bearing deposits with banks, decreased $4.3million to $11.6 million at December 31, 2004, compared to $15.9 millionat December 31, 2003.

 

The asset portion of the balance sheetprovides liquidity primarily through loan principal repayments, maturities ofinvestment securities, the sale of available for sale investment securities,and the sale of 1-4 family mortgage loans to the secondary mortgage market throughthe Federal National Mortgage Association.

 

The liability portion of the balance sheetprovides liquidity through federal funds purchased, securities sold underagreements to repurchase, other short-term debt, and long-term debt.  Illini is also a member of the Federal HomeLoan Bank of Chicago (“FHLB”) and can borrow up to $11.2 million.  As of December 31, 2004, Illini hadadvances through the FHLB of $2.0 million maturing in 2005 and $9.0 millionmaturing in 2006.  The Corporation alsohad a note payable in the amount of $2.3 million, maturing in 2005.  The note was paid in full on February 17,2005 from proceeds from private placement of securities as discussed in note16.

 

14

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•      ***Capital Resources***

 

Total shareholders’ equity decreased to $13.4million at December 31, 2004 from $15.0 million at December 31,2003.  The decline of $1.6 million wascomprised of a net loss of $1.2 million, a decrease in accumulated othercomprehensive income of $0.2 million and dividends paid of $0.2 million.  The primary source of capital of theCorporation is retained earnings.  Cashdividends per share were $0.56 for 2004 and $1.00 for 2003.

 

The capital issupplemented by a preferred security issued by the trust subsidiary, IlliniStatutory Trust I (“IST”), which was completed February 22, 2001.  Twenty Five (25) percent of the Tier Icapital ratio can be comprised of the trust preferred issue.

 

The capital is furthersupplemented by the proceeds from the sale of 126,500 shares of common stock ofthe Corporation to a limited number of accredited investors.  Gross proceeds of $4,174,500 from the salewere used as follows:  $2.3 million toretire the Marine Bank loan; $1.0 million sent to Illini as a capital infusion;and the balance retained for general corporate purposes.

 

Regulatory guidelines require bank holdingcompanies, commercial banks, and thrifts to maintain certain minimum ratios anddefine companies as “well capitalized” that sufficiently exceed the minimumratios.  The banking regulators may alterminimum 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, 2004 were 8.68%, 11.17%, and 12.42%,respectively, which meet the criteria for “well capitalized.” Camp Point’sratios as of December 31, 2004 were 8.87%, 16.49%, and 17.74%,respectively, which meet the criteria for “well capitalized.”  The Corporation’s ratios as of December 31,2004 were 6.20%, 8.37%, and 12.35%, respectively, which meets the criteria for “wellcapitalized”.

 

In May of 2004, Illini entered into amemorandum of understanding with the FDIC and the Illinois DFPR.  The memorandum of understanding requiresprior regulatory approval for payment of dividends by Illini to the Corporation.  In July of 2004, the Corporationapproved a resolution requested by the Federal Reserve Bank of Chicago thatincludes restrictions similar to those contained in the above referencedmemorandum of understanding.

 

As of December 31, 2004, management isnot aware of any current recommendations by banking regulatory authorities,which if they were to be implemented, would have or are reasonably likely tohave a material adverse impact on the Corporation’s liquidity, capitalresources, or operations.

 

**RESULTS OF OPERATIONS**

 
| ** **                              | ** ** | **Key Ratios  For the years ended December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Return on  average assets               | ** ** | **(0.50**                                             | **)%**     | 0.22 | % | 0.54 | % | 0.49 | % | 0.75 | % |
| Return on  average equity               | ** ** | **(8.83**                                             | **)**      | 3.83 |   | 10.83 |   | 8.00 |   | 9.42 |   |
| Dividend  payout ratio                  | ** ** | **n/m**                                               |       | 69.24 |   | 27.05 |   | 37.88 |   | 33.74 |   |
| Average  equity to average assets ratio | ** ** | **5.****63**                                          |       | 5.69 |   | 4.98 |   | 6.16 |   | 7.92 |   |

 

----

n/m – not meaningful

 

•      ***Net Interest Income***

 

Net interest income isthe principal component of the Corporation’s net income stream and representsthe difference between interest and fee income generated from earning assetsand interest expense paid on deposits and borrowed funds.  Fluctuations in interest rates, as well asvolume and mix changes in earning

 

15

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assets and interest bearing liabilities, canmaterially impact net interest income. The discussion of net interest income is presented on a taxableequivalent basis to facilitate performance comparisons among various taxableand tax-exempt assets.

 

Interest income declined by $2.0 million from2003 to 2004, while interest expense declined by $1.9 million for the sameperiod, resulting in a net decrease in net interest income of $0.1million.  Although interest earningassets and interest bearing liabilities were both down in 2004, the Corporationwas able to improve its net interest margin by 39 basis points, to 3.92% for2004 compared to 3.53% for 2003.  Whilethe investment and loan portfolios both experienced a reduction in yields from year-end2003 to year-end 2004 of 53 basis points and 18 basis points, respectively, thecost of interest bearing liabilities decreased by 56 basis points for the sameperiod, causing an overall positive impact on the net interest margin.

 

During the second half of2004, the Federal Reserve System began to gradually increase the overnightborrowing rate between banks.  Banksadjusted their prime lending rates upward in synch with the Federal Reserve’sincreases.  The Corporation’s loans thatare priced against the prime rate repriced upward with the rate increases,positively impacting the Corporation’s net interest margin.

 

The $1.9 million decreasein interest expense was primarily attributable to a $1.9 million decline intime deposit interest expense.  Averageinterest bearing liabilities decreased $28.0 million, while the overall cost offunds decreased 56 basis points.

 

**Net Interest Income - Rate/Volume VarianceAnalysis**

 
| ** **                                    | ** ** | **2004-03**                    | ** ** | **2003-02**        | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **Changes in  Income/Expense** | ** ** | **Volume  Effect** | ** ** | **Rate  Effect** | ** ** | **Changes in  Income/Expense** | ** ** | **Volume  Effect** | ** ** | **Rate  Effect** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**     | ** ** |
|                                          |       |                           |       |               |       |   |   |   |   |   |   |   |   |
| Short-term  investments                       | ** ** | **$**                          | **(47**    | **)**              | **$**      | **(61** | **)** | **$** | **14** |   | $ | 23 |   | $ | 95 |   | $ | (72 | ) |
| Investment  securities:                       |       |                           |       |               |       |   |   |   |   |   |   |   |   |
| Taxable                                       | ** ** | **144**                        | ** ** | **181**            | ** ** | **(37** | **)** | (597 | ) | (190 | ) | (407 | ) |
| Nontaxable  (*)                               | ** ** | **(179**                       | **)**      | **(85**            | **)**      | **(94** | **)** | 44 |   | 38 |   | 6 |   |
| Loans (*)                                     | ** ** | **(1,912**                     | **)**      | **(1,632**         | **)**      | **(280** | **)** | (2,688 | ) | (1,057 | ) | (1,631 | ) |
| Total  interest income                        | ** ** | **$**                          | **(1,994** | **)**              | **$**      | **(1,597** | **)** | **$** | **(397** | **)** | $ | (3,218 | ) | $ | (1,114 | ) | $ | (2,104 | ) |
| Savings and  interest bearing demand accounts | ** ** | **(62**                        | **)**      | **4**              | ** ** | **(66** | **)** | (587 | ) | 9 |   | (596 | ) |
| Time  deposits                                | ** ** | **(1,857**                     | **)**      | **(1,165**         | **)**      | **(692** | **)** | (1,034 | ) | (400 | ) | (634 | ) |
| Short-term  debt                              | ** ** | **2**                          | ** ** | **10**             | ** ** | **(8** | **)** | (12 | ) | (13 | ) | 1 |   |
| Long-term  debt                               | ** ** | **4**                          | ** ** | **156**            | ** ** | **(152** | **)** | (43 | ) | 46 |   | (89 | ) |
| Subordinated  debentures                      |       | **—**                     | ** ** | **—**         | ** ** | **—** | ** ** | 7 |   | — |   | 7 |   |
| Total interest  expense                       | ** ** | **$**                          | **(1,913** | **)**              | **$**      | **(995** | **)** | **$** | **(918** | **)** | $ | (1,669 | ) | $ | (358 | ) | $ | (1,311 | ) |
|                                          | ** ** | ** **                     | ** ** | ** **         | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Net interest  income                          | ** ** | **$**                          | **(81**    | **)**              | **$**      | **(602** | **)** | **$** | **521** | ** ** | $ | (1,549 | ) | $ | (756 | ) | $ | (793 | ) |
|                                               |            |                                |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(*) Fully taxable equivalent basis using the federal statutory rate of34% for all years presented. NOTE:  Thechange in interest, which cannot be attributed to only a change in volume or achange in rate, but instead represents a combination of the two factors, hasbeen allocated to the rate effect.

 

16

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

 
| ** **                                           | ** ** | **Year ended December 31,** | ** **  |
|------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                           | ** ** | **2004**                         | ** **  | **2003** | ** ** |
| ** **                                           | ** ** | **Average  Balance**             | ** **  | **Percent  of Total  Assets** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Percent  of Total  Assets** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**       | ** **  |
| **ASSETS**                                           | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets:                            |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                              | ** ** | **$**                            | **7,876**   | ** ** | **3.2** | **%** | **$** | **94** | ** ** | **1.19** | **%** | $ | 13,874 |   | 5.1 | % | $ | 141 |   | 1.02 | % |
| Investment  securities (3)                           |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              | ** ** | **30,941**                       | ** **  | **12.6** | ** ** | **1,127** | ** ** | **3.64** |   | 26,125 |   | 9.6 |   | 983 |   | 3.76 |   |
| Tax-exempt  (1)                                      | ** ** | **14,109**                       | ** **  | **5.7** | ** ** | **1,088** | ** ** | **7.71** |   | 15,125 |   | 5.5 |   | 1,267 |   | 8.37 |   |
| Total  securities                                    | ** ** | **45,050**                       | ** **  | **18.3** | ** ** | **2,215** | ** ** | **4.92** |   | 41,250 |   | 15.1 |   | 2,250 |   | 5.45 |   |
| Loans                                                |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  (1)                                      | ** ** | **31,467**                       | ** **  | **12.8** | ** ** | **1,918** | ** ** | **6.09** |   | 36,943 |   | 13.5 |   | 2,386 |   | 6.46 |   |
| Agriculture                                          | ** ** | **12,181**                       | ** **  | **5.0** | ** ** | **625** | ** ** | **5.13** |   | 14,632 |   | 5.3 |   | 797 |   | 5.45 |   |
| Real estate                                          |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           | ** ** | **89,991**                       | ** **  | **36.6** | ** ** | **5,883** | ** ** | **6.54** |   | 96,672 |   | 35.4 |   | 6,220 |   | 6.43 |   |
| Agriculture                                          | ** ** | **5,626**                        | ** **  | **2.3** | ** ** | **397** | ** ** | **7.06** |   | 5,888 |   | 2.2 |   | 450 |   | 7.63 |   |
| Residential                                          | ** ** | **28,977**                       | ** **  | **11.8** | ** ** | **1,775** | ** ** | **6.12** |   | 35,409 |   | 13.0 |   | 2,353 |   | 6.65 |   |
| Consumer,  net                                       | ** ** | **4,533**                        | ** **  | **1.8** | ** ** | **378** | ** ** | **8.34** |   | 7,325 |   | 2.7 |   | 653 |   | 8.92 |   |
| Credit card                                          | ** ** | **656**                          | ** **  | **0.3** | ** ** | **104** | ** ** | **15.84** |   | 759 |   | 0.3 |   | 133 |   | 17.50 |   |
| Total loans                                          | ** ** | **173,431**                      | ** **  | **70.6** | ** ** | **11,080** | ** ** | **6.39** |   | 197,628 |   | 72.4 |   | 12,992 |   | 6.57 |   |
| Allowance  for loan losses                           | ** ** | **(2,568**                       | **)**       | **(1.0** | **)** |   |   |   |   | (2,149 | ) | (0.8 | ) |   |   |   |   |
| Net loans  (1) (2)                                   | ** ** | **170,863**                      | ** **  | **69.6** | ** ** | **11,080** | ** ** | **6.48** |   | 195,479 |   | 71.6 |   | 12,992 |   | 6.65 |   |
| Total  interest earning assets                       | ** ** | **223,789**                      | ** **  | **91.1** | ** ** | **13,389** | ** ** | **5.98** |   | 250,603 |   | 91.8 |   | 15,383 |   | 6.14 |   |
| Cash and due  from banks                             | ** ** | **6,091**                        | ** **  | **2.5** |   |   |   |   |   | 5,806 |   | 2.1 |   |   |   |   |   |
| Premises and  equipment                              | ** ** | **6,198**                        | ** **  | **2.5** |   |   |   |   |   | 6,521 |   | 2.4 |   |   |   |   |   |
| Other real  estate owned                             | ** ** | **3,185**                        | ** **  | **1.3** |   |   |   |   |   | 3,218 |   | 1.2 |   |   |   |   |   |
| Other assets  (3)                                    | ** ** | **6,466**                        | ** **  | **2.6** |   |   |   |   |   | 6,872 |   | 2.5 |   |   |   |   |   |
| **Total  assets**                                    | ** ** | **$**                            | **245,729** | ** ** | **100.0** | **%** |   |   |   |   | $ | 273,020 |   | 100.0 | % |   |   |   |   |
|                                                 |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                      |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |       |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest  bearing deposits                        | ** ** | **$**                            | **34,270**  | ** ** | **14.0** | **%** |   |   |   |   | 32,198 |   | 11.8 | % |   |   |   |   |
| Interest  bearing demand                             | ** ** | **58,048**                       | ** **  | **23.6** | ** ** | **$** | **524** | ** ** | **0.90** | **%** | 58,108 |   | 21.3 |   | $ | 562 |   | 0.97 | % |
| Savings                                              | ** ** | **22,046**                       | ** **  | **9.0** | ** ** | **132** | ** ** | **0.60** |   | 21,407 |   | 7.8 |   | 156 |   | 0.73 |   |
| Time  deposits less than $100,000                    | ** ** | **77,511**                       | ** **  | **31.5** | ** ** | **2,172** | ** ** | **2.80** |   | 102,921 |   | 37.7 |   | 3,707 |   | 3.60 |   |
| Total core  deposits                                 | ** ** | **191,875**                      | ** **  | **78.1** | ** ** | **2,828** | ** ** | **1.47** |   | 214,634 |   | 78.6 |   | 4,425 |   | 2.06 |   |
| Time  deposits $100,000 and over                     | ** ** | **14,471**                       | ** **  | **5.9** | ** ** | **427** | ** ** | **2.95** |   | 21,725 |   | 8.0 |   | 749 |   | 3.45 |   |
| Total  deposits                                      | ** ** | **206,346**                      | ** **  | **84.0** | ** ** | **3,255** | ** ** | **1.58** |   | 236,359 |   | 86.6 |   | 5,174 |   | 2.19 |   |
| Short-term  debt                                     | ** ** | **1,029**                        | ** **  | **0.4** | ** ** | **20** | ** ** | **1.97** |   | 660 |   | 0.2 |   | 18 |   | 2.76 |   |
| Long-term  debt                                      | ** ** | **12,988**                       | ** **  | **5.3** | ** ** | **397** | ** ** | **3.05** |   | 9,305 |   | 3.4 |   | 393 |   | 4.23 |   |
| Subordinated  debentures (4)                         | ** ** | **9,000**                        | ** **  | **3.7** | ** ** | **947** | ** ** | **10.52** |   | 9,000 |   | 3.3 |   | 947 |   | 10.52 |   |
| Total  interest bearing liabilities                  | ** ** | **195,093**                      | ** **  | **79.4** | ** ** | **4,619** | ** ** | **2.37** |   | 223,126 |   | 81.7 |   | 6,532 |   | 2.93 |   |
| Other  liabilities                                   | ** ** | **2,539**                        | ** **  | **1.0** |   |   |   |   |   | 2,157 |   | 0.8 |   |   |   |   |   |
| Total  liabilities                                   | ** ** | **231,902**                      | ** **  | **94.4** |   |   |   |   |   | 257,481 |   | 94.3 |   |   |   |   |   |
| Shareholders’  Equity                           | ** ** | **13,827**                       | ** **  | **5.6** |   |   |   |   |   | 15,539 |   | 5.7 |   |   |   |   |   |
| **Total  liabilities and shareholders’ equity** | ** ** | **$**                            | **245,729** | ** ** | **100.0** | **%** |   |   |   |   | $ | 273,020 |   | 100.0 | % |   |   |   |   |
| **Net interest  margin**                             | ** ** | ** **                       | ** **  | ** ** |   | **$** | **8,770** |   | **3.92** | **%** |   |   |   |   | $ | 8,851 |   | 3.53 | % |
|                                                      |            |                                  |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(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 $360,000 in 2004 and$406,000 in 2003.

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

(4)   Theaverage balance for the Corporation is based on a monthly average balanceversus a daily average balance.

