UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period of              to             

Commission File Number 000-53935

Harvard Illinois Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

Maryland	27-2238553
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)

58 N. Ayer Street Harvard, IL	60033
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (815) 943-5261

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period the registrant was required to submit and post such filings).    ¨  Yes    ¨  No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.

¨  Large Accelerated Filer	¨  Accelerated Filer
¨  Non-Accelerated Filer	x  Smaller Reporting Company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of August 12, 2010, 784,689 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

HARVARD ILLINOIS BANCORP, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to the Consolidated Financial Statements	7-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4T.	Controls and Procedures	37
PART II	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Removed and Reserved	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
	Signatures	39
EXHIBITS
	Section 302 Certifications	40
	Section 906 Certification	42

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	(Unaudited) June 30, 2010			December 31, 2009
Assets
Cash and due from banks	$	1,055		$	973
Interest-bearing demand deposits in banks		1,759			2,594
Securities purchased under agreements to resell		5,950			11,800
Cash and cash equivalents		8,764			15,367
Interest-bearing deposits with other financial institutions		11,556			8,110
Available-for-sale securities		3,443			3,225
Held-to-maturity securities, at amortized cost (estimated fair value of $3,443 and $3,939 at June 30, 2010 and December 31, 2009, respectively)		3,211			3,789
Loans, net of allowance for loan losses of $1,603 and $1,426 at June 30, 2010 and December 31, 2009, respectively		121,807			108,895
Premises and equipment, net		3,701			3,652
Federal Home Loan Bank stock, at cost		6,549			6,549
Foreclosed assets held for sale		720			506
Accrued interest receivable		764			515
Deferred income taxes		1,322			1,231
Bank-owned life insurance		4,033			3,992
Mortgage servicing rights		360			398
Other		677			1,380
Total assets	$	166,907		$	157,609
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	3,976		$	3,939
Savings, NOW and money market		44,874			47,047
Certificates of deposit		76,313			70,564
Brokered certificates of deposit		2,813			2,811
Total deposits		127,976			124,361
Federal Home Loan Bank advances		17,512			18,128
Advances from borrowers for taxes and insurance		502			415
Deferred compensation		2,138			2,096
Accrued interest payable		67			79
Other		244			215
Total liabilities		148,439			145,294
Commitments and Contingencies		—			—
Stockholders’ Equity
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.01 par value, 30,000,000 shares authorized; 784,689 shares issued and outstanding		8			—
Additional paid-in capital		6,807			—
Unearned ESOP shares, at cost		(615	)		—
Retained earnings		12,219			12,250
Accumulated other comprehensive income, net of tax		49			65
Total stockholders’ equity		18,468			12,315
Total liabilities and equity	$	166,907		$	157,609

See accompanying notes to the unaudited consolidated financial statements.

3

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands)

	(Unaudited) Three Months  Ended June 30,						(Unaudited) Six Months  Ended June 30,
	2010			2009			2010			2009
Interest and Dividend Income
Interest and fees on loans	$	1,809		$	1,788		$	3,584		$	3,648
Securities
Taxable		72			105			148			174
Tax-exempt		6			8			14			18
Securities purchased under agreements to resell		11			72			36			128
Other		46			48			91			82
Total interest and dividend income		1,944			2,021			3,873			4,050
Interest Expense
Deposits		608			781			1,222			1,578
Federal Home Loan Bank advances		163			243			333			493
Total interest expense		771			1,024			1,555			2,071
Net Interest Income		1,173			997			2,318			1,979
Provision for Loan Losses		216			253			432			294
Net Interest Income After Provision for Loan Losses		957			744			1,886			1,685
Noninterest Income
Customer service fees		70			56			130			118
Brokerage commission income		11			15			17			34
Net realized gains (losses) on loan sales		(25	)		289			9			294
Net realized losses on sales of available-for-sale securities		(1	)		—			(1	)		(7	)
Losses on other than temporary impairment of equity securities		(2	)		(4	)		(6	)		(39	)
Loan servicing fees		41			42			84			83
Bank-owned life insurance income, net		40			36			78			71
Other		3			4			7			7
Total noninterest income		137			438			318			561
Noninterest Expense
Compensation and benefits		621			487			1,224			1,158
Occupancy		113			140			248			285
Data processing		118			113			234			230
Professional fees		66			14			103			39
Marketing		20			27			44			62
Office supplies		14			10			29			30
Federal deposit insurance premiums		62			140			116			169
Indirect automobile servicing fees		56			52			94			112
Foreclosed assets, net		34			23			71			80
Other		76			22			140			84
Total noninterest expense		1,180			1,028			2,303			2,249
Income (Loss) Before Income Taxes		(86	)		154			(99	)		(3	)
Provision (Benefit) for Income Taxes		(54	)		53			(68	)		(11	)
Net Income (Loss)	$	(32	)	$	101		$	(31	)	$	8
Earnings (Loss) Per Share:
Basic and diluted (Note 5)	$	(.04	)		N/A		$	N/A			N/A