 

17

----

 

**Consolidated Average Balances, InterestIncome/Expense and Yield/Rates**

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2002**                         | ** ** |
| ** **                                           | ** ** | **Average  Balance**             | ** ** | **Percent  of Total  Assets** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**       | ** ** |
| **ASSETS**                                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets:                            |       |                             |       |   |   |   |   |   |   |
| Short-term  investments                              |       | $                                | 7,698      |   | 2.7 | % | $ | 118 |   | 1.54 | % |
| Investment  securities (3)                           |       |                             |       |   |   |   |   |   |   |
| Taxable                                              |       | 29,698                           |       | 10.5 |   | 1,580 |   | 5.32 |   |
| Tax-exempt  (1)                                      |       | 14,671                           |       | 5.2 |   | 1,223 |   | 8.34 |   |
| Total  securities                                    |       | 44,369                           |       | 15.7 |   | 2,803 |   | 6.32 |   |
| Loans                                                |       |                             |       |   |   |   |   |   |   |
| Commercial  (1)                                      |       | 44,989                           |       | 16.0 |   | 3,199 |   | 7.11 |   |
| Agriculture                                          |       | 15,800                           |       | 5.6 |   | 1,012 |   | 6.40 |   |
| Real estate                                          |       |                             |       |   |   |   |   |   |   |
| Commercial                                           |       | 100,104                          |       | 35.5 |   | 7,378 |   | 7.37 |   |
| Agriculture                                          |       | 6,604                            |       | 2.3 |   | 520 |   | 7.88 |   |
| Residential                                          |       | 31,677                           |       | 11.2 |   | 2,411 |   | 7.61 |   |
| Consumer,  net                                       |       | 11,526                           |       | 4.1 |   | 1,019 |   | 8.84 |   |
| Credit card                                          |       | 839                              |       | 0.3 |   | 141 |   | 16.86 |   |
| Total loans                                          |       | 211,539                          |       | 75.0 |   | 15,680 |   | 7.41 |   |
| Allowance  for loan losses                           |       | (2,226                           | )          | (0.8 | ) |   |   |   |   |
| Net loans  (1) (2)                                   |       | 209,313                          |       | 74.2 |   | 15,680 |   | 7.49 |   |
| Total  interest earning assets                       |       | 261,380                          |       | 92.6 |   | 18,601 |   | 7.12 |   |
| Cash and due  from banks                             |       | 5,899                            |       | 2.1 |   |   |   |   |   |
| Premises and  equipment                              |       | 6,940                            |       | 2.5 |   |   |   |   |   |
| Other real  estate owned                             |       | 753                              |       | 0.3 |   |   |   |   |   |
| Other assets  (3)                                    |       | 7,183                            |       | 2.5 |   |   |   |   |   |
| **Total  assets**                                    |       | $                                | 282,155    |   | 100.0 | % |   |   |   |   |
|                                                 |       |                             |       |   |   |   |   |   |   |
| **LIABILITIES**                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                                            |       |                             |       |   |   |   |   |   |   |
| Noninterest  bearing deposits                        |       | $                                | 32,189     |   | 11.4 | % |   |   |   |   |
| Interest  bearing demand                             |       | 58,983                           |       | 20.9 |   | $ | 1,044 |   | 1.77 | % |
| Savings                                              |       | 19,608                           |       | 6.9 |   | 261 |   | 1.33 |   |
| Time  deposits less than $100,000                    |       | 109,594                          |       | 38.8 |   | 4,444 |   | 4.06 |   |
| Total core  deposits                                 |       | 220,374                          |       | 78.0 |   | 5,749 |   | 2.61 |   |
| Time  deposits $100,000 and over                     |       | 24,793                           |       | 8.8 |   | 1,046 |   | 4.22 |   |
| Total  deposits                                      |       | 245,167                          |       | 86.8 |   | 6,795 |   | 2.77 |   |
| Short-term  debt                                     |       | 1,135                            |       | 0.4 |   | 30 |   | 2.67 |   |
| Long-term  debt                                      |       | 8,410                            |       | 3.0 |   | 436 |   | 5.19 |   |
| Subordinated  debentures (4)                         |       | 9,000                            |       | 3.2 |   | 940 |   | 10.44 |   |
| Total  interest bearing liabilities                  |       | 231,523                          |       | 82.0 |   | 8,201 |   | 3.54 |   |
| Other  liabilities                                   |       | 4,389                            |       | 1.6 |   |   |   |   |   |
| Total  liabilities                                   |       | 268,101                          |       | 95.0 |   |   |   |   |   |
| Shareholders’  Equity                           |       | 14,054                           |       | 5.0 |   |   |   |   |   |
| **Total  liabilities and shareholders’ equity** |       | $                                | 282,155    |   | 100.0 | % |   |   |   |   |
| **Net  interest margin**                             |       |                             |       |   |   | $ | 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 $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)   Theaverage balance for the Corporation is based on a monthly average balanceversus a daily average balance.

 

18

----

 

•      ***Provision for Loan Losses, Net Charge-Offs andAllowance for Loan Losses***

 

The provision for loan losses charged toearnings was $1,395,000 for 2004, an increase of $314,000, or 29.1%, from the$1,081,000 in 2003.  During 2002, the provisionfor loan losses was $760,000.  The ratioof net charge-offs to average loans outstanding has increased from 0.19% to0.60% to 0.77% for the years ended December 31, 2002, 2003 and 2004,respectively.  The provision for loanloss expense increased to $1,395,000 for 2004 from $1,081,000 for 2003, asIllini implemented a more stringent program to evaluate the risks present inIllini’s loan portfolio.  Nonaccrualloans decreased to $2,711,000 at December 31, 2004, compared to $5,505,000at December 31, 2003.

 

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

 

•      Historical dataand trends relating to net charge-offs, delinquency rates, average outstandingloans, 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;

•      Results ofcontinuing reviews of individual higher risk loans by management personnel;

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

•      The resultsfrom loan reviews performed by an independent third party.

 

The allowance for loan losses as a percent oftotal loans, including loans held for sale, increased from 1.25% at December 31,2003, to 1.52% at December 31, 2004. Excluding loans held for sale, the ratio was 1.36% and 1.52%,respectively, for the same periods. During the first quarter of 2004, Illini charged off impaired loanstotaling $909,000.  As a consequence ofthese charge-offs, as well as an increase in impaired loans and an increase inclassified assets as a result of improved reporting systems (credit quality andproduction), management determined to record a provision of $1,390,000 toIllini’s allowance for loan losses during the first quarter of 2004.  During the third quarter of 2004, loans inthe amount of $180,000 were charged off. There was also an increase in impaired loans from $9.2 million as of June 30,2004 to $10.4 million as of September 30, 2004.  Based on these factors, management determinedit appropriate to record a provision of $212,000 to Illini’s allowance for loanlosses.  During the fourth quarter of2004, one large loan for which Illini had made specific provisions of $300,000was paid in full.  Based on the payoff ofthis credit, along with the status of remaining loans reviewed in Illini’sevaluation of potential loan losses, management determined it appropriate tolower the allowance for loan loss account. Consequently, the provision for loan losses was reduced in the fourthquarter by $207,000, resulting in a net provision for loan losses in 2004 of$1,395,000.

 

19

----

 

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

 

The following summary presents the changes inthe allowance for loan losses for the years ended December 31, 2004, 2003,and 2002:

 
| ** **                                                               | ** ** | **2004**                    | ** **  | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|-------------|------------|------------|------------|------------|
| ** **                                                               | ** ** | **(dollars in thousands )** | ** **  |
|                                                                     |       |                        |        |       |       |       |       |
| Average  loans outstanding                                               | ** ** | **$**                       | **173,431** |       | $          | 197,628    |       | $ | 211,539 |   |
|                                                                     |       |                        | ** **  |       |       |       |       |
| Allowance  for loan losses:                                              | ** ** | ** **                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year                                            | ** ** | **$**                       | **2,359**   | ** ** | $          | 2,468      |       | $ | 2,103 |   |
| Loans  charged-off:                                                      |       |                        | ** **  |       |       |       |       |
| Commercial,  financial, and agricultural                                 | ** ** | **(348**                    | **)**       | (737       | )          | (157       | )          |
| Real estate                                                              | ** ** | **(986**                    | **)**       | (382       | )          | (246       | )          |
| Consumer                                                                 | ** ** | **(151**                    | **)**       | (148       | )          | (108       | )          |
| Total                                                                    | ** ** | **(1,485**                  | **)**       | (1,267     | )          | (511       | )          |
| Recoveries  of loans previously charged-off:                             |       |                        | ** **  |       |       |       |       |
| Commercial,  financial, and agricultural                                 | ** ** | **69**                      | ** **  | 60         |       | 11         |       |
| Real estate                                                              | ** ** | **55**                      | ** **  | 3          |       | 89         |       |
| Consumer                                                                 | ** ** | **19**                      | ** **  | 14         |       | 16         |       |
| Total                                                                    | ** ** | **143**                     | ** **  | 77         |       | 116        |       |
| Net  charge-offs                                                         | ** ** | **(1,342**                  | **)**       | (1,190     | )          | (395       | )          |
| Provision  charged to expense                                            | ** ** | **1,395**                   | ** **  | 1,081      |       | 760        |       |
| Balance at  end of year                                                  | ** ** | **$**                       | **2,412**   | ** ** | $          | 2,359      |       | $ | 2,468 |   |
|                                                                     |       |                        | ** **  |       |       |       |       |
| Ratio of net  charge-offs to average loans outstanding during the period | ** ** | **0.77**                    | **%**       | 0.60       | %          | 0.19       | %     |
|                                                                          |            |                             |             |            |            |            |            |  |  |  |  |  |

 

In 2004, asillustrated in the preceding chart, loan losses increased in the real estateand consumer areas of the portfolio, compared to loan losses incurred in 2003and 2002, while losses on commercial, financial, and agricultural were downfrom 2003 but above levels reported in 2002. Management remains committed to improving the quality of the loanportfolio through enhanced credit approval systems and active identification ofweak or deteriorating customer relationships.

 

***•******      AllowanceAllocation***

 

The risk of losses in the loan portfolio isnot precisely 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, 2003 through December 31,2004.  The change in allocation among thevarious loan categories related primarily to an increase in the specific allowanceallocation due to individual credit exposure as identified by management.  Based on its review for adequacy, managementhas estimated those portions of the allowance that could be attributable tomajor categories of loans as follows:

 

20

----

 
| ** **                              | ** ** | **2004**                   | ** ** | **2003**              | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Amount**                 | ** ** | **% of Total  Loans** | ** ** | **Amount** | ** ** | **% of Total  Loans** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
|                                    |       |                       |       |                  |       |   |   |   |   |
| Commercial,  financial, and agriculture | ** ** | **$**                      | **1,100**  | ** **            | **21.57**  | **%** | $ | 1,471 |   | 29.05 | % |
| Real estate                             | ** ** | **1,246**                  | ** ** | **75.79**             | ** ** | 806 |   | 67.39 |   |
| Consumer                                | ** ** | **66**                     | ** ** | **2.64**              | ** ** | 82 |   | 3.56 |   |
| Total  allowance for loan losses        | ** ** | **$**                      | **2,412**  | ** **            | **100.00** | **%** | $ | 2,359 |   | 100.00 | % |

 

These allocationestimates do not specifically represent that loan charge-offs of that magnitudewill be incurred, nor do these allocations restrict future loan lossesattributable to a particular category from being absorbed by the allowanceattributable to other categories.  Therisk factors considered when estimating the allocations for major loancategories are the same as the factors considered when determining the adequacyof the overall allowance as specified in the allowance summary.

 

**•****      *Nonperforming Assets***

 

Nonperforming assets consist of loans greaterthan 90 days past due, which are primarily commercial and commercial real estateloans on nonaccrual status, and other real estate owned.  Loans are generally classified as nonaccrualwhen there are reasonable doubts as to the collectibility of principal andinterest or when payment becomes 90 days past due, except loans which are wellsecured and in the process of collection. Interest collection on nonaccrual loans for which the ultimatecollectibility of principal is uncertain is applied as principal reduction.  Otherwise, such collections are applied tointerest when received.  If a loan isimpaired, a portion of the allowance is allocated so that the loan is reported,net, at the present value of estimated future cash flows using the loan’sexisting rate or at the fair value of collateral if repayment is expectedsolely from the collateral.  Thefollowing table presents information concerning the aggregate amount ofnonperforming assets.
| ** **                                                         | ** ** | **December 31,**       | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **(dollars in thousands )** | ** ** |
| Nonaccrual                                                         | ** ** | **$**                       | **2,711**  |   | $ | 5,505 |   |
| Accruing  loans past due 90 days                                   | ** ** | **19**                      |       | 9 |   |
| Other real  estate owned                                           | ** ** | **994**                     |       | 3,918 |   |
| Nonperforming  assets                                              | ** ** | **$**                       | **3,724**  | ** ** | $ | 9,432 |   |
|                                                               | ** ** | ** **                  | ** ** |   |   |
| Nonperforming  loans to total loans, including loans held for sale | ** ** | **1.72**                    | **%**      | 2.93 | % |
| Nonperforming  assets to total assets                              | ** ** | **1.57**                    | **%**      | 3.56 | % |

 

Nonperforming assets totaled $3.7 million asof year-end 2004, a decrease of $5.7 million from $9.4 million at year-end2003.  Total nonperforming assetsrepresent 1.57% of total assets at December 31, 2004, compared to 3.56% atDecember 31, 2003.  Impaired loansas of December 31, 2004 and 2003 were $8.8 million and $5.5 million,respectively, and include all nonaccrual loans.

 

Nonaccrual loans decreased $2.8 million, to$2.7 million at year-end 2004. At December 31, 2004 nonaccrual loansconsisted primarily of two loan relationships. The first is several loans related to one primary borrower totaling $1.9million.  The loan was restructured in2004 and is secured primarily by commercial real estate.  The borrower is complying with the terms ofthe loan agreement.  The secondnonaccrual loan totals $499,000 and is considered well secured by accountsreceivable.

 

21

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•      ***Noninterest Income***

 

The following table depictsthe amount of and annual changes in noninterest income categories:

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** | **Percent Change** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|
| ** **                                           | ** ** | **2004**                         | ** ** | **2003**           | ** ** | **2002** | ** ** | **2004/2003** | ** ** | **2003/2002** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands )**      | ** ** |
| Service  charges on deposit accounts                 | ** ** | **$**                            | **1,555**  | ** **         | $          | 1,379 |   | $ | 1,333 | ** ** | **12.8** | **%** | 3.5 | % |
| Other fee  income                                    | ** ** | **271**                          | ** ** | 457                |       | 374 | ** ** | **(40.7** | **)** | 22.2 |   |
| Mortgage  loan servicing fees, net                   | ** ** | **80**                           | ** ** | 1                  |       | 108 | ** ** | **n/m** | ** ** | (99.1 | ) |
| Gains  (losses) on sales/transfers of mortgage loans | ** ** | **(101**                         | **)**      | 202                |       | 261 | ** ** | **(150.0** | **)** | (22.6 | ) |
| Gains  (losses) on sale of fixed assets              |       | —                           | ** ** | —             |       | (1 | ) | **N/A** | ** ** | 100.0 |   |
| Gains  (losses) on sales of securities, net          | ** ** | **27**                           | ** ** | —             |       | — |   | **N/A** | ** ** | N/A |   |
| Gains  (losses) on sales of other real estate owned  | ** ** | **(23**                          | **)**      | 21                 |       | (18 | ) | **(209.5** | **)** | 216.7 |   |
| Other                                                | ** ** | **215**                          | ** ** | 161                |       | 132 |   | **33.5** | ** ** | 22.0 |   |
| ** **                                           |       | **$**                            | **2,024**  | ** **         | $          | 2,221 |   | $ | 2,189 |   | **(8.9** | **)** | 1.5 |   |

 

----

**n/m** – not meaningful

 

Total noninterest incomedecreased by $197,000 from year-end 2003 to year-end 2004.  Service charges on deposit accounts increasedto $1.6 million in 2004, up 12.8% from 2003. The Corporation also experienced increases in mortgage loan servicingfees, which were up $79,000 from the previous year, and other income, up$54,000 from 2003.  These increases wereoffset, however, by declines in other fee income and gains (losses) onsales/transfers of mortgage loans.  Otherfee income decreased as the result of the sale of Illini’s merchant processingservice in late 2003 and the related decrease in fee income from thatactivity.  During 2004, Illini liquidatedits portfolio of loans available for sale. The sale of these loans in the secondary market and the transfer of aportion of the portfolio into Illini’s real estate loan portfolio resulted in anet loss of $101,000 during 2004, as compared to a net gain of $202,000 in2003.

 

•      ***Noninterest Expense***

 

The followingtable depicts the amount of and annual changes in noninterest expensecategories:

 
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** | **Percent Change** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **2004**                         | ** ** | **2003**           | ** ** | **2002** | ** ** | **2004/2003** | ** ** | **2003/2002** | ** ** |
| ** **                                             | ** ** | **(dollars in thousands)**       | ** ** |
| Salaries and  employee benefits                        | ** ** | **$**                            | **5,145**  |               | $          | 4,474 |   | $ | 4,932 | ** ** | **15.0** | **%** | (9.3 | )% |
| Net  occupancy expense                                 | ** ** | **730**                          |       | 760                |       | 767 | ** ** | **(3.9** | **)** | (0.9 | ) |
| Equipment expense                                      | ** ** | **210**                          |       | 230                |       | 290 | ** ** | **(8.7** | **)** | (20.7 | ) |
| Data  processing                                       | ** ** | **678**                          |       | 782                |       | 680 | ** ** | **(13.3** | **)** | 15.0 |   |
| Supplies                                               | ** ** | **170**                          |       | 166                |       | 157 | ** ** | **2.4** | ** ** | 5.7 |   |
| Communication  and transportation                      | ** ** | **502**                          |       | 464                |       | 457 | ** ** | **8.2** | ** ** | 1.5 |   |
| Marketing  and advertising                             | ** ** | **277**                          |       | 146                |       | 214 | ** ** | **89.7** | ** ** | (31.8 | ) |
| Correspondent  bank fees                               | ** ** | **233**                          |       | 300                |       | 355 | ** ** | **(22.3** | **)** | (15.5 | ) |
| Loan  foreclosure and other real estate owned expenses | ** ** | **1,978**                        |       | 316                |       | 154 | ** ** | **525.9** | ** ** | 105.2 |   |
| Professional  fees                                     | ** ** | **713**                          |       | 585                |       | 819 | ** ** | **21.9** | ** ** | (28.6 | ) |
| Regulatory  fees                                       | ** ** | **116**                          |       | 103                |       | 111 | ** ** | **12.6** | ** ** | (7.2 | ) |
| Other                                                  | ** ** | **762**                          |       | 811                |       | 497 | ** ** | **(6.0** | **)** | 63.2 |   |
| Total  noninterest expense                             | ** ** | **$**                            | **11,514** |               | $          | 9,137 |   | $ | 9,433 | ** ** | **26.0** | ** ** | (3.1 | ) |
|                                                        |            |                                  |            |                    |            |  |  |  |  |  |  |  |  |  |  |

 

22

----

 

Noninterest expenses increased by $2,377,000to $11,514,000 in 2004, compared to $9,137,000 in 2003, an increase of26.0%.  Four major categories contributedto this increase:  loan foreclosure andother real estate owned expense; salaries and employee benefits; professionalfees; and marketing and advertising expenses. Loan foreclosure and other real estate owned expense caused the mostsignificant negative impact on noninterest expenses.  The management of Illini was activelyinvolved throughout the year in reducing the level of other real estate owned.The total reduction in the carrying value was the result of various events thatoccurred throughout the year including the following: Illini reduced thecarrying value of two properties by an aggregate $455,000 during the firstquarter based on new information obtained.  Then during the second quarter Illini reduced the carrying value of twoproperties by an aggregate amount of $548,000, based upon the values of signedcontracts for purchase of those two properties, which were received during thelatter part of the second quarter.  Oneof these properties called for settlement to take place in the month ofAugust.  At that time, the buyers wereunable to complete the purchase and the property remained in Illini’spossession.  Upon re-evaluating the costsassociated to remarket this property, as well as current market conditions forthis type of property, management determined it was appropriate to reduce thecarrying value of this property by an additional $200,000; this amount wascharged to loan foreclosure and other real estate expense in the thirdquarter.  The total reduction in thecarrying values of properties in this category to marketable values resulted inexpenses totaling $1,410,000, and the costs of servicing and maintaining theseproperties totaled $452,000.

 

Illini restructured its operations in2004.  As a result of these efforts,several positions within the organization were eliminated.  As a result of costs associated with thetermination provisions in related management contracts, cost of livingincreases, and the appointment of a new president at Illini, salaries andemployee benefits increased $671,000 in 2004, compared to costs incurred in2003.  Professional fees, which arecomprised of legal fees, auditing and accounting fees, increased $128,000 in2004 to $713,000.  Legal fees contributedprimarily to the increase.  Finally, in2004 Illini commenced an aggressive marketing campaign to re-establish itspresence in the markets it serves.  Theresulting increase in costs associated with the increased use of radio, printand billboard media totaled $277,000, an increase of $131,000 from costsincurred in 2003.

 

•      ***Income Tax Expense***

 

The total tax benefit for 2004 was$1,253,000, compared to a tax benefit of $161,000 in 2003.  This benefit is primarily related to theCorporation’s operating loss in 2004.

 

•      ***Effects of Inflation***

 

The effects ofinflation on financial institutions are different from the effects on othercommercial enterprises.  Duringinflationary periods, companies typically incur fewer significant capital andinventory expenditures, the latter being directly affected by changingprices.  As a result, inflation does notdirectly affect a financial institution as much as changes in interest rates.The general level of inflation does, in fact, underlie the general level ofmost interest rates; however, interest rates do not increase at the rate ofinflation, in the same manner as the prices of goods and services.  Rather, interest rates fluctuate based onanticipated changes in the rate of inflation and changes in monetary and fiscalpolicy.

 

Inflation, however, does have an impact onthe growth of total assets in the banking industry, often resulting in a needto increase capital at higher than normal rates to maintain an appropriatecapital-to-asset ratio.

 

23

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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, 2004 and 2003                                         |   |   |
| Consolidated  Statements of Income / (Loss) for the years ended December 31, 2004 and  2003           |   |   |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2004  and 2003 |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004 and 2003                 |   |   |
| Notes to  Consolidated Financial Statements                                                                |   |   |

 

24

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders andBoard of Directors

Illini Corporation

 

We have audited theaccompanying consolidated balance sheets of Illini Corporation and Subsidiariesas of December 31, 2004 and 2003 and the related consolidated statementsof income/(loss), shareholders’ equity, and cash flows for the years thenended.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial 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 audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Illini Corporation andSubsidiaries as of December 31, 2004 and 2003 and the results of theiroperations and their cash flows for the years then ended, in conformity withU.S. generally accepted accounting principles.

 

 
|                    | Crowe Chizek and  Company LLC |
|-------------------------|-------------------------------|
|                    |                          |
|                    |                          |
| Oak Brook,  Illinois    |                          |
| February 28,  2005 |                          |

 

25

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**ILLINI CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**December 31, 2004 and 2003**

 
| ** **                                                                                                             | ** ** | **2004**                   | ** **  | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|----------|------------|
| ** **                                                                                                             | ** ** | **(dollars in thousands)** | ** **  |
| ASSETS:                                                                                                                |       |                       |        |     |       |
| Cash and due from banks                                                                                                | ** ** | **$**                      | **8,136**   |     | $          | 8,623 |   |
| Interest-bearing deposits in other banks                                                                               | ** ** | **66**                     |        | 31       |       |
| Federal funds sold                                                                                                     | ** ** | **3,359**                  |        | 7,262    |       |
| Cash and cash equivalents                                                                                              | ** ** | **11,561**                 |        | 15,916   |       |
| Investment securities available for sale, at fair  value                                                               | ** ** | **56,161**                 |        | 47,172   |       |
| Loans held for sale                                                                                                    |       | **—**                 |        | 15,287   |       |
| Loans, net of allowance for loan losses of $2,412 and  $2,359                                                          | ** ** | **156,160**                |        | 170,846  |       |
| Federal Home Loan Bank stock                                                                                           | ** ** | **863**                    |        | 813      |       |
| Premises and equipment                                                                                                 | ** ** | **5,903**                  |        | 6,255    |       |
| Accrued interest receivable                                                                                            | ** ** | **1,649**                  |        | 1,838    |       |
| Other real estate owned                                                                                                | ** ** | **994**                    |        | 3,918    |       |
| Goodwill                                                                                                               | ** ** | **1,856**                  |        | 1,856    |       |
| Other assets                                                                                                           | ** ** | **2,369**                  |        | 858      |       |
| Total Assets                                                                                                           | ** ** | **$**                      | **237,516** |     | $          | 264,759 |   |
|                                                                                                                   |       |                       |        |     |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY:                                                                             |       |                       |        |     |       |
| Noninterest-bearing demand deposits                                                                                    | ** ** | **$**                      | **37,569**  |     | $          | 34,400 |   |
| Interest-bearing deposits:                                                                                             |       |                       |        |     |       |
| NOW and money market accounts                                                                                          | ** ** | **57,797**                 |        | 59,490   |       |
| Savings deposits                                                                                                       | ** ** | **21,902**                 |        | 21,408   |       |
| Time deposits, $100,000 and over                                                                                       | ** ** | **13,209**                 |        | 18,319   |       |
| Other time deposits                                                                                                    | ** ** | **68,242**                 |        | 92,998   |       |
| Total Deposits                                                                                                         | ** ** | **198,719**                |        | 226,615  |       |
|                                                                                                                   | ** ** | ** **                 |        |     |       |
| Federal funds purchased and securities sold under  agreements to repurchase                                            | ** ** | **1,392**                  |        | 528      |       |
| Borrowings                                                                                                             | ** ** | **13****,298**             |        | 11,347   |       |
| Subordinated debentures                                                                                                | ** ** | **9,000**                  |        | 9,000    |       |
| Accrued interest payable                                                                                               | ** ** | **813**                    |        | 1,082    |       |
| Other liabilities                                                                                                      | ** ** | **869**                    |        | 1,146    |       |
| Total Liabilities                                                                                                      | ** ** | **224,091**                |        | 249,718  |       |
|                                                                                                                   |       |                       |        |     |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                 |       |                       |        |     |       |
|                                                                                                                   |       |                       |        |     |       |
| Shareholders’ equity:                                                                                             |       |                       |        |     |       |
| Preferred stock, $0.01 par value, authorized and  unissued 10,000,000 shares                                           |       | **—**                 |        | —   |       |
| Common stock, $0.01 par value, authorized 45,000,000  shares; 571,789 shares issued and outstanding                    | ** ** | **6**                      |        | 6        |       |
| Capital surplus                                                                                                        | ** ** | **9,038**                  |        | 9,070    |       |
| Retained earnings                                                                                                      | ** ** | **10,615**                 |        | 12,068   |       |
| Accumulated other comprehensive income                                                                                 | ** ** | **843**                    |        | 1,101    |       |
| Less: Treasury shares, at cost, 157,260 shares at December 31,  2004 and 160,088 shares at December 31, 2003 | ** ** | **(7,077**                 | **)**       | (7,204   | )          |
| Total Shareholders’ Equity                                                                                        | ** ** | **13,425**                 |        | 15,041   |       |
| Total Liabilities and Shareholders’ Equity                                                                        | ** ** | **$**                      | **237,516** |     | $          | 264,759 |   |

 

See accompanying notes toconsolidated financial statements.

 

26

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**ILLINI CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME****/ (LOSS)**

**Years Ended December 31, 2004 and 2003**

 
| ** **                                                                                                                                 | ** ** | **2004**                                              | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                                                 | ** ** | **(dollars in thousands, except  per share amounts)** | ** ** |
| Interest income:                                                                                                                           |       |                                                  |       |       |       |
| Loans, including fees                                                                                                                      | ** ** | **$**                                                 | **11,058** | ** ** | $          | 12,965 |   |
| Investment securities:                                                                                                                     |       |                                                  | ** ** |       |       |
| Taxable                                                                                                                                    | ** ** | **1,127**                                             | ** ** | 983        |       |
| Exempt from federal income taxes                                                                                                           | ** ** | **751**                                               | ** ** | 874        |       |
| Federal Funds sold and interest-bearing deposits                                                                                           | ** ** | **94**                                                | ** ** | 141        |       |
| Total interest income                                                                                                                      | ** ** | **13,030**                                            | ** ** | 14,963     |       |
| Interest expense:                                                                                                                          |       |                                                  | ** ** |       |       |
| Deposits:                                                                                                                                  |       |                                                  | ** ** |       |       |
| NOW and money market accounts                                                                                                              | ** ** | **524**                                               | ** ** | 562        |       |
| Savings deposits                                                                                                                           | ** ** | **132**                                               | ** ** | 156        |       |
| Time deposits, $100,000 and over                                                                                                           | ** ** | **427**                                               | ** ** | 749        |       |
| Other time deposits                                                                                                                        | ** ** | **2,172**                                             | ** ** | 3,707      |       |
| Securities sold under agreements to repurchase                                                                                             | ** ** | **20**                                                | ** ** | 18         |       |
| Borrowings                                                                                                                                 | ** ** | **397**                                               | ** ** | 393        |       |
| Subordinated debentures                                                                                                                    | ** ** | **947**                                               | ** ** | 947        |       |
| Total interest expense                                                                                                                     | ** ** | **4,619**                                             | ** ** | 6,532      |       |
|                                                                                                                                       | ** ** | ** **                                            | ** ** |       |       |
| Net interest income                                                                                                                        | ** ** | **8,411**                                             | ** ** | 8,431      |       |
| Provision for loan losses                                                                                                                  | ** ** | **1,395**                                             | ** ** | 1,081      |       |
| Net interest income after provision for loan losses                                                                                        | ** ** | **7,016**                                             | ** ** | 7,350      |       |
| Noninterest income:                                                                                                                        |       |                                                  | ** ** |       |       |
| Service charges on deposit accounts                                                                                                        | ** ** | **1,555**                                             | ** ** | 1,379      |       |
| Other fee income                                                                                                                           | ** ** | **271**                                               | ** ** | 457        |       |
| Mortgage loan servicing fees, net                                                                                                          | ** ** | **80**                                                | ** ** | 1          |       |
| Gains (losses) on sales/transfers of mortgage loans                                                                                        | ** ** | **(101**                                              | **)**      | 202        |       |
| Investment security gains                                                                                                                  | ** ** | **27**                                                | ** ** | —     |       |
| Gains (losses) on sales of other real estate owned                                                                                         | ** ** | **(23**                                               | **)**      | 21         |       |
| Other                                                                                                                                      | ** ** | **215**                                               | ** ** | 161        |       |
| Total noninterest income                                                                                                                   | ** ** | **2,024**                                             | ** ** | 2,221      |       |
| Noninterest expense:                                                                                                                       |       |                                                  | ** ** |       |       |
| Salaries and employee benefits                                                                                                             | ** ** | **5,145**                                             | ** ** | 4,474      |       |
| Net occupancy expense                                                                                                                      | ** ** | **730**                                               | ** ** | 760        |       |
| Equipment expense                                                                                                                          | ** ** | **210**                                               | ** ** | 230        |       |
| Data processing fees                                                                                                                       | ** ** | **678**                                               | ** ** | 782        |       |
| Supplies expense                                                                                                                           | ** ** | **170**                                               | ** ** | 166        |       |
| Communication and transportation expense                                                                                                   | ** ** | **502**                                               | ** ** | 464        |       |
| Marketing and advertising expense                                                                                                          | ** ** | **277**                                               | ** ** | 146        |       |
| Correspondent bank fees                                                                                                                    | ** ** | **233**                                               | ** ** | 300        |       |
| Loan foreclosure and other real estate owned expense                                                                                       | ** ** | **1,978**                                             | ** ** | 316        |       |
| Professional fees                                                                                                                          | ** ** | **713**                                               | ** ** | 585        |       |
| Regulatory fees                                                                                                                            | ** ** | **116**                                               | ** ** | 103        |       |
| Other                                                                                                                                      | ** ** | **762**                                               | ** ** | 811        |       |
| Total noninterest expense                                                                                                                  | ** ** | **11,****514**                                        | ** ** | 9,137      |       |
| Income (loss) before income tax expense (benefit)                                                                                          | ** ** | **(2,474**                                            | **)**      | 434        |       |
| Income tax expense (benefit)                                                                                                               | ** ** | **(1,253**                                            | **)**      | (161       | )          |
| Net income (loss)                                                                                                                          | ** ** | **$**                                                 | **(1,221** | **)**      | $          | 595 |   |
| Basic and diluted earnings (loss) per share (based  on weighted average common shares outstanding of 414,034 in 2004 and 411,701  in 2003) | ** ** | **$**                                                 | **(2.95**  | **)**      | $          | 1.45 |   |

 

See accompanying notes toconsolidated financial statements.

 

27

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**ILLINI CORPORATION ANDSUBSIDIARIES**

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

#### **Years Ended December 31,2004 and 2003**

 
| ** **                                                               | ** ** | **Common  stock**           | ** ** | **Capital  surplus** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  Income (loss)** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------|------------|------------------------|------------|---------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **(dollars  in thousands)** | ** ** |
|                                                                     |       |                        |       |                 |       |                   |       |                |       |                                                 |       |       |       |
| Balance at January 1,  2003                                         |       | $                           | 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     |       |
|                                                                     |       |                        |       |                 |       |                   |       |                |       |                                                 |       |       |       |
| Comprehensive income (loss):                                             | ** ** | ** **                  | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income (loss)                                                        |       | —                      |       | —               |       | (1,221                 | )          | —              |       | —                                               |       | (1,221     | )          |
| Sale of 2,828 shares of  treasury stock                                  |       | —                      |       | (32                  | )          | —                 |       | 127                 |       | —                                               |       | 95         |       |
| Change in unrealized gains on  securities available for sale, net of tax |       | —                      |       | —               |       | —                 |       | —              |       | (258                                                 | )          | (258       | )          |
| Total comprehensive income  (loss)                                       |       |                        |       |                 |       |                   |       |                |       |                                                 |       | (1,384     | )          |
| Cash dividends paid, $0.56 per  share                                    |       | —                      |       | —               |       | (232                   | )          | —              |       | —                                               |       | (232       | )          |
|                                                                     |       |                        |       |                 |       |                   |       |                |       |                                                 |       |       |       |
| Balance at December 31,  2004                                       |       | $                           | 6          |                 | $          | 9,038                  |       | $                   | 10,615     |                                                 | $          | (7,077     | )          | $ | 843 |   | $ | 13,425 |   |

 

See accompanying notes toconsolidated financial statements.