See accompanying notes to the unaudited consolidated financial statements.

4

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

	Common Stock		Additional Paid-In Capital			Unearned ESOP Shares			Retained Earnings			Accumulated Other Comprehensive Income			Total
For the six months ended June 30, 2010 (unaudited)
Balance, January 1, 2010	$	—	$	—		$	—		$	12,250		$	65		$	12,315
Comprehensive loss:
Net loss		—		—			—			(31	)		—			(31	)
Change in unrealized appreciation on available-for-sale securities, net of tax benefit of $23		—		—			—			—			(16	)		(16	)
Total comprehensive loss																(47	)
Common stock issued in initial public offering, 784,689 shares, net of issuance costs of $1,030		8		6,809			—			—			—			6,817
Acquisition of ESOP shares		—		—			(628	)		—			—			(628	)
ESOP shares earned		—		(2	)		13			—			—			11
Balance, June 30, 2010	$	8	$	6,807		$	(615	)	$	12,219		$	49		$	18,468
For the six months ended June 30, 2009 (unaudited)
Balance, January 1, 2009	$	—	$	—		$	—		$	12,512		$	15		$	12,527
Comprehensive income:
Net income		—		—			—			8			—			8
Change in unrealized appreciation on available-for-sale securities, net of tax expense of $13		—		—			—			—			27			27
Total comprehensive income																35
Balance, June 30, 2009	$	—	$	—		$	—		$	12,520		$	42		$	12,562

See accompanying notes to unaudited consolidated financial statements.

5

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	(Unaudited) Six Months  Ended June 30,
	2010			2009
Operating Activities
Net income (loss)	$	(31	)	$	8
Items not requiring (providing) cash
Depreciation		102			110
Provision for loan losses		432			294
Amortization of premiums and discounts on securities		(9	)		(7	)
Deferred income taxes		(68	)		(10	)
Net realized gains on loan sales		(9	)		(294	)
Net realized losses on sales of available-for-sale securities		1			7
Loss on other than temporary impairment of equity securities		6			39
Loss on foreclosed assets held for sale		50			59
Bank-owned life insurance income, net		(78	)		(71	)
Originations of loans held for sale		(7,540	)		(20,557	)
Proceeds from sales of loans held for sale		7,587			20,717
ESOP compensation expense		11			—
Changes in
Accrued interest receivable		(249	)		(1	)
Other assets		740			(63	)
Accrued interest payable		(12	)		(31	)
Deferred compensation		42			130
Other liabilities		29			146
Net cash provided by operating activities		1,004			476
Investing Activities
Net increase in interest-bearing deposits		(3,446	)		(7,441	)
Purchases of available-for-sale securities		(2,011	)		(11	)
Proceeds from the sales of available-for-sale securities		927			495
Proceeds from maturities and pay-downs of available-for-sale securities		823			1,136
Purchases of held-to-maturity securities		—			(4,460	)
Proceeds from maturities and pay-downs of held-to-maturity securities		584			844
Net change in loans		(13,748	)		6,975
Purchase of premises and equipment		(151	)		(110	)
Proceeds from sale of foreclosed assets		140			545
Net cash used in investing activities		(16,882	)		(2,027	)
Financing Activities
Net increase (decrease) in demand deposits, money market, NOW and savings accounts		(2,136	)		6,921
Net increase in certificates of deposit, including brokered certificates		5,751			254
Net increase (decrease) in advances from borrowers for taxes and insurance		87			(10	)
Proceeds from Federal Home Loan Bank advances		2,206			2,653
Repayments of Federal Home Loan Bank advances		(2,822	)		(8,663	)
Proceeds from issuance of common stock, net of costs		6,817			—
Stock issuance from Employee Stock Ownership Plan purchase		(628	)		—
Net cash provided by financing activities		9,275			1,155
Net Decrease in Cash and Cash Equivalents		(6,603	)		(396	)
Cash and Cash Equivalents, Beginning of Period		15,367			14,019
Cash and Cash Equivalents, End of Period	$	8,764		$	13,623
Supplemental Cash Flows Information
Interest paid	$	1,567		$	2,102
Income taxes paid		—			—
Foreclosed assets acquired in settlement of loans		404			133