 

28

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**ILLINI CORPORATION ANDSUBSIDIARIES**

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

**Years Ended December 31, 2004 and 2003**

 
| ** **                                                                                             | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                                             | ** ** | **(dollars in thousands)** | ** ** |
| Cash flows from operating activities:                                                                  |       |                       |       |       |       |
| Net income (loss)                                                                                      | ** ** | **$**                      | **(1,221** | **)**      | $          | 595 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:              |       |                       | ** ** |       |       |
| Depreciation                                                                                           | ** ** | **688**                    | ** ** | 774        |       |
| Provision for loan losses                                                                              | ** ** | **1,395**                  | ** ** | 1,081      |       |
| Investment security amortization, net                                                                  | ** ** | **74**                     | ** ** | 155        |       |
| Gains on sales of investment securities, net                                                           | ** ** | **(27**                    | **)**      | **—** | ** ** |
| Federal Home Loan Bank stock dividend                                                                  | ** ** | **(50**                    | **)**      | (60        | )          |
| (Gains) losses on sales/transfers of mortgage loans,  net                                              | ** ** | **101**                    | ** ** | (202       | )          |
| Loss on sale of premises and equipment                                                                 | ** ** | **1**                      | ** ** | —     |       |
| Valuation allowance established or direct writedown  for other real estate owned                       | ** ** | **1,388**                  | ** ** | —     |       |
| Deferred tax benefit                                                                                   | ** ** | **(934**                   | **)**      | (21        | )          |
| (Gains) losses on sales of other real estate owned                                                     | ** ** | **23**                     | ** ** | (21        | )          |
| Decrease in accrued interest receivable                                                                | ** ** | **189**                    | ** ** | 508        |       |
| Decrease in accrued interest payable                                                                   | ** ** | **(269**                   | **)**      | (250       | )          |
| Origination of secondary market mortgage loans                                                         | ** ** | **(5,989**                 | **)**      | (26,003    | )          |
| Proceeds from the sales of secondary market mortgage  loans                                            | ** ** | **15,718**                 | ** ** | 16,718     |       |
| Other, net                                                                                             | ** ** | **(711**                   | **)**      | (1,900     | )          |
| Net cash provided by (used in) operating activities                                                    | ** ** | **10,376**                 | ** ** | (8,626     | )          |
| Cash flows from investing activities:                                                                  |       |                       | ** ** |       |       |
| Proceeds from sales of investment securities  available for sale                                       | ** ** | **1,545**                  | ** ** | —     |       |
| Proceeds from maturities and paydowns of investment  securities available for sale                     | ** ** | **17,802**                 | ** ** | 25,552     |       |
| Purchases of investment securities available for  sale                                                 | ** ** | **(28,784**                | **)**      | (31,237    | )          |
| Net decrease in loans                                                                                  | ** ** | **17,838**                 | ** ** | 26,046     |       |
| Purchases of premises and equipment                                                                    | ** ** | **(464**                   | **)**      | (348       | )          |
| Proceeds from sale of premises and equipment                                                           | ** ** | **127**                    | ** ** | **—** | ** ** |
| Proceeds from sales of other real estate owned                                                         | ** ** | **2,423**                  | ** ** | 483        |       |
| Net cash provided by investing activities                                                              | ** ** | **10,487**                 | ** ** | 20,496     |       |
| Cash flows from financing activities:                                                                  |       |                       | ** ** |       |       |
| Net increase (decrease) in noninterest bearing  deposit accounts                                       | ** ** | **3,169**                  | ** ** | (710       | )          |
| Net increase (decrease) in NOW, money market  accounts and savings deposits                            | ** ** | **(1,199**                 | **)**      | 4,365      |       |
| Net decrease in time deposits, $100,000 and over                                                       | ** ** | **(5,110**                 | **)**      | (4,475     | )          |
| Net decrease in other time deposits                                                                    | ** ** | **(24,756**                | **)**      | (17,399    | )          |
| Net increase (decrease) in securities sold under  agreements to repurchase and federal funds purchased | ** ** | **864**                    | ** ** | (128       | )          |
| Proceeds from sale of treasury shares                                                                  | ** ** | **95**                     | ** ** | **—** | ** ** |
| Proceeds of borrowings                                                                                 | ** ** | **6,000**                  | ** ** | 3,000      |       |
| Repayment of borrowings                                                                                | ** ** | **(4,049**                 | **)**      | (48        | )          |
| Cash dividends paid                                                                                    | ** ** | **(232**                   | **)**      | (412       | )          |
| Net cash used in financing activities                                                                  | ** ** | **(25,218**                | **)**      | (15,807    | )          |
|                                                                                                   | ** ** | ** **                 | ** ** |       |       |
| Net decrease in cash and cash equivalents                                                              | ** ** | **(4,355**                 | **)**      | (3,937     | )          |
|                                                                                                   | ** ** | ** **                 | ** ** |       |       |
| Cash and cash equivalents at beginning of period                                                       | ** ** | **15,916**                 | ** ** | 19,853     |       |
|                                                                                                   | ** ** | ** **                 | ** ** |       |       |
| Cash and cash equivalents at end of period                                                             | ** ** | **$**                      | **11,561** | ** ** | $          | 15,916 |   |
|                                                                                                   | ** ** | ** **                 | ** ** |       |       |
| Supplemental information:                                                                              |       |                       | ** ** |       |       |
| Interest paid                                                                                          | ** ** | **$**                      | **4,888**  | ** ** | $          | 6,782 |   |
| Income taxes paid                                                                                      | ** ** | **50**                     | ** ** | 407        |       |
| Other non-cash investing activities:                                                                   |       |                       | ** ** |       |       |
| Transfer of loans to other real estate owned                                                           | ** ** | **910**                    | ** ** | 3,593      |       |
| Transfer of loans held for sale to loan portfolio                                                      | ** ** | **5,457**                  | ** ** | **—** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

29

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**ILLINI CORPORATION ANDSUBSIDIARIES**

Notesto Consolidated Financial Statements

December 31, 2004and 2003

 

**(1)****         Summary ofSignificant Accounting Policies**

 

Illini Corporation (the “Corporation”),which operates 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 to competition fromother financial and nonfinancial institutions providing financial products incentral Illinois. Additionally, the Corporation, Illini, and Camp Point aresubject to the regulations of certain federal and state agencies and undergoperiodic examinations by those regulatory authorities.  As further discussed below Illini StatutoryTrust I (“IST”), which had previously been consolidated with the company, isnow reported separately.

 

IST wasformed on January 31, 2001, to issue cumulative trust preferredsecurities.  The Corporation owns all ofthe securities of IST that possess general voting powers. The preferredsecurities, issued through an underwritten pooled public offering on February 22,2001, were sold at their $1,000 par value. IST issued 9,279 shares of the preferredsecurities bearing a dividend rate of 10.2% for net proceeds of $9 million,after deducting underwriting commissions and other costs. IST invested theproceeds in the Corporation’s junior subordinated debentures, which also havean interest rate of 10.2%. The junior subordinated debentures mature on February 22,2031, which date may be shortened to a date not earlier than February 22,2011, if certain conditions are met. IST’s sole asset is the holding company’sjunior subordinated debt. Considered together, the Corporation’s obligationswith respect 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 arecumulative and based upon the liquidation value of $1,000 per preferredsecurity.  The Corporation has the right,at any time, so long as no event of default has occurred and is continuing, todefer payments of interest on the junior subordinated debentures, which willrequire deferral 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 subordinated debentures.  The preferred securities are subject tomandatory redemption, in whole or in part, upon repayment of the juniorsubordinated debentures at maturity or their earlier redemption.

 

Theobligation with respect to the holders of the preferred securities is recordedas a liability in the accompanying consolidated balance sheets as “subordinateddebentures”.  The related dividendexpense is reported as interest expense in the accompanying consolidatedstatements of income.

 

Followingis a description of the more significant of these policies:

 

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

 

The consolidated financial statements include theaccounts of the Corporation, Illini and Camp Point, after elimination of allsignificant intercompany accounts and transactions.

 

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

 

Cash and cash equivalents includes cash and due frombanks, interest-bearing deposits in other banks, and federal funds sold, all ofwhich are considered to be highly liquid assets.  Net cash flows are reported for loan, deposit,federal funds sold and securities sold under agreements to repurchasetransactions.

 

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

 

Investment securities designated as available forsale, which include any security which the Corporation has no immediate plan tosell but which may be sold in the near future under different circumstances,are stated at fair value.  Amortizationof premiums and accretion of discounts on securities available for sale arerecorded using the interest method over the period to maturity of therespective security.  Unrealized holdinggains and losses for available for sale securities are excluded from earningsand reported as a net amount in a separate component of shareholders’ equityuntil

 

30

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realized.  Securities are written down to fair valuewhen a decline in fair value is not temporary.

 

Realized gains and losses for securities are includedin earnings using the specific identification method for determining the costbasis of securities sold.  Interest anddividends on investments in debt and equity securities are included in incomewhen earned.

 

Declines in the fair value of securities below theircost that are other than temporary are reflected as realized losses.  In estimating other-than-temporary losses,management considers: (1) the length of time and extent that fair valuehas been less than cost, (2) the financial condition and near termprospects of the issuer, and (3) the Company’s ability and intent to holdthe security for a period sufficient to allow for any anticipated recovery infair value.

 

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

 

Loans that management has the intent and ability tohold for the foreseeable future or until maturity or payoff are reported at theprincipal balance outstanding, net of unearned interest and deferred loan feesand an allowance for loan losses. Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain directorigination costs, are deferred and recognized in interest income using thelevel-yield method without anticipating prepayments.

 

Interest income on mortgage and commercial loans isdiscontinued at the time the loan is 90 day delinquent unless the loan is wellsecured and in process of collection. Consumer and credit card loans are typically charged off no later that120 days past due.  Past due status isbased on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at anearlier date if collection of principal or interest is considered doubtful.

 

All interest accrued by not received for loans placeon nonaccrual is reversed against interest income.  Interest received on such loans is accountedfor on the cash-basis or cost-recovery method, until qualifying for return toaccrual.  Loans are returned to accrualstatus when all the principal and interest amounts contractually due arebrought current and future payments are reasonably assured.

 

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

 

The allowance for loan losses is a valuation allowancefor probable incurred credit losses, increased by the provision for loan lossesand decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believesthe uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are creditedto the allowance. Management estimates the allowance balance required usingpast loan loss experience, the nature and volume of the portfolio, informationabout specific borrower situations and estimated collateral values, economicconditions, and other factors. Allocations of the allowance may be made for specific loans, but theentire allowance is available for any loan that, in management’s judgment,should be charged-off.

 

The allowance consists of specific and generalcomponents.  The specific componentrelates to loans that are individually classified as impaired or loansotherwise classified as substandard or doubtful.  The general component covers non-classifiedloans and is based on historical loss experience adjusted for current factors.

 

A loan is impaired when full payment under the loanterms is not expected.  Commercial andcommercial real estate loans are individually evaluated for impairment.  If a loan is impaired, a portion of the allowanceis allocated so that the loan is reported, net, at the present value ofestimated future cash flows using the loan’s existing rate or at the fair valueof collateral if repayment is expected solely from the collateral.  Large groups of smaller balance homogeneousloans, such as consumer and residential real estate loans, are collectivelyevaluated for impairment, and accordingly, they are not separately identifiedfor impairment disclosures.

 

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

 

Mortgage loans held for sale are recorded at the lowerof cost or market value on an aggregate basis as determined by outstandingcommitments from investors.  Netunrealized losses, if any, are reported as a valuation allowance and arecharged to earnings.  Deferred fees onloans held for sale are not amortized. Gains and losses on the sale of these loans and loan origination feesare recognized upon sale of the related loans and included in the consolidatedstatements of income as noninterest income. Net unrealized losses, if any, are recorded as a valuation allowance andcharged to earnings.

 

31

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

 

Servicing rights represent the allocated value ofretained servicing rights on loans sold. Servicing assets are expensed in proportion to, and over the period of,estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, usinggroupings of the underlying loans as to interest rates and then, secondarily,as to geographic and prepayment characteristics.  Fair value is determined using prices forsimilar assets with similar characteristics, when available, or based upondiscounted cash flows using market-based assumptions.  Any impairment of a grouping is reported as avaluation allowance, to the extent that fair value is less than the capitalizedamount for a grouping.

 

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

 

Premises and equipment are stated at cost lessaccumulated depreciation. Depreciation is computed using primarily thestraight-line method.  The estimateduseful lives are 40 years for bank premises, 7 to 40 years for improvements tobank premises, and 3 to 20 years for furniture and equipment.  Costs for maintenance and repairs areexpensed as incurred.

 

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

 

Federal Home Loan Bank Stock is stated at cost and isa required investment for institutions that are members of the Federal HomeLoan Bank system.  The requiredinvestment in the common stock is based on a predetermined formula.

 

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

 

The Corporation and its subsidiaries file aconsolidated federal income tax return.

 

Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  Deferred taxassets and liabilities are measured using enacted tax rates.

 

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

 

The Corporation recognized goodwill with the purchaseof banks in Camp Point, Auburn and McLean County and represents the excess ofthe purchase price over the fair value of acquired tangible assets andliabilities.  Upon adopting newaccounting guidance in 2002, the Company ceased amortizing goodwill.  Goodwill is assessed at least annually forimpairment and any such impairment will be recognized in the period identified.

 

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

 

Other real estate owned (“OREO”) represents propertyacquired through foreclosure or deeded to Illini in lieu of foreclosure onloans on which the borrowers have defaulted. They are initially recorded at fair value when acquired, establishing anew cost basis.

 

OREO is recorded on an individual asset basis at thelower of fair value less estimated disposal costs or cost.  If the fair value declines subsequent toforeclosure the deficiency is recorded as a valuation allowance or a directwritedown and is recorded through expense. Costs after acquisition are expensed.

 

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

 

Basic earnings per share is computed by dividing netincome available to common shareholders by the weighted-average number ofcommon shares outstanding for the period. Diluted earnings per share would give the effect to potential commonstock, such as stock options.  TheCorporation has not issued instruments which are dilutive.

 

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

 

Financial instruments include off-balance sheet creditinstruments, such as commitments to make loans and commercial letters ofcredit, issued to meet customer financing needs.  The face amount for these items representsthe exposure to loss, before considering customer collateral or ability torepay.  Such financial instruments arerecorded when they are funded.

 

32

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

 

Treasury stock is stated at cost.  Cost is determined by the first-in, first-out(FIFO) method.

 

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

 

Certain amounts in the 2003 consolidated financialstatements have been reclassified to conform to the 2004 presentation.  Such reclassifications have no effect onpreviously reported consolidated net income or shareholders’ equity.

 

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

 

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported period.  Actualresults could differ from those estimates.

 

Material estimates that are particularly susceptibleto significant change relate to the determination of the allowance for loanlosses, the valuation of real estate acquired in connection with foreclosuresor in satisfaction of loans, and mortgage servicing rights.

 

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

 

Comprehensive income consists of net income (loss) andother comprehensive income.  Othercomprehensive income includes unrealized gains and losses on securitiesavailable for sale, which are also recognized as separate components of equity.

 

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

 

FAS 123, Revised, requires all public companies torecord compensation cost for stock options provided to employees in return foremployee service.  The cost is measuredat the fair value of the options when granted, and this cost is expensed overthe employee service period, which is normally the vesting period of theoptions.  This will apply to awardsgranted or modified after the first quarter or year beginning after December 15,2005.  Compensation cost will also berecorded for prior option grants that vest after the date of adoption.  The effect on results of operations willdepend on the level of future option grants and the calculation of the fairvalue of the options granted at such future date, as well as the vesting periodsprovided, and so cannot currently be predicted. There were no options outstanding at December 31, 2004.

 

FAS 152 requires real estate time-share transactionsto be accounted for as nonretail land sales, and to use the additional guidancein SOP 04-2.  SOP 04-2illustrates how to apply FAS 66 to specific forms of real estate time-sharetransactions for fiscal years beginning after June 15, 2005.

 

FAS 153 modifies an exception from fair valuemeasurement of nonmonetary exchanges. Exchanges that are not expected to result in significant changes in cashflows of the reporting entity are not measured at fair value.  This supersedes the prior exemption from fairvalue measurement for exchanges of similar productive assets, and applies forfiscal years beginning after June 15, 2005.

 

SOP 03-3 requires that a valuation allowance forloans acquired in a transfer, including in a business combination, reflect onlylosses incurred after acquisition and should not be recorded atacquisition.  It applies to any loanacquired in a transfer that showed evidence of credit quality deteriorationsince it was made.

 

The effect of these other new standards on theCorporation’s financial position and results of operations is not expected tobe material upon and after adoption.

 

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

 

Fair values of financial instruments are estimatedusing relevant market information and other assumptions, as more fullydisclosed in a separate note.  Fair valueestimates involve uncertainties and matters of significant judgment regardinginterest rates, credit risk, prepayments, and other factors, especially in theabsence of broad markets for particular items. Changes in assumptions or in market conditions could significantlyaffect the estimates.

 

33

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

 

While the chief decision-makers monitor the revenuestreams of the various products and services, the identifiable segments are notmaterial and operations are managed and financial performance is evaluated on aCorporation-wide basis.  Accordingly, allof the financial service operations are considered by management to beaggregated in one reportable operating segment.

 

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

 

Loss contingencies, including claims and legal actionsarising in the ordinary course of business, are recorded as liabilities whenthe likelihood of loss is probable and an amount or range of loss can bereasonably estimated.  Except asindicated in Note 15, Management does not believe there now are such mattersthat will have a material effect on the financial statements.

 

***(w)******       Transfersof Financial Assets***

 

Transfers of financial assets are accounted for assales, when control over the assets has been surrendered.  Control over transferred assets is deemed tobe surrendered when (1) the assets have been isolated from theCorporation, (2) the transferee obtains the right (free of conditions thatconstrain it from taking advantage of that right) to pledge or exchange thetransferred assets, and (3) the Corporation does not maintain effectivecontrol over the transferred assets through an agreement to repurchase thembefore their maturity.

 

***(x)******         Restrictionson Cash***

 

Cash on hand or on deposit with the Federal ReserveBank of $1,879,000 and $1,797,000 was required to meet regulatory reserve andclearing requirements at year-end 2004 and 2003.  These balances do not earn interest

 

**(2)****         InvestmentSecurities**

 

The fair value ofinvestment securities available for sale and the related gross unrealized gainsand losses recognized in accumulated other comprehensive income (loss) were asfollows at December 31, 2004 and 2003:

 
| ** **                                                              | ** ** | **Fair value**             | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                                              | ** ** | **(dollars in thousands)** | ** ** |
| **December 31, 2004**                                              |       |                       |       |                         |       |                          |       |
|                                                                    |       |                       |       |                         |       |                          | ** ** |
| United States Treasury and United States government  sponsored entities | ** ** | **$**                      | **23,290** | ** **                   | **$**      | **22**                        | ** ** | **$** | **(115** | **)** |
| Mortgage-backed securities                                              | ** ** | **15,807**                 | ** ** | **52**                       | ** ** | **(102**                      | **)**      |
| Collateralized mortgage obligations                                     | ** ** | **1,040**                  | ** ** | **—**                   | ** ** | **—**                    | ** ** |
| Obligations of state and political subdivisions                         | ** ** | **16,011**                 | ** ** | **1,461**                    | ** ** | **(7**                        | **)**      |
| Equity securities                                                       | ** ** | **13**                     | ** ** | **4**                        | ** ** | **—**                    | ** ** |
|                                                                    | ** ** | **$**                      | **56,161** | ** **                   | **$**      | **1,539**                     | ** ** | **$** | **(224** | **)** |
| December 31, 2003                                                  |       |                       |       |                         |       |                          |       |
|                                                                    |       |                       |       |                         |       |                          |       |
| United States Treasury and United States government  sponsored entities |       | $                          | 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 | ) |

 

34

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The fair value ofsecurities classified as available for sale at December 31, 2004, 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 maturity date,primarily mortgage-backed securities, are shown separately.

 
| ** **                             | ** ** | **Fair  value**            | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **(dollars in thousands)** | ** ** |
| Due in one year or less                | ** ** | **$**                      | **2,047**  | ** ** |
| Due after one year through five years  | ** ** | **24,919**                 | ** ** |
| Due after five years through ten years | ** ** | **7,652**                  | ** ** |
| Due after ten years                    | ** ** | **4,683**                  | ** ** |
| ** **                             |       | **39,301**                 |       |
| Mortgage-backed securities             | ** ** | **15,807**                 | ** ** |
| Collateralized mortgage obligations    | ** ** | **1,040**                  | ** ** |
| Equity securities                      | ** ** | **13**                     | ** ** |
| ** **                             |       | **$**                      | **56,161** |   |

 

Securitieswith unrealized losses at year-end 2004 and 2003 not recognized in income areas follows:

 
| ** **                                                                  | ** ** | **Less than 12 Months**    | ** ** | **12 Months or More** | ** ** | **Total**       | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|-----------------|------------|
| **December 31, 2004**                                                  | ** ** | **Fair  Value**            | ** ** | **Unrealized  Loss**  | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| **United States Treasury and United States  government sponsored entities** | ** ** | **$**                      | **16,455** | ** **            | **$**      | **(75**         | **)**      | **$** | **2,210** | ** ** | **$** | **(40** | **)** | **$** | **18,665** | ** ** | **$** | **(115** | **)** |
| **Mortgage-backed securities**                                              | ** ** | **11,613**                 | ** ** | **(93**               | **)**      | **520**         | ** ** | **(9** | **)** | **12,133** | ** ** | **(102** | **)** |
| **Collateralized mortgage obligations**                                     | ** ** | **—**                 | ** ** | **—**            | ** ** | **—**      | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Obligations of state and Political subdivisions**                         | ** ** | **739**                    | ** ** | **(2**                | **)**      | **588**         | ** ** | **(5** | **)** | **1,327** | ** ** | **(7** | **)** |
| **Total temporarily impaired**                                              | ** ** | **$**                      | **28,807** | ** **            | **$**      | **(170**        | **)**      | **$** | **3,318** | ** ** | **$** | **(54** | **)** | **$** | **32,125** | ** ** | **$** | **(224** | **)** |
| ** **                                                                  | ** ** | ** **                 | ** ** | ** **            | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Less than 12 Months**    | ** ** | **12 Months or More** | ** ** | **Total**       | ** ** |
| **December 31, 2003**                                                  | ** ** | **Fair  Value**            | ** ** | **Unrealized  Loss**  | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| United States Treasury and United States government  sponsored entities     |       | $                          | 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 | ) |

 

The Corporation evaluates securities forother-than-temporary impairment at least on a quarterly basis, and morefrequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of timeand the extent to which the fair value has been less that cost, the financialcondition and near-term prospects of the issuer, and the intent and ability ofthe Corporation to retain its investment in the

 

35

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issuerfor a period of time sufficient to allow for any anticipated recovery in fairvalue.  In analyzing an issuer’sfinancial condition, the Corporation may consider whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and the results of reviews of the issuer’sfinancial condition.

 

Proceedsfrom sales of investment securities during 2004 were $1.5 million.  Gross gains of $35,000, and gross losses of$8,000 were realized on those sales. The tax expense recognized from thesesales was $10,000.  There were no salesof investment securities during 2003.

 

Thefair value of securities pledged to secure United States Government and otherpublic deposits, securities sold under agreements to repurchase, and for otherpurposes as required by law was approximately $9.6 million and $11.2 million atDecember 31, 2004 and 2003, respectively.

 

Other comprehensiveincome (loss) is as follows:

 
| ** **                                                    | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                    | ** ** | **(dollars in thousands)** | ** ** |
| Unrealized holding gains arising during the period            | ** ** | **$**                      | **(427**   | **)**    | $          | (574 | ) |
| Reclassification adjustment for gains realized in  net income | ** ** | **(27**                    | **)**      | —   |       |
| Net unrealized gains (losses), before tax expense             | ** ** | **(400**                   | **)**      | (574     | )          |
| Tax benefit                                                   | ** ** | **142**                    | ** ** | 211      |       |
| Other comprehensive income (loss)                             | ** ** | **$**                      | **(258**   | **)**    | $          | (363 | ) |

 

**(3)****         Loans**

 

Theloan portfolio at December 31, 2004 and 2003 is composed of the followingloan types:

 
| ** **                              | ** ** | **2004**                   | ** **  | **2003** | ** ** |
|-----------------------------------------|------------|----------------------------|-------------|----------|------------|
| ** **                              | ** ** | **(dollars in thousands)** | ** **  |
| Commercial, financial, and agricultural | ** ** | **$**                      | **34,211**  |     | $          | 50,323 |   |
| Real estate:                            |       |                       |        |     |       |
| Construction                            | ** ** | **9,231**                  |        | 4,558    |       |
| Mortgage loans held for investment      | ** ** | **110,945**                |        | 112,168  |       |
| Consumer                                | ** ** | **4,185**                  |        | 6,156    |       |
| Total loans                             | ** ** | **158,572**                |        | 173,205  |       |
| Allowance for loan losses               | ** ** | **(2,412**                 | **)**       | (2,359   | )          |
| Net loans                               | ** ** | **$**                      | **156,160** |     | $          | 170,846 |   |

 

TheCorporation grants agricultural, commercial, industrial, residential, andconsumer loans to customers in central Illinois through its network of bankingoffices.  As such, the Corporation issusceptible to changes in the economic environment in the central Illinoisarea.

 

A summary of impairedloans at December 31, 2004 and 2003 is as follows:

 
| ** **                                                         | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                         | ** ** | **(dollars in thousands)** | ** ** |
| Nonaccrual loans                                                   | ** ** | **$**                      | **2,711**  |     | $          | 5,505 |   |
| Impaired loans continuing to accrue interest                       | ** ** | **6,110**                  |       | —   |       |
| Total impaired loans                                               | ** ** | **$**                      | **8,821**  |     | $          | 5,505 |   |
| Allowance for losses on specific impaired loans                    | ** ** | **$**                      | **947**    |     | $          | 500 |   |
| Impaired loans with no specific related allowance for  loan losses | ** ** | **3,135**                  |       | 4,081    |       |
| Average balance of impaired loans during the year                  | ** ** | **5,589**                  |       | 4,511    |       |
| Accruing loans delinquent 90 days or more                          | ** ** | **1****9**                 |       | 9        |       |

 

36

----

 

Interestincome of $189,000 in 2004 and $401,000 in 2003 would have been recognized hadnonaccrual loans remained current.  Theamount recognized as interest income on nonaccrual loans was $253,852 and$203,159 for the years ended December 31, 2004 and 2003, respectively.

 

A summary of changes inthe allowance for loan losses for the years ended December 31, 2004 and2003 is as follows:

 
| ** **                                 | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|--------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Balance at beginning of year               | ** ** | **$**                      | **2,359**  |       | $          | 2,468 |   |
| Provision charged to operating expense     | ** ** | **1,395**                  | ** ** | 1,081      |       |
|                                       | ** ** | ** **                 | ** ** |       |       |
| Loans charged off                          | ** ** | **(1,485**                 | **)**      | (1,267     | )          |
| Recoveries of loans previously charged off | ** ** | **143**                    | ** ** | 77         |       |
| Net loan charge-offs                       | ** ** | **(1,342**                 | **)**      | (1,190     | )          |
| Balance at end of year                     | ** ** | **$**                      | **2,412**  | ** ** | $          | 2,359 |   |

 

The following table summarizes the 2004 activity forloans made by Illini and Camp Point to executive officers, directors, andprincipal shareholders (insiders) of the Corporation and subsidiaries and/ortheir related interests.

 
| ** **                        | ** ** | **Insider loans**          | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **(dollars in thousands)** | ** ** |
| Balance at December 31, 2003 | ** ** | **$**                      | **479**    | ** ** |
| Advances on existing loans        | ** ** | **2,251**                  | ** ** |
| Payments received                 | ** ** | **(2,457**                 | **)**      |
| Changes in insiders’ status  | ** ** | **(9**                     | **)**      |
| Balance at December 31, 2004 | ** ** | **$**                      | **264**    | ** ** |

 

**(4)****        ****Loan Servicing**

 

Mortgage loans serviced for others are not included inthe accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for otherstotaled approximately $52.9 million and $49.6 million at December 31, 2004and 2003, respectively.

 

Mortgage servicing rights of $98,300 and $93,626 werecapitalized in 2004 and 2003, respectively. The carrying value of capitalized mortgage servicing rights was $306,957and $278,496 at December 31, 2004 and 2003, respectively.  Amortization of mortgage servicing rights was$69,839 and $186,203 in 2004 and 2003, respectively.  There was no valuation allowance at or duringthe years ended December 31, 2004 and 2003.

 

**(5)****         Premisesand Equipment**

 

A summary of premises andequipment at December 31, 2004 and 2003 by major category is as follows:

 
| ** **                    | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                    | ** ** | **(dollars in thousands)** | ** ** |
| Land                          | ** ** | **$**                      | **1,013**  |     | $          | 1,013 |   |
| Bank premises                 | ** ** | **7,355**                  |       | 7,316    |       |
| Furniture and equipment       | ** ** | **6,531**                  |       | 6,260    |       |
| ** **                    |       | **14,899**                 |       | 14,589   |       |
| Less accumulated depreciation | ** ** | **8,996**                  |       | 8,334    |       |
| ** **                    |       | **$**                      | **5,903**  |     | $          | 6,255 |   |

 

37

----

 

**(6)****         Other RealEstate Owned**

 

Other real estate owned is reported net of avaluation allowance.  Activity in theother real estate owned account was as follows:

 
| ** **                                     | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Beginning of year                              | ** ** | **$**                      | **3,918**  |       | $          | 787 |   |
| Additions to other real estate owned           | ** ** | **910**                    |       | 3,593      |       |
| Sales of other real estate owned               | ** ** | **(2,423**                 | **)**      | (483       | )          |
| Gain (loss) on sale of other real estate owned | ** ** | **(23**                    | **)**      | 21         |       |
| Direct write-downs                             | ** ** | **(1,388**                 | **)**      | **—** | ** ** |
| End of Year                                    | ** ** | **$**                      | **994**    |       | $          | 3,918 |   |

 

Expensesrelated to other real estate owned include:

 
| ** **                                     | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Net loss (gain) on sales                       | ** ** | **$**                      | **23**     |       | $          | (21 | ) |
| Write down of other real estate owned property | ** ** | **1,388**                  | ** ** | **—** | ** ** |
| Other real estate owned valuation allowance    | ** ** | **22**                     |       | 63         |       |
| Operating expenses                             | ** ** | **456**                    |       | 207        |       |
| ** **                                     |       | **$**                      | **1,889**  |       | $          | 249 |   |

 

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

 

At December 31,2004, the scheduled maturities of time deposits are as follows:

 
| **Year**   | ** ** | **Amount**                 | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **(dollars in thousands)** | ** ** |
| 2005       |       | $                          | 59,793     |   |
| 2006       |       | 15,203                     |       |
| 2007       |       | 4,527                      |       |
| 2008       |       | 1,017                      |       |
| 2009       |       | 911                        |       |
| Thereafter |       | —                     |       |
|       |       | $                          | 81,451     |   |

 

**(8)****         SecuritiesSold Under Agreements to Repurchase**

 

Securities sold underagreements to repurchase consist of obligations of the Corporation to otherparties.  The obligations are secured byvarious securities and such collateral is held by Commerce Bank a safekeepingagent.  The maximum amount of outstandingagreements at any month end during 2004 and 2003 totaled $692,000 and $661,000and the monthly average of such agreements totaled $584,000 and $603,000,respectively.  The agreements at December 31,2004 mature within 15 months.

 

38

----

 

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

 

The following summarizesborrowings at December 31, 2004 and 2003.

 
| ** **                                                                                                                     | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                                                                     | ** ** | **(dollars in thousands)** | ** ** |
| Note payable                                                                                                                   | ** ** | **$**                      | **2,298**  | ** ** | $          | 2,347 | ** ** |
| Federal Home Loan Bank advances, due at various  dates through September 4, 2006, fixed rates ranging from 2.05% to 3.13% | ** ** | **$**                      | **11,000** |       | $          | 9,000 |   |
| Total long-term debt                                                                                                           | ** ** | **$**                      | **13,298** |       | $          | 11,347 |   |

 

On March 27, 2002,the Corporation borrowed $2,400,000 from Marine Bank.  The floating rate note is indexed to the WallStreet Journal Prime Rate plus 1.00% (6.25% at December 31, 2004).  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 and Camp Point.  The note contains various operating andreporting covenants.  On November 3,2004 the Corporation received a debt covenant waiver on the return on assetscovenant.  The note was paid in full on February 17,2005 from a private placement of securities, discussed in note 16.

 

The Federal Home LoanBank advances are secured by first-mortgage loans totaling $17.2 million.  Advances are subject to restrictions orpenalties in the event of prepayment.

 

At December 31,2004, the scheduled maturities of advances are as follows:

 
| **Year**   | ** ** | **Amount**                 | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **(dollars in thousands)** | ** ** |
| 2005       |       | $                          | 4,298      |   |
| 2006       |       | 9,000                      |       |
|       |       | $                          | 13,298     |   |

 

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

 

Thecomponents of income tax expense (benefit) for the years ended December 31,2004 and 2003 are as follows:

 
| ** **                       | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Current income taxes:            |       |                       |       |     |       |
| Federal                          | ** ** | **$**                      | **(319**   | **)**    | $          | (90 | ) |
| State                            |       | **—**                 |       | (50      | )          |
| Net operating loss carryforwards | ** ** | **(1,194**                 | **)**      | —   |       |
| Deferred income taxes            | ** ** | **260**                    |       | (21      | )          |
| ** **                       |       | **$**                      | **(1,253** | **)**    | $          | (161 | ) |

 

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, 2004 and 2003 is as follows:

 

39

----

 
| ** **                                          | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                          | ** ** | **(dollars in thousands)** | ** ** |
|                                                |       |                       |       |
| Income tax expense at statutory rate                | ** ** | **$**                      | **(841**   | **)**      | $          | 147 |   |
| Increase (decrease) in income taxes resulting from: |       |                       | ** ** |       |       |
| Tax-exempt income                                   | ** ** | **(256**                   | **)**      | (294       | )          |
| State income taxes                                  | ** ** | **(141**                   | **)**      | (14        | )          |
| Other, net                                          | ** ** | **(15**                    | **)**      | **—** | ** ** |
| Income tax expense/(benefit)                        | ** ** | **$**                      | **(1,253** | **)**      | $          | (161 | ) |

 

Thetax effect of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at December 31, 2004and 2003 are presented below:

 
| ** **                                             | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                             | ** ** | **(dollars in thousands)** | ** ** |
| Deferred tax assets:                                   |       |                       |       |     |       |
| Allowance for loan losses                              | ** ** | **$**                      | **515**    |     | $          | 493 |   |
| Nonaccrual loan interest                               | ** ** | **74**                     |       | 254      |       |
| Other real estate owned                                | ** ** | **72**                     |       | 94       |       |
| Intangible assets                                      | ** ** | **65**                     |       | 60       |       |
| Accrued expenses                                       | ** ** | **110**                    |       | 94       |       |
| Net operating loss carry forward                       | ** ** | **1,194**                  |       | —   |       |
| Other                                                  | ** ** | **63**                     |       | 80       |       |
| ** **                                             |       | **2,093**                  |       | 1,075    |       |
| ** **                                             |       | ** **                 |       |     |       |
| Deferred tax liabilities:                              |       |                       |       |     |       |
| Net unrealized gains on securities available for  sale | ** ** | **472**                    |       | 614      |       |
| Mortgage servicing rights                              | ** ** | **119**                    |       | 107      |       |
| Depreciation                                           | ** ** | **420**                    |       | 428      |       |
| Prepaids                                               | ** ** | **60**                     |       | —   |       |
| Federal Home Loan Bank stock                           | ** ** | **88**                     |       | 68       |       |
| ** **                                             |       | **1,159**                  |       | 1,217    |       |
| Net deferred tax asset (liability)                     | ** ** | **$**                      | **934**    |     | $          | (142 | ) |

 

The net operating loss carryforward for federalpurposes approximates $2.9 million.  Thefederal net operating loss carryforward expires in 2024. The net operating losscarryforward for state purposes approximates $3.5 million and the state netoperating loss carryforward expires in 2023 and 2024.