Supplemental disclosure of noncash financing activities:

With the initial public offering in April 2010, the Company loaned $628 to the Employee Stock Ownership Plan, which was used to acquire 62,775 shares of the Company’s common stock. The loan is secured by the shares purchased and is shown as unearned ESOP shares in the consolidated balance sheets.

See accompanying notes to unaudited consolidated financial statements.

6

HARVARD ILLINOIS BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (In thousands)

Note 1: Basis of Financial Statement Presentation

The 2009 consolidated financial statements include the accounts of Harvard Illinois Bancorp, Inc. (Company) and its wholly-owned subsidiaries, Harvard Savings Bank (Bank) and Harvard Illinois Financial Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.

The conversion has been accounted for in accordance with accounting principles generally accepted in the United States of America (GAAP). Accordingly, the consolidated balance sheet as of December 31, 2009, the consolidated statement of operations for the three and six months ended June 30, 2009, and consolidated statement of cash flows for the six months ended June 30, 2009 are presented as results of the Harvard Savings, MHC and its subsidiaries. The consolidated balance sheet as of June 30, 2010, the consolidated statement of operations for the three and six months ended June 30, 2010, and consolidated statement of cash flows for the and six months ended June 30, 2010 are presented as results of the Company and its subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10–Q and Rule 10–01 of Regulation S–X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of June 30, 2010 and December 31, 2009, and the results of its operations for the six month periods ended June 30, 2010 and 2009. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2009 included as part of Harvard Illinois Bancorp, Inc.’s Form 10-K (File No. 000-53935) (2009 Form 10-K) filed with the Securities and Exchange Commission on May 14, 2010.

The results of operations for the six month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes thereto included in the 2009 Form 10–K.

Note 2: Conversion

On April 8, 2010, Harvard Savings, MHC completed its conversion and reorganization from a two-tier mutual holding company to a stock holding company. In accordance with the plan of conversion adopted by the Board of Directors of Harvard Savings, MHC on July 23, 2009, Harvard Savings, MHC (the mutual holding company) and Harvard Illinois Financial Corporation (the mid-tier stock holding company) ceased to exist as separate legal entities and a stock holding company, Harvard Illinois Bancorp, Inc. issued and sold shares of common stock to eligible depositors of Harvard Savings Bank and to former borrowers of Morris Building & Loan, s.b. in a subscription offering, and to the general public in a community offering. A total of 784,689 shares, par value of $0.01 per shares, were sold in the conversion at $10 per share, raising $7.8 million of gross proceeds. The Company established an employee stock ownership plan that purchased 8% of the total shares, or a total of 62,775 shares in the offering, for a total of $627,750. $1.0 million of conversion expenses were offset against the gross proceeds. Harvard Illinois Bancorp, Inc.’s common stock began trading on the over-the-counter market under the symbol “HARI” on April 9, 2010. The 2010 consolidated financial statements include the accounts of Harvard Illinois Bancorp, Inc. and its wholly-owned subsidiary, Harvard Savings Bank.

7

Note 3: New Accounting Pronouncements

Recent and Future Accounting Requirements

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2010-09 “Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 amends the subsequent events disclosure guidance. The amendments include a definition of an SEC filer, requires an SEC filer to evaluate subsequent events through the date the financial statements are issued, and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective upon issuance. Adoption of this update did not have a material effect on the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends the fair value disclosure guidance. The amendments include new disclosures and changes to clarify existing disclosure requirements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this update as of June 30, 2010 did not have a material effect on the Company’s financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which will require the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”). This ASU will also require the Company to disclose additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The provisions of this ASU are effective for the Company’s reporting period ending December 31, 2010. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption will have no impact on the Company’s statements of income and condition.