 

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

 

TheCorporation has a defined contribution 401(k) plan that covers substantiallyall employees.  Employees may contributeup to 100% of eligible compensation to the plan. The Corporation’s contributionsare voluntary and at the discretion of the Board of Directors.  All contributions are subject to statutoryrestrictions.  Employer contributionscharged to expense were approximately $63,000 and $74,000 in 2004 and 2003,respectively.

 

In March 2002,the shareholders approved the adoption of a qualified incentive stock optionplan (60,000 shares) for executive employees of the Corporation and anon-qualified incentive stock option plan (7,500 shares) for directors of theCorporation.  At December 31, 2004and 2003, there were no stock options awarded under these plans.

 

40

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**(12)****       Condensed FinancialInformation of Parent Company**

 

Following are condensedbalance sheets as of December 31, 2004 and 2003 and the related condensedstatements of income and cash flows for each of the years in the two-yearperiod ended December 31, 2004 of the Corporation (parent company only):

 

**Condensed Balance Sheets**

**December 31, 2004 and 2003**

 
| ** **                                               | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                               | ** ** | **(dollars in thousands)** | ** ** |
| ASSETS:                                                  |       |                       |       |     |       |
| Cash                                                     | ** ** | **$**                      | **761**    |     | $          | 1,985 |   |
| Investment securities available for sale, at fair  value | ** ** | **13**                     |       | 10       |       |
| Investment in subsidiaries                               | ** ** | **23,203**                 |       | 24,309   |       |
| Other assets                                             | ** ** | **1,729**                  |       | 816      |       |
| ** **                                               |       | **$**                      | **25,706** |     | $          | 27,120 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY:               |       |                       |       |     |       |
| Subordinated debentures                                  | ** ** | **$**                      | **9,000**  |     | $          | 9,000 |   |
| Borrowings                                               | ** ** | **2,298**                  |       | 2,347    |       |
| Other liabilities                                        | ** ** | **983**                    |       | 732      |       |
| Shareholders’ equity                                | ** ** | **13,425**                 |       | 15,041   |       |
| ** **                                               |       | **$**                      | **25,706** |     | $          | 27,120 |   |

 

**Condensed Statements of Income / (Loss)**

**Years Ended December 31, 2004 and 2003**

 
| ** **                                                                                  | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| REVENUE:                                                                                    |       |                       |       |     |       |
| Dividends received from subsidiaries                                                        | ** ** | **$**                      | **941**    |     | $          | 2,033 |   |
| Other                                                                                       | ** ** | **29**                     |       | 44       |       |
| ** **                                                                                  |       | **970**                    |       | 2,077    |       |
| EXPENSES:                                                                                   |       |                       |       |     |       |
| Interest expense                                                                            | ** ** | **1,071**                  |       | 1,070    |       |
| Professional fees                                                                           | ** ** | **416**                    |       | 319      |       |
| Other                                                                                       | ** ** | **691**                    |       | 644      |       |
| ** **                                                                                  |       | **2,178**                  |       | 2,033    |       |
| Income (loss) before income tax benefit and equity  in undistributed income of subsidiaries | ** ** | **(1,208**                 | **)**      | 44       |       |
| Income tax benefit                                                                          | ** ** | **835**                    | ** ** | 785      |       |
| Equity in overdistributed income of subsidiaries                                            | ** ** | **(848**                   | **)**      | (234     | )          |
| Net income (loss)                                                                           | ** ** | **$**                      | **(1,221** | **)**    | $          | 595 |   |

 

41

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**Condensed Statements of Cash Flows**

**Years Ended December 31, 2004 and 2003**

 
| ** **                                                                                | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                                | ** ** | **(dollars in thousands)** | ** ** |
| Cash flows from operating activities:                                                     |       |                       |       |       |       |
| Net income (loss)                                                                         | ** ** | **$**                      | **(1,221** | **)**      | $          | 595 |   |
| Adjustments to reconcile net income/(loss) to net  cash provided by operating activities: |       |                       | ** ** |       |       |
| Depreciation and amortization                                                             | ** ** | **37**                     | ** ** | 40         |       |
| Equity in overdistributed income of subsidiaries                                          | ** ** | **848**                    | ** ** | 234        |       |
| Other, net                                                                                | ** ** | **(724**                   | **)**      | (162       | )          |
| Net cash provided by (used in) operating activities                                       | ** ** | **(1,060**                 | **)**      | 707        |       |
| Cash flows from investing activities:                                                     |       |                       | ** ** |       |       |
| Subsidiary return of capital                                                              | ** ** | **—**                 | ** ** | 900        |       |
| Purchase of premises and equipment                                                        | ** ** | **—**                 | ** ** | (27        | )          |
| Proceeds from sale of premises and equipment                                              | ** ** | **22**                     | ** ** | —     |       |
| Net decrease in loans                                                                     | ** ** | **—**                 | ** ** | 482        |       |
| Net cash provided by investing activities                                                 | ** ** | **22**                     | ** ** | 1,355      |       |
| Cash flows from financing activities:                                                     |       |                       | ** ** |       |       |
| Repayment of borrowings                                                                   | ** ** | **(49**                    | **)**      | (48        | )          |
| Proceeds from sale of treasury shares                                                     | ** ** | **95**                     | ** ** | **—** | ** ** |
| Cash dividends paid                                                                       | ** ** | **(232**                   | **)**      | (412       | )          |
| Net cash used in financing activities                                                     | ** ** | **(186**                   | **)**      | (460       | )          |
| Net increase (decrease) in cash                                                           | ** ** | **(1,224**                 | **)**      | 1,602      |       |
|                                                                                      |       |                       | ** ** |       |       |
| Cash at beginning of year                                                                 | ** ** | **1,985**                  |       | 383        |       |
| Cash at end of year                                                                       | ** ** | **$**                      | **761**    |       | $          | 1.985 |   |

 

**(13)****       Commitments and Credit Risk**

 

TheCorporation is party to financial instruments with off-balance-sheet risk inthe normal course of business to meet the financing needs of its customers.These financial instruments include commitments to extend credit and standbyletters of credit. Such instruments may involve, to varying degrees, elementsof credit risk in excess of the amounts recognized in the consolidated balancesheets.  The contractual amounts of theseinstruments reflect the extent of involvement the Corporation has in particularclasses of financial instruments.

 

TheCorporation’s exposure to credit loss in the event of nonperformance by theother party to the financial instrument for commitments to extend credit andstandby letters of credit is represented by the contractual amount of theseinstruments.  The Corporation uses thesame credit policies in making commitments and conditional obligations as itdoes for financial instruments recorded in the consolidated balancesheets.  The off-balance-sheet financialinstruments of the Corporation at December 31, 2004 and 2003 are presentedbelow:

 
| ** **                                                              | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                              | ** ** | **(dollars in thousands)** | ** ** |
| Financial instruments whose contractual amounts represent  credit risk: |       |                       |       |     |       |
| Commitments to extend credit                                            | ** ** | **$**                      | **21,738** |     | $          | 18,037 |   |
| Standby letters of credit                                               | ** ** | **2,623**                  |       | 2,632    |       |
| ** **                                                              |       | **$**                      | **24,361** |     | $          | 20,669 |   |

 

Commitmentsto extend credit, which include lines of credits, are agreements to lend to acustomer as long as

 

42

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there is no violation ofany condition established in the contract. Of the total commitments to extend credit at December 31, 2004 and2003, approximately $6.5 million and $9.4 million, respectively, representfixed-rate loan commitments.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee.  Since certainof the commitments are expected to expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements.  The Corporation evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based onmanagement’s credit evaluation of the counterparty.  Collateral held varies, but generallyincludes residential or income-producing commercial property, inventory,accounts receivable, and/or equipment.

 

Standbyletters of credit are considered financial guarantees under FASB Interpretation45.  These instruments are carried atfair value, which was not considered material. 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)****       Disclosures about FairValue of Financial Instruments**

 

Followingis a summary of the carrying amounts and fair values of the Corporation’sfinancial instruments at December 31, 2004 and 2003:

 
| **December 31, 2004**                                                      | ** ** | **Carrying  amount**       | ** **  | **Fair  value** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------|------------|
| ** **                                                                      | ** ** | **(dollars in thousands)** | ** **  |
| **Balance sheet assets:**                                                       |       |                       |        |            |       |
| **Cash and cash equivalents**                                                   | ** ** | **$**                      | **11,561**  | ** **      | **$**      | **11,561** | ** ** |
| **Investment securities available for sale**                                    | ** ** | **56,161**                 | ** **  | **56,161**      | ** ** |
| **Loans, net**                                                                  | ** ** | **156,160**                | ** **  | **158,675**     | ** ** |
| **Federal Home Loan Bank stock**                                                | ** ** | **863**                    | ** **  | **863**         | ** ** |
| **Accrued interest receivable**                                                 | ** ** | **1,649**                  | ** **  | **1,649**       | ** ** |
|                                                                            |       |                       |        |            |       |
| **Balance sheet liabilities:**                                                  |       |                       |        |            |       |
| **Deposits**                                                                    | ** ** | **$**                      | **198,719** | ** **      | **$**      | **197,012** | ** ** |
| **Federal funds purchased and securities sold  under agreements to repurchase** | ** ** | **1,392**                  | ** **  | **1,376**       | ** ** |
| **Borrowings**                                                                  | ** ** | **13,298**                 | ** **  | **12,719**      | ** ** |
| **Subordinated debentures**                                                     | ** ** | **9,000**                  | ** **  | **10,485**      | ** ** |
| **Accrued interest payable**                                                    | ** ** | **813**                    | ** **  | **813**         | ** ** |
|                                                                            |       |                       |        |            |       |
| **December 31, 2003**                                                      | ** ** | **Carrying  amount**       | ** **  | **Fair  value** | ** ** |
|                                                                            |       |                       |        |            |       |
| 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           |       |

 

Themethods and assumptions used to estimate the fair value are described asfollows.

 

43

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Carryingamount is the estimated fair value for cash and cash equivalents, interestbearing deposits, Federal Home Loan Bank stock, accrued interest receivable andpayable, noninterest-bearing demand deposits, securities sold under agreementsto repurchase, 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 loans areestimated 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 similarfinancing.  The fair value of off-balance-sheetitems is based on the current fees or cost that would be charged to enter intoor terminate such arrangements and was not considered material.

 

**(15)****       Litigation**

 

Two legalclaims are pending against the Corporation in the normal course of business,which, in the opinion of management, will not result in any material liabilityto the Corporation.   The Corporation hasnegotiated a settlement of one of the claims. The terms of that settlement have been agreed upon and approved by thecourt.  That agreement provided for acomplete resolution of the shareholder claims and a portion of the claims forattorney fees for the class representative. As of December 31, 2004 and 2003 the Corporation has an accrual of$200,000 for this settlement and believes it will have no further adverseimpact on the Corporation. This accrual is included in other liabilities in theConsolidated Balance Sheet.  The court’sapproval of the settlement and other orders of the court are being appealed tothe Appellate Court of Illinois, Fourth District.

 

In April 2003,the Corporation, its directors, and one of its officers were named asdefendants in a complaint filed in the Circuit Court of Sangamon County.  The Corporation has filed motions to dismisson the basis of a prior pending action and to realign the parties, naming theCorporation as the party plaintiff, and for leave of court to dismiss theaction.  Those motions are pending.

 

**(16)****       Regulatory Restrictions**

 

TheCorporation, Illini, and Camp Point are subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on theCorporation’s consolidated financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Corporation, Illini, andCamp Point must meet specific capital guidelines that involve quantitativemeasures of the Corporation’s, Illini’s, and Camp Point’s assets, liabilities,and certain off-balance-sheet items as calculated under regulatory accountingprinciples.  The Corporation, Illini, andCamp Point capital amounts and classifications are also subject to qualitativejudgments by the regulators about components, risk-weightings, and otherfactors.

 

Quantitativemeasures established by regulations to ensure capital adequacy require theCorporation, Illini, and Camp Point to maintain minimum amounts and ratios (setforth in the table below) of total and Tier I capital (as defined in theregulations) to risk-weighted assets (as defined), and of Tier I capital toaverage assets (as defined).  Managementbelieves, as of December 31, 2004, the Corporation, Illini, and Camp Pointmeet all capital adequacy requirements to which they are subject.

 

As of December 31,2004, the Corporation’s subsidiary banks were “well capitalized” underregulatory prompt corrective action provisions. To be categorized as adequately or well capitalized, each bank mustmaintain 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.

 

TheCorporation, Illini, and Camp Point’s actual and required capital amounts andratios as of

 

44

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December 31, 2004and 2003 are as follows:

 
| ** **                                    | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **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                            | ** ** | **$**                      | **21,712** | ** ** | **12.35** | **%** | **$** | **14,064** | ** ** | **8.00** | **%** | **$** | **17,580** | ** ** | **10.00** | **%** |
| Illini                                        | ** ** | **19,454**                 | ** ** | **12.42** | ** ** | **12,530** | ** ** | **8.00** | ** ** | **15,663** | ** ** | **10.00** | ** ** |
| Camp Point                                    | ** ** | **3,303**                  | ** ** | **17.74** | ** ** | **1,489** | ** ** | **8.00** | ** ** | **1,862** | ** ** | **10.00** | ** ** |
| Tier I capital (to risk-weighted assets):     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Illini Corporation                            | ** ** | **14,707**                 | ** ** | **8.37** | ** ** | **7,032** | ** ** | **4.00** | ** ** | **10,548** | ** ** | **6.00** | ** ** |
| Illini                                        | ** ** | **17,494**                 | ** ** | **11.17** | ** ** | **6,265** | ** ** | **4.00** | ** ** | **9,398** | ** ** | **6.00** | ** ** |
| Camp Point                                    | ** ** | **3,069**                  | ** ** | **16.49** | ** ** | **745** | ** ** | **4.00** | ** ** | **1,117** | ** ** | **6.00** | ** ** |
| Tier I capital (to quarterly average assets): |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Illini Corporation                            | ** ** | **14,707**                 | ** ** | **6.20** | ** ** | **9,495** | ** ** | **4.00** | ** ** | **11,869** | ** ** | **5.00** | ** ** |
| Illini                                        | ** ** | **17,494**                 | ** ** | **8.68** | ** ** | **8,059** | ** ** | **4.00** | ** ** | **10,074** | ** ** | **5.00** | ** ** |
| Camp Point                                    | ** ** | **3,069**                  | ** ** | **8.87** | ** ** | **1,384** | ** ** | **4.00** | ** ** | **1,730** | ** ** | **5.00** | ** ** |
|                                          |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                    | ** ** | **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 |   |

 

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. At December 31, 2004, Illini and CampPoint had retained earnings available to be paid as dividends to theCorporation, while still being considered well capitalized under applicableregulations, of approximately $3.3 million and $636,000, respectively.  The memorandum of understanding discussedbelow requires prior regulatory approval before the payment of any dividends byIllini.

 

During March of2004, a safety and soundness examination was commenced by the primaryregulators of Illini.

 

In May of 2004,Illini entered into a memorandum of understanding with the FDIC and theIllinois

 

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DFPR.  The memorandum of understanding requires,among other items, prior regulatory approval for the payment of dividends byIllini Bank, updates of various policies and procedures, a reduction ofsubstandard credits, a reduction in loan concentrations, development of awritten profit plan and development of a management plan.  In July of 2004, the Corporationapproved a resolution requested by the Federal Reserve Bank of Chicago thatincludes restrictions similar to those contained in the above referencedmemorandum of understanding.  Compliancecost associated with these agreements will be minimal and primarily related toadditional reporting requirements while the agreements are in effect.  Management believes that these agreementsshould have no material adverse affects on the operations or financialperformance of the Corporation.  At December 31,2004 the Corporation believes it is in compliance with the provisions of thememorandum of understanding.

 

On February 17,2005, the Corporation closed on the sale of 126,500 shares of common stock,$0.01 par value, of the Corporation to a limited number of accreditedinvestors.  Gross proceeds of theoffering were $4,174,500, based on the $33.00 per share purchase price.  Howe Barnes Investments, Inc. served asplacement agent in connection with the transaction and received a fee equal to3% of the gross proceeds.  The proceedsof this offering were used to pay off the Marine Bank borrowing, discussed inNote 9.

 

**(17)****       Termination of ProposedAcquisition**

 

In November 2001 theCorporation executed a definitive agreement and plan of merger to acquire allof the outstanding stock of Illinois Community Bancorp, Inc. (“ICBI”)through the merger of ICBI with a wholly owned subsidiary of theCorporation.  In conjunction with theproposed merger, ICBI requested that the Corporation provide funds to paycertain liabilities of ICBI and expenses related to the transaction. TheCorporation provided a direct loan to ICBI for these items.  On December 23, 2002 the Federal ReserveBoard of Governors denied the merger application.  The Corporation subsequently filed an appealwith the Board of Governors for reconsideration.  The Corporation was notified that the appealwas denied.  On June 13, 2003, theCorporation entered into an agreement with ICBI to terminate the proposedmerger by mutual consent.  Thetermination agreement reaffirmed certain provisions of the original mergeragreement, including payment of expenses by each party, the disposition of theloan, and a general release between all parties to the proposed merger.  The Corporation collected all principal andinterest on the note, totaling approximately $532,000, and received approximately$50,000 as payment in full on the account receivable from ICBI.  The account receivable represented funds paidby the Corporation for professional services related to the proposed merger.  The balance of the account, approximately$75,000, was written off during the second quarter of 2003 in conjunction withthe termination agreement.  These feeswere for accountants, lawyers and filing fees used to prepare the mergeragreement and 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.

 

**ITEM 8****. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None

 

**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’sdisclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of December 31,2004. Based on that evaluation, the Corporation’s management, including theChief Executive Officer and Chief Financial Officer, concluded that theCorporation’s disclosure controls and procedures were effective. There havebeen no significant changes in the Corporation’s internal controls or in otherfactors that could significantly affect internal controls.

 

**ITEM 8B****. – OTHER INFORMATION**

 

None.

 

46

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**PART III.**

 

**ITEM 9****. –DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OFTHE EXCHANGE ACT**

 

***Directors and Executive Officers***

 

Under the Corporation’sArticles of Incorporation, as amended, the Board of Directors is divided intothree classes.  The Board of Directorspresently consists of nine (9) members. Each year, the shareholders are asked to elect the members of a class fora term of three years.  The informationbelow is provided with respect to each nominee for Director and each Directorwhose term of office extends beyond the date of the Annual Meeting and who willcontinue in office for their existing terms. On November 4, 1993, Illini Bank East, Illini Bank Menard County,and Illini Bank North were merged with, into, and under the charter of IlliniBank, a wholly-owned subsidiary of the Corporation.  As discussed herein, certain of the Directorswere directors of these predecessor banks prior to the merger with Illini.

 

### **Continuing Directors forthe term ending in 2008**

 
| **Name,  Age, Principal Occupation  and other Directorships**                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Director of the  Corporation Since** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| William N.  Etherton - 78, Farmer                                                                                                                                                                                                                                                                                                                                                                                            |       | 1994                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| Mr. Etherton  has been engaged in farming and the livestock business in the Mechanicsburg  vicinity all of his lifetime. He remains active in Etherton Stock Farms, a  2,500-acre farm operation. He previously served as a director of  Citizens State Bank of Mechanicsburg and Illini Bank of Sangamon County  before being elected to the Board of Illini in 1994.                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| Gaylon E. Martin  - 58, President of Illini Corporation                                                                                                                                                                                                                                                                                                                                                                      |       | 2004                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| Mr. Martin  has an extensive career in community banking, principally in Northern,  Illinois. Mr. Martin served in senior officer positions with Citizens  National Bank, Princeton, Farmers National Bank, Geneseo and Wells Fargo. Mr. Martin  began his career with the Corporation in January 2004 as President of  Illini and was appointed as a director of the Corporation in November 2004. |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Jesse Werner, Jr.  – 68, President of Champion Gas & Oil                                                                                                                                                                                                                                                                                                                                                  |       | 2001                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| Mr. Werner  is President of Champion Gas & Oil Company, Vice President of Arrow  Trailer & Equipment Company and Vice President of Waco Leasing  Company. Mr. Werner served on the Board of American Bank &  Trust Co. until 1994, and was a director of Illini. He previously served as a  director of the Corporation from 1983 until 1996.                                           |

 

**Nomineesfor the term ending in 2007**

 
| **Name,  Age, Principal Occupation  and other Directorships**                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Director of the  Corporation Since** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                   |
| William B.  McCubbin - 67, Farmer                                                                                                                                                                                                                                                                                                                                                                                                       |       | 1983                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                   |
| Mr. McCubbin  has engaged in farming in Sangamon County since 1961.  He served as a director of Citizen State  Bank of Mechanicsburg, Illini Bank of Sangamon County and Illini Bank-Coffeen  until their consolidation with Illini.   Mr. McCubbin has served as a director of Illini since 1994 and  with the Corporation since 1983.  Mr. McCubbin  has also served as corporate secretary since 1998. |

 

47

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| N. Ronald Thunman – 73, Chairman of the Board of  Pinkerton  Government Services, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 1997   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| Mr. Thunman  serves as Chairman of the Board of Pinkerton Government Services, Inc.  Previously, Mr. Thunman was President  of CAE Electronics Corporation in Leesburg, Virginia from 1995 through 1999,  Chairman of the Board of CAE Electronics Corporation from 1999 through 2002,  and was Chairman of the Board of Directors of ABB Government Services  Corporation from 1990 through 1995.  Mr. Thunman  is a retired Vice Admiral from the United States Navy.  Mr. Thunman also serves as a director  of Illini. |

 
| Dr. Jane  Schachtsiek – 57, Chancellor, Dept. of Nursing                                                                                                                                                                                                                                                                                                                    |   | 1997   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| Dr. Schachtsiek  has served at Chancellor at St. Johns College, Department of Nursing since  1990. Previously, Dr. Schachtsiek earned her Doctorate of Philosophy  from Southern Illinois University in Carbondale and is a member of the Board  of St. John’s College. She was also elected a director of Illini in 1997 and  has served in that capacity since then. |

 

### **Continuing Directors forthe term ending in 2006**

 
| **Name,  Age, Principal Occupation  and other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Director of the  Corporation Since** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| Thomas A. Black  - 67, Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 1983                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                   |
| Mr. Black  was employed by Caterpillar Tractor Company since 1956 and held a management  position from 1973 until his retirement in July 2000.  He served as a director of Stonington  Community Bank & Trust Co. and Illini Bank-East until the merger  with Illini in 1994.  Mr. Black  was elected to the Board of Directors of Illini in 1994 and has served as its  Chairman since 1996.  Mr. Black  also serves as Chairman of the Board of the Corporation and has held such  position since 1983. Mr. Black was elected to the Board of Directors of  Camp Point in 1999 and has served as its Chairman since then. |

 
| Lawrence B.  Curtin - 78, Farmer                                                                                                                                                                                                                                      |   | 1983   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                  |   |   |
| Mr. Curtin  owns and operates a large corn and soybean farm and has been in farming his  entire life.  He served as a director  and Chairman of the Board of Illini Bank-East until the merger with  Illini.  He also serves as a director  of Illini. |

 
| Dr. Anthony  F. Liberatore – 58, Professor of Economics                                                                                                                                                                                                                                                                                                                                                   |   | 1997   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| Dr. Liberatore  has been a fully tenured Professor of Economics at Millikin University since  1985 and is currently the Hermann Chair of Management Development and  Director of MBA Programs with the Tabor School of Business.  He founded Quality By Design, a private  consulting firm, in 1990.  He was also  elected a director of Illini in 1997 and has served in that capacity since  then. |

 

During 2004, the Corporation’s Board of Directors heldeleven meetings.  Each of the currentDirectors attended more than 75% of the total number of meetings of the Boardof Directors.  The Board of Directors hasestablished Committees to assist in the discharge of its responsibilities.

 

The Executive Committee met five times during2004.  The Executive Committee iscomprised of Messrs. Thunman, Black, Liberatore, Martin and Ms. Schachtsiek.  Each of the current members attended morethan 75% of the total number of Executive Committee meetings.  The Executive Committee was established toact directly on behalf of the Board during interim periods between Boardmeetings and during emergencies.  TheExecutive Committee is also responsible for reviewing all litigation pending orthreatened by or against the Corporation, or its subsidiaries, and except wheresettlement of any such litigation will involve an aggregate expenditure inexcess of $1 million, the Executive Committee has

 

48

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authority to authorize settlement or compromise of anysuch litigation.

 

The CompensationCommittee met eight times during 2004 and consists of Messrs. Black,Liberatore, and Thunman.  Each of thecurrent members attended more than 75% of the total number of CompensationCommittee meetings.  This Committee wascreated by the Corporation to oversee and control all administration ofemployee compensation and benefit matters for the Corporation and itssubsidiary banks.

 

The Nominating Committeemet once during 2004 and consists of Messrs. Black, Etherton, McCubbin,and Thunman.  Each of the current membersattended more than 75% of the total number of Nominating Committeemeetings.  The Nominating Committee wascreated by the Corporation to oversee the duties of nominating a slate forelection to the Board of Directors and with reviewing and determining thequalifications and eligibility of any nominee.

 

The Audit Committee mettwelve times during 2004. The Board of Directors established the AuditCommittee to oversee the external and internal audit functions of theCorporation and its subsidiaries.  Onlyoutside directors are eligible to serve on the Audit Committee.  The Charter for the Audit Committee wasestablished in 2001 and significant amendments were adopted in January of 2004.  The Charter was included as Appendix B in the2003 proxy statement.  During 2004, theAudit Committee consisted of Messrs. Curtin, Black, Etherton, Liberatoreand McCubbin.  Each of the current membersattended more than 75% of the total number of Audit Committee meetings.

 

While the Board of Directorsendorses the effectiveness of our Audit Committee, its membership does notinclude a director who qualifies for designation as an “audit committee financialexpert” - a new concept under federal regulation that contemplates suchdesignation only when an audit committee member satisfies all fivequalification requirements, such as experience (or “experience activelysupervising” others engaged in), preparing, auditing, analyzing or evaluatingfinancial statements presenting a level of accounting complexity comparable towhat is encountered in connection with our Company’s financial statements.

 

***ExecutiveOfficers***

 

The following tableprovides information with respect to the Executive Officers of the Corporationas of December 31, 2004 including all positions and offices with theCorporation.

 
| **Name**             | ** ** | **Age** | ** ** | **Office**                          |
|----------------------|------------|---------|------------|-------------------------------------|
|                 |       |    |       |                                |
| Thomas A. Black      |       | 67      |       | Chairman of the  Board              |
| N. Ronald  Thunman   |       | 73      |       | Vice Chairman of  the Board         |
| Gaylon E. Martin     |       | 58      |       | President                           |
| William B.  McCubbin |       | 67      |       | Secretary                           |
| Dennis Guthrie       |       | 53      |       | Chief Financial  Officer, Treasurer |

 

***BusinessExperience of Non-Director Executive Officers***

 
| Dennis Guthrie-  53 |   | Senior Vice  President, Chief Financial Officer and Treasurer |
|---------------------|--------|---------------------------------------------------------------|

 

Mr. Guthriejoined the Corporation in August 2003 as Senior Vice President and ChiefFinancial Officer.  He has over 30 yearsof bank management experience, the most recent as Vice President of CitizensFirst National Bank, located in Princeton, Illinois.

 

***Section 16(a) BeneficialOwnership Reporting Compliance***

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires Illini’s executive officers andDirectors, and persons who own more than ten percent of a registered class ofIllini’s equity securities, to file reports of ownership on Form 3 andchanges in ownership on Form 4 or 5 with the Securities and ExchangeCommission

 

49

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(the “SEC”).  Such executive officers, Directors and tenpercent shareholders are also required by SEC rules to furnish the Companywith copies of all Section 16(a) forms that they file.

 

Based solely on the Corporation’s review of copies ofsuch forms it has received, the Corporation believes that, during the periodfrom January 1, 2004 until December 31, 2004, all Section 16(a) filingrequirements applicable to its executive officers, Directors and ten percentshareholders were met to the best of the Corporation’s knowledge.

 

***Code of Ethics***

 

TheCompany has adopted a Code of Ethics that applies to all of our employees,officers and directors, including our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions. Our Code of Ethics contains written standardsthat we believe are reasonably designed to deter wrongdoing and to promote:

 

•                  Honestand ethical conduct, including the ethical handling of actual or apparentconflicts of interest between personal and professional relationships;

•                  Full,fair, accurate, timely, and understandable disclosure in reports and documentsthat we file with, or submit to, the Securities and Exchange Commissions and inother public communications we make;

•                  Compliancewith applicable governmental laws, rules and regulations;

•                  Theprompt internal reporting of violations of the code to an appropriate person orpersons named in the code; and

•                  Accountabilityfor adherence to the code.

 

ThisCode of Ethics is attached to our Annual Report on Form 10-KSB forthe fiscal year ended December 31, 2004 as Exhibit 14. We willprovide to any person without charge, upon request, a copy of our Code ofEthics. Requests for a copy of our Code of Ethics should be made to ourSecretary at 3200 West Iles, Springfield, IL 62711.

 

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

 

The following table setsforth the compensation for the fiscal years ended December 31, 2004, 2003and 2002 awarded to or earned by the Chief Executive Officer and the other mosthighly compensated executives of the Company or its subsidiaries earning morethan $100,000 annually:

 

**Summary Compensation Table**

 
| ** **              | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **All Other** | ** ** |
|-------------------------|------------|------------|------------|-------------------------|------------|---------------|------------|
| ** **              | ** ** | **Year**   | ** ** | **Salary**              | ** ** | **Bonus**     | ** ** | **Compensation** | ** ** |
| Gaylon E. Martin        |       | 2004       |       | $                       | 135,000    |          | $          | 11,000 |   | $ | 20,871 | (1) |
| Chief Executive Officer |       |       |       |                    |       |          |       |   |   |
|                    |       |       |       |                    |       |          |       |   |   |
| Burnard K. McHone       |       | 2004       |       | $                       | 135,000    |          | $          | 0 |   | $ | 300,550 | (2) |
| Chief Executive Officer |       | 2003       |       | $                       | 135,000    |          | $          | 29,051 |   | $ | 17,960 | (3) |
|                    |       | 2002       |       | $                       | 114,000    |          | $          | 32,052 |   | $ | 16,760 | (4) |

 

----

(1)  Representscontributions by the Corporation to the Corporation’s 401(k) Retirement Plan onbehalf of the Named Executive in the amount of $2,371, Directors fees of theCorporation and subsidiaries of $11,300 and car allowance of $7,200.

(2)  Representsagreement payments in the amounts of $135,000 on or about January 1, 2005and 2006; $20,000 bonus payable on or about January 1, 2005, contributionsby the Corporation to the Corporation’s 401(k) Retirement Plan on behalf of theNamed Executive in the amount of $4,050, and Directors fees of the Corporationand subsidiaries of $6,500.

 

50

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(3)  Representscontributions by the Corporation to the Corporation’s 401(k) Retirement Plan onbehalf of the Named Executive in the amount of $4,560 and Directors fees of theCorporation and subsidiaries of $13,400.

(4)  Representscontributions by the Corporation to the Corporation’s 401(k) Retirement Plan onbehalf of the Named Executive in the amount of $3,360 and Directors fees of theCorporation and subsidiaries of $13,400.

 

No other executiveofficers of the Corporation received compensation in 2004 in excess of$100,000.

 

### **Employment Agreement**

 

The Corporation and/or Illini have entered into aManagement Continuity Agreement with Gaylon E. Martin, effective November 1,2004 through November 1, 2008, which provides for a base salary of$135,000.  On July 1, 2005 andannually thereafter, Mr. Martin’s base salary will be adjusted to equalthe 75th percentile of banks of similar asset size according to theIllinois Community Bank salary surveys. Adjustments to Mr. Martin’s base salary are subject to the approvalof the Board of Directors.  Mr. Martinshall be paid a $600.00 monthly automobile allowance as reimbursement for theuse of his personally owned automobile and in addition, Mr. Martin shallbe reimbursed for gasoline expense incurred in official travel.  Officer will not participate in any incentiveprogram except as may be awarded by the Board of Directors on an arbitrarybasis.  Such other compensation andbenefit plans are hereinafter referred to collectively as the “Compensation andBenefits Plans”, and exclude any participation or rights that the Officer mayhave been granted or offered to Illini stock options, which rights, to theextent that they exist, are waived by Officer.

 

The Corporation and/or Illini have entered into aManagement Continuity Agreement with Dennis Guthrie, effective August 4,2003 through August 4, 2005, which provides a base salary of $90,000,which salary may be increased from time to time.  Mr. Guthrie shall also be eligible toparticipate in any Compensation and Benefits Plans offered by the Corporationand/or Illini.

 

The Corporation and/or Illini have entered into aManagement Continuity Agreement with Ronald E. Wenger, effective December 31,2002 through December 31, 2005, which provides a base salary of $76,500,which salary may be increased from time to time.  Mr. Wenger shall also be eligible toparticipate in any Compensation and Benefits Plans offered by the Corporationand/or Illini.

 

Unless sooner terminatedin accordance with the terms outlined in the employment agreements, allobligations shall terminate after the expiration of the employment terms of therespective employment agreements.  The officersmay, with the consent of the Corporation, continue to be employed by theCorporation and Illini after the expiration of the employment term of therespective employment agreements on such terms and conditions as may be agreedupon by the Corporation and the officers. These officers may terminate the employment agreements at any time upon30 days’ prior notice to the Corporation.

 

The Corporation mayterminate the executive and the related agreement for cause.  The agreements specify certain acts orconduct that would be a basis for termination. If terminated for cause, the Company has no ongoing obligation to theofficer.