Note 4: Employee Stock Ownership Plan (ESOP)

In connection with the conversion to stock form, the Bank established an ESOP for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 18). The ESOP borrowed funds from the Company in an amount sufficient to purchase 62,775 shares (approximately 8% of the Common Stock issued in the stock offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 15 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest 100% in their accrued benefits under the employee stock ownership plan after three vesting years, with no prorated vesting prior to reaching three vesting years. Vesting is accelerated upon retirement, death or disability of the participant or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.

Participants receive the shares at the end of employment. Because the Company’s stock is not traded on an established market, as of June 30, 2010, it is required to provide the participants in the Plan with a put option to repurchase their shares. This repurchase obligation is reflected in the Company’s financial statements in other liabilities and reduces shareholders’ equity by the estimated fair value of the earned shares.

8

The Company is accounting for its ESOP in accordance with ASC Topic 718, Employers Accounting for Employee Stock Ownership Plans. Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per shares computations. Dividends, if any, on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

A summary of ESOP shares at June 30, 2010 is as follows (dollars in thousands):

Shares committed for release		1,272
Unearned shares		61,503
Total ESOP shares		62,775
Fair value of unearned ESOP shares	$	486

Note 5: Earnings Per Common Shares (“EPS”)

Basic earnings per common share are presented for the period beginning April 8, 2010, the date of conversion, to June 30, 2010. Income (loss) per shares data is not presented for the three months ended March 31, 2010 or for the three and six months ended June 30, 2009, since there were no outstanding shares of common stock until the conversion on April 8, 2010. The factors used in the earnings per common shares computation follow (dollars in thousands):

	2010
Basic
Net loss since formation of the Company on April 8, 2010	$	(32	)
Weighted average common shares outstanding		784,689
Less: Average unallocated ESOP shares		(61,927	)
Average shares		722,762
Basic earnings (loss) per common shares	$	(0.04	)

There were no potential dilutive common shares for the period presented. There were no common shares outstanding prior to April 8, 2010.

9

Note 6: Securities Purchased Under Agreements to Resell

The Company enters into purchases of securities under agreements to resell. The amounts advanced under these agreements were $5,950 and $11,800 at June 30, 2010 and December 31, 2009. The agreements are over-collateralized by 102.5% with collateral consisting of securities guaranteed by the “full faith and credit” of the United States Government. The securities underlying the agreements are book-entry securities. All securities are delivered by appropriate entry into the third-party custodian’s account designated by the Company under a written custodial agreement that explicitly recognizes the Company’s interest in the securities. These agreements mature by notice by the Company or 30 days by the custodian. The Company’s policy requires that all securities purchased under agreements to resell be fully collateralized.

At June 30, 2010 and December 31, 2009, agreements to resell securities purchased were outstanding with the following entities (in thousands):

	June 30, 2010		December 31, 2009
BCM High Income Fund, LP	$	—	$	5,350
HEC Opportunity Fund LLC		1,500		—
Coastal Securities		4,450		6,450
Total	$	5,950	$	11,800

Note 7: Securities

The amortized cost and approximate fair value of securities, together with gross unrealized gains and losses, of securities are as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale Securities:
June 30, 2010:
U.S. government agencies	$	1,621	$	27	$	—		$	1,648
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		932		24		—			956
State and political subdivisions		362		—		—			362
Equity securities		469		12		(4	)		477
	$	3,384	$	63	$	(4	)	$	3,443
December 31, 2009:
U.S. Government and federal agency	$	976	$	32	$	—		$	1,008
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		1,105		29		—			1,134
State and political subdivisions		582		—		(2	)		580
Equity securities		465		38		—			503
	$	3,128	$	99	$	(2	)	$	3,225

10

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity Securities:
June 30, 2010:
U.S. government agencies	$	500	$	48	$	—	$	548
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		36		1		—		37
Private-label residential		2,575		182		—		2,757
State and political subdivisions		100		1		—		101
	$	3,211	$	232	$	—	$	3,443
December 31, 2009:
U.S. Government agencies	$	500	$	35	$	—	$	535
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		43		—		—		43
Private-label residential		3,146		113		—		3,259
State and political subdivisions		100		2		—		102
	$	3,789	$	150	$	—	$	3,939

The Company held no securities at June 30, 2010 with a book value that exceeded 10% of total equity, with the exception of obligations of U.S. Treasury and other U.S. government agencies and corporations.