 

The Corporation mayterminate the agreements without cause prior to expiration of the agreement’sterm by providing thirty days notice to the officer.  In such event, the officer shall have nofurther obligation to the Corporation, except the duty to not discloseconfidential information outlined in the Agreement, and the Corporation shallhave no further obligation to the officer from the date of such termination,except to pay to the officer his or her salary, benefits, and reasonableexpenses of out placement services during the twelve month period following thedate of termination; provided, however, that the Corporation shall only pay forout placement expenses actually incurred.

 

Under the terms of theagreement, the officer has no further obligation to the Corporation, except theduty to refrain from disclosing confidential information, in the event of anyof the following:

 

51

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•                  A “Change in control” of theCorporation during a specified period and termination of the officer’semployment other than for cause;

•                  Within the employment term, theofficer resigns from employment within thirty days following a material changein the officer’s title, authorities or duties in effect immediately prior tothe change in control;

•                  Within the employment term, theofficer resigns from employment within thirty days following a reduction incompensation or benefits, or a reduction of compensation and benefits in effectimmediately prior to the change in control; or

•                  Within the employment term, theofficer resigns from his employment within thirty days following a change inthe officer’s principal place of employment without his consent to a city morethan 25 miles from Springfield, Illinois.

 

In the event of theforegoing, the Corporation has no further obligation to the officer from thedate of termination, except to pay the officer his or her salary and benefitsfor a period of twelve months from the date of termination.

 

**BurnardK. McHone Agreement**

 

The Corporation hasentered into an Agreement with Burnard K. McHone, (“Executive”) effective November 10,2004.  The Executive desired to resignfrom all positions with the Corporation and the banks and its and theiraffiliated companies.  The parties agreethat as of the date of this agreement through December 31, 2004, theExecutive’s only duties shall be as an advisor to the Corporation and thebanks.  As of January 1, 2005 theExecutive shall resign as an employee of the Corporation and the banks.  Under terms of the agreement the Corporationshall pay Executive the following amounts and provide him with the followingbenefits:

 

(a)            TheExecutive shall be paid $135,000 on or about January 1, 2005;

(b)            TheExecutive shall be paid $135,000 on or about January 1, 2006;

(c)            TheExecutive shall be entitled to participate in the Corporation’s healthinsurance coverage pursuant to the Consolidated Omnibus Reconciliation Act of1985 (“COBRA Continuation Coverage).  Inthe event of such election, the Executive shall pay all premiums applicable tosuch COBRA Continuation Coverage.

 

The terms of theagreement contain customary covenants concerning conduct, nonsolicitation andnondisclosure.

 

### **Compensation of Directors**

 

Directors of theCorporation receive $500 per meeting paid quarterly. Executive and AuditCommittee members receive $100 per meeting paid quarterly.  Compensation and Nominating Committee membersreceive $100 per meeting paid quarterly. Certain Directors also receive fees for services as directors of theCorporation’s subsidiaries, which is an annual retainer of $4,800 paid quarterly.  Loan Committee members receive $100 permeeting paid quarterly.  Bank ExecutiveCommittee members receive $100 per meeting paid quarterly.  Committee Chairs are paid at 150% of thenormal fee.

 

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

 

***SecurityOwnership of Certain Beneficial Owners and Management***

 

The following table setsforth information as of February 28, 2005, with respect to allshareholders known to the Corporation to have been the beneficial owners ofmore than five percent of its Common Stock, and the shares of Common Stock ofthe Corporation beneficially owned by each Director, Nominee, and by allDirectors and executive officers of the Corporation as a group based uponinformation received from such persons. Beneficial ownership of securities generally means the power to vote ordispose of securities, regardless of any economic interest.  Unless otherwise indicated, all persons shownin the table below have

 

52

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sole voting anddispositive power or share voting and dispositive power with members of theirimmediate families with respect to the number of shares listed next to theirnames.

 
| ** **                           | ** **                                                     | ** **               | ** ** | **Common Stock Beneficially Owned** | ** ** |
|--------------------------------------|----------------------------------------------------------------|--------------------------|------------|-------------------------------------|------------|
| **Name of Beneficial Owner Address** | ** **                                                     | **Number of  Shares**    | ** ** | **Percentage  of Total**            | ** ** |
|                                 |                                                           |                     |       |                                |       |   |   |
| D. Marlene H. Huls                   |                                                           | P.O. Box  579       |       |                                |       |   |   |
|                                 |                                                           | Gifford,  Illinois 61847 |       | 103,756                             |       | 14.86 | % |
|                                 |                                                           |                     |       |                                |       |   |   |
| D. Marlene H. Huls,                  |                                                           | P.O. Box  579       |       |                                |       |   |   |
| TR UW, Ernest H. Huls                |                                                           | Gifford,  Illinois 61847 |       |                                |       |   |   |
| Family Trust                         |                                                           |                     |       | 19,577                              |       | 2.80 | % |
|                                 |                                                           |                     |       |                                |       |   |   |
| HBI Private Equity Fund I, LLP       |                                                           |                     |       | 44,082                              |       | 6.31 | % |
|                                 |                                                           |                     |       |                                |       |   |   |
| Thomas A. Black                      |                                                           |                     |       | 18,624                              |       | 2.62 | % |
| Lawrence B. Curtin                   |                                                           |                     |       | 3,194                               |       |   | * |
| William N. Etherton                  |                                                           |                     |       | 8,110                               |       | 1.16 | % |
| Anthony Liberatore                   |                                                           |                     |       | 3,556                               |       |   | * |
| William B. McCubbin                  |                                                           |                     |       | 3,250                               |       |   | * |
| Jane A. Schachtsiek                  |                                                           |                     |       | 455                                 |       |   | * |
| N. Ronald Thunman                    |                                                           |                     |       | 4,200                               |       |   | * |
| Jesse A. Werner                      |                                                           |                     |       | 8,134                               |       | 1.16 | % |
| Gaylon E. Martin                     |                                                           |                     |       | 2,750                               |       |   | * |
|                                 |                                                           |                     |       |                                |       |   |
|                                 | All 9 Directors,  Nominees, and  Executive Officers as a group |                     | 52,273     |                                | 7.49       | % |
|                                      |                                                                |                          |            |                                     |            |  |  |  |

 

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*less than 1%.

 

***Equity Compensation Plan***

 

The following tablepresents information about the Corporation’s Equity Compensation Plan as of December 31,2004.

 
| **Plan category**                                           | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                              | ** ** | ** **                                                                              | ** ** | ** **                                                                                                                                      | ** ** |
| Equity  compensation plans approved by security holders     |       | 0                                                                                                       |       | 0                                                                                       |       | 67,500                                                                                                                                          |       |
|                                                        |       |                                                                                                    |       |                                                                                    |       |                                                                                                                                            |       |
| Equity  compensation plans not approved by security holders |       | 0                                                                                                       |       | 0                                                                                       |       | 0                                                                                                                                               |       |
|                                                        |       |                                                                                                    |       |                                                                                    |       |                                                                                                                                            |       |
| Total                                                       |       | 0                                                                                                       |       | 0                                                                                       |       | 67,500                                                                                                                                          |       |

 

53

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

 

***Transactionswith Directors, Executive Officers and Associates***

 

During 2004, certain Directors and executive officersof the Corporation (and members of their immediate families and corporations,organizations and trusts with which these individuals are associated) have beenindebted to one or more of the subsidiary banks in amounts of $60,000 or more.All such loans were made in the ordinary course of business, did not involvemore than normal risk of collectibility or present other unfavorable features,and were made on substantially the same terms, including interest rates andcollateral requirements, as those prevailing at the same time for comparableloan transactions with unaffiliated persons. No such loan was classified by any of the subsidiary banks as of December 31,2004 as a non-accrual, past due, restructured or potential problem loan.

 

Outside of normalcustomer relations, none of the Directors, executive officers, or 5%shareholders of the Corporation (or members of their immediate families)currently maintains or has maintained during 2004 any significant business orpersonal relationship with the Corporation or any of its subsidiaries otherthan such as might arise by virtue of such person’s ownership interest in, orposition with, the Corporation.

 

**ITEM 13****. - EXHIBITSLIST**

 

(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 the Corporation’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 November 3, 2004).                                             |
| (9)     |   | Not applicable.                                                                                                                                                                                                                                            |
| (10)(i) |   | (1) 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).   |
|    |   | (2) 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).                                                     |
|    |   | (3) 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).                                                           |
|    |   | (4) Management  Continuity Agreements by and between Illini Corporation and/or Illini Bank  and Dennis B. Guthrie, dated August 4, 2003 (incorporated by reference  to Illini Corporation’s Form 10-KSB file on March 26, 2004).  |
|    |   | (5) Management  Continuity Agreement by and between Illini Corporation and/or Illini Bank and  Gaylon E. Martin, dated November 1, 2004 (incorporated by reference to  Illini Corporation’s Form 8-K filed on November 24, 2004). |
|    |   | (6) Agreement  by and between Illini Corporation and Burnard K. McHone dated November 10,  2004 (incorporated by reference to Illini Corporation’s Form 8-K  dated November 16, 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 90 days as the annual report to security holders.                                                                                                                                             |
| (14)    |   | Code of Ethics,  dated January 1, 2005.                                                                                                                                                                                                               |
| (16)    |   | Not applicable                                                                                                                                                                                                                                             |
| (18)    |   | Not applicable.                                                                                                                                                                                                                                            |
| (21)    |   | Subsidiaries of  the Registrant: Illini Bank, an Illinois state chartered bank, Farmers State  Bank of Camp Point, an Illinois state chartered bank, and Illini Statutory  Trust I, a special purpose Delaware trust subsidiary.                           |
| (22)    |   | Not applicable.                                                                                                                                                                                                                                            |
| (23)    |   | Not applicable.                                                                                                                                                                                                                                            |
| (24)    |   | Not applicable.                                                                                                                                                                                                                                            |

 

54

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| (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.                                                                                                                         |

 

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

 

***Payment of Fees toAuditors***

 

Crowe Chizek and Company LLC (“Crowe Chizek”),independent public accountants, were the auditors for the financial statementsof the Corporation for the years ended December 31, 2004 and 2003.  Representatives of Crowe Chizek will bepresent at the 2004 Annual Meeting, and they will be given an opportunity tomake a statement if they desire to do so and will be available to respond to anyappropriate questions from shareholders.

 

In addition to retaining Crowe Chizek to audit theconsolidated financial statements for fiscal 2004, the Corporation and itssubsidiaries retained Crowe Chizek to provide various other services in fiscal2004. The aggregate fees billed for professional services by Crowe Chizek infiscal 2004 for these various services were:

 

**Audit Fees**

 

Auditfees and expenses billed to the Company by Crowe Chizek for the audit of theCompany’s financial statements for the fiscal years ended December 31,2004 and December 31, 2003, and for review of the Company’s financialstatements included in the Company’s quarterly reports on Form 10-QSB,are as follows: 

 

| **2004** | ** ** | **2003**   | ** ** |
|----------|------------|------------|------------|
| **$**    | **67,166** | ** ** | **$**      | **52,500** | ** ** |
|          |            |            |            |  |  |

 

**Audit Related Fees**

 

Auditrelated fees and expenses billed to the Company by Crowe Chizek for fiscalyears 2004 and 2003 for services related to the performance of the audit orreview of the Company’s financial statements that were not included under theheading “Audit Fees”, are as follows: 

 

| **2004** | ** ** | **2003**   | ** ** |
|----------|------------|------------|------------|
| **$**    | **0**      | ** ** | **$**      | **0** | ** ** |
|          |            |            |            |  |  |

 

**TaxFees**

 

Taxfees and expenses billed to the Company by Crowe Chizek for fiscal years 2004and 2003 for services related to tax compliance, tax advice and tax planning,consisting primarily of preparing the Company’s federal and state income taxreturns for the previous fiscal periods and inclusive of expenses are asfollows 

 

| **2004** | ** ** | **2003**   | ** ** |
|----------|------------|------------|------------|
| **$**    | **15,000** | ** ** | **$**      | **8,700** | ** ** |
|          |            |            |            |  |  |

 

**All Other Fees**

 

Feesand expenses billed to the Company by Crowe Chizek for all other servicesprovided during fiscal years 2004 and 2003 are as follows: 

 

| **2004** | ** ** | **2003**   | ** ** |
|----------|------------|------------|------------|
| **$**    | **1,875**  | ** ** | **$**      | **0** | ** ** |
|          |            |            |            |  |  |

 

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In accordance with Section 10A(i) of theExchange Act, before Crowe Chizek is engaged by us to render audit or non-auditservices, the engagement is approved by our Audit Committee. None of theaudit-related, tax and other services described in the table above wereapproved by the Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) ofRegulation S-X.

 

The Audit Committee considered the provision by CroweChizek of non-audit services to Illini and determined that the provision ofsuch services was compatible with maintaining the independence of Crowe Chizek.

 

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**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Exchange Act, the registrant has caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| Dated:                              |   March 29,  2005 |   |   |
|-------------------------------------|----------------------------------|--------|--------|
|                                |                             |
| Illini  Corporation, Registrant, by |                             |
|                                |                             |
| /s/ Gaylon E.  Martin               |                             |   |
|                                |                             |
| Gaylon E. Martin,  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 29,  2005** |
|-----------------------------------------------------------------------------|--------------------------|
| Thomas A. Black,  Chairman                                                  | Date                     |
|                                                                        |                     |
| **/s/  Lawrence B. Curtin**                                                 | **March 29,  2005** |
| Lawrence  B. Curtin, Director                                               | Date                     |
|                                                                        |                     |
| **/s/  William N. Etherton**                                                | **March 29,  2005** |
| William N.  Etherton, Director                                              | Date                     |
|                                                                        |                     |
| **/s/  William B. McCubbin**                                                | **March 29,  2005** |
| William B.  McCubbin, Director                                              | Date                     |
|                                                                        |                     |
| **/s/  Anthony F. Liberatore**                                              | **March 29,  2005** |
| Anthony F.  Liberatore, Director                                            | Date                     |
|                                                                        |                     |
| **/s/  Jane A. Schachtsiek**                                                | **March 29,  2005** |
| Jane A.  Schachtsiek, Director                                              | Date                     |
|                                                                        |                     |
| **/s/  Jesse A. Werner, Jr.**                                          | **March 29,  2005** |
| Jesse A. Werner, Jr.,  Director                                        | Date                     |
|                                                                        |                     |
| **/s/ Gaylon E. Martin**                                                    | **March 29,  2005** |
| Gaylon  E. Martin, Director & Pres.  (Principal Executive Officer) | Date                     |
|                                                                        |                     |
| **/s/ N.  Ronald Thunman**                                                  | **March 29,  2005** |
| N. Ronald  Thunman, Director                                                | Date                     |
|                                                                        |                     |
| **/s/  Dennis B. Guthrie**                                                  | **March 29,  2005** |
| Dennis B.  Guthrie, CFO  (Principal Financial and Accounting Officer)       | Date                     |

 

57

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**IlliniCorporation, Illini Bank and Farmers State Bank of Camp Point Officers**

 

**IlliniCorporation**

 

Gaylon E. Martin

President / ChiefExecutive Officer

 

Dennis B. Guthrie

Sr. Vice President /Chief Financial Officer

 

**IlliniBank**

 

Gaylon E. Martin

President / ChiefExecutive Officer

 

Dennis B. Guthrie

Sr. Vice President /Chief Financial Officer

 

Ronald E. Wenger

Sr. Vice President /Corporate Banking

 

Scott P. Klor

Sr. Vice President / WealthManagement

 

Molly A. Appelt

Sr. Vice President /Retail Banking

 

Juanita L. Mathis

Vice President /Operations

 

Greg A. Birky

Vice President /Corporate Banking

 

Jean L. Jachino

Asst. Vice President /Business Development

 

**FarmersState Bank of Camp Point**

 

Gaylon E. Martin,

President

 

Terry D. Reuschel

Vice President / ChiefExecutive Officer

 

Jerelyn S. Douglas

Asst. Vice President /Cashier

 

**IlliniBank Locations**

 

3200West Iles Avenue

Springfield

*EdHart, Asst. Vice President / Branch Manager*

 

120 SouthChatham Road

Springfield

*AnnCowhick, Branch Manager*

 

615 West Jefferson St.

Springfield

*DottieBellm, Branch Manager*

 

2120 Peoria Road

Springfield

*CarolynDowns-Hansel, Branch Manager*

*JimMcGuire, Asst. Vice President / Corporate Banker*

 

375West Andrew Road

Sherman

*StephanieHoover, Asst. Vice President / Branch Manager*

 

133Dodds Street

Divernon

*SusanDarling, Community Bank President*

 

Route4 and Jefferson

Auburn

*VickieBly, Community Bank President*

 

2201 Woodlawn, Ste. 100

Lincoln

*SharonAwe, Community Bank President*

 

120Governor Oglesby

Elkhart

*SharonAwe, Community Bank President*

 

116East Exchange

Danvers

*GregBirky, Community Bank President*

 

103Franklin

Hudson

*GregBirky, Community Bank President*

 

100 East Third St.

Stonington

*CathyBrackemyer, Asst. Vice President / Retail Manager*

 

West Main St.

Mechanicsburg

*CathyBrackemyer, Asst. Vice President / Retail Manager*

 

**FarmersState Bank of Camp Point Location**

 

206 E. Wood Street

Camp Point

*GaylonE. Martin, President*

 

**StockTransfer Agent**

 

IllinoisStock Transfer

209 West Jackson Blvd., Suite 903

Chicago, IL 60606

1-800-757-5755

 

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