Available for sale equity securities consist of shares in the Shay Asset Management mutual funds, shares of FHLMC and FNMA common stock, and shares in other financial institutions.

The Company recorded other-than-temporary impairment on investments in FNMA and FHLMC common stock totaling $3 and $5 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, the Company held investments in FNMA and FHLMC common stock with fair value of $20 and $23, respectively. The investments in FNMA and FHLMC common stock are valued using available market prices. Management performed an analysis and deemed the remaining investment in FNMA and FHLMC common stock was not other than temporarily impaired as of June 30, 2010 and December 31, 2009.

The Company recorded an other-than-temporary impairment on the Shay Asset Management mutual funds included in equity securities in the amount of $29 for the six month period ended June 30, 2009. As of June 30, 2010 and December 31, 2009, the Company held investments in the mutual funds with an amortized cost of $429 and $418, respectively. The investments in mutual funds are valued using available market prices. Management performed an analysis and deemed the remaining investment in the mutual funds was not other than temporarily impaired as of June 30, 2010 and December 31, 2009.

The Company recorded an other-than-temporary impairment on other equity securities of $3 and $5 for the six month periods ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, the Company held investments in other equity securities with an amortized cost of $20 and $23, respectively. Management performed an analysis and deemed the remaining investment in other equity securities was not other than temporarily impaired as of June 30, 2010 and December 31, 2009.

Other than temporary impairment recorded for the six month periods ended June 30, 2010 and 2009 totaled $6 and $39, respectively, as previously described.

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $5,339 and $2,729 as of June 30, 2010 and December 31, 2009, respectively.

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Gross gains of $1 and $0, and gross losses of $2 and $7, resulting from sales of available-for-sale securities were realized for the six month periods ended June 30, 2010 and 2009, respectively.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2010, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	895	$	921	$	—	$	—
One to five years		901		902		600		649
Five to ten years		187		187		—		—
After ten years		—		—		—		—
		1,983		2,010		600		649
Mortgage-backed securities		932		956		2,611		2,794
Equity securities		469		477		—		—
Totals	$	3,384	$	3,443	$	3,211	$	3,443

Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical cost. Total fair value of these investments at June 30, 2010 was $208, which is approximately 3% of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent increases in market interest rates and failure of certain investments to maintain consistent credit quality ratings. Management believes the declines in fair value for these securities are not other-than-temporary.

The following table shows the Company’s securities’ gross unrealized losses and fair value of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2010 (in thousands):

	Less than 12 Months					12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale:
Equity securities	$	208	$	(4	)	$	—	$	—	$	208	$	(4	)
Total temporarily impaired securities	$	208	$	(4	)	$	—	$	—	$	208	$	(4	)

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Note 8: Loan Portfolio Composition

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated (in thousands).

	At June 30, 2010					At December 31, 2009
	Amount			Percent		Amount			Percent
Real estate loans:
One-to-four family	$	51,313		41.58	%	$	53,733		48.43	%
Home equity line of credit and other 2nd mortgage		11,735		9.51			12,315		11.10
Multifamily		1,444		1.17			175		0.16
Commercial		25,667		20.80			20,133		18.14
Farmland		2,926		2.37			459		0.41
Construction and land development		2,156		1.74			5,323		4.80
Total real estate loans		95,241		77.17			92,138		83.04
Commercial and industrial		4,945		4.01			6,557		5.91
Agriculture		14,828		12.01			778		0.70
Consumer loans:
Purchased indirect automobile		8,033		6.51			11,018		9.93
Other		366		0.30			469		0.42
Total consumer loans		8,399		6.81			11,487		10.35
Total loans		123,413		100.00	%		110,960		100.00	%
Deferred loan costs (fees)		(12	)				(14	)
Loans in process		9					(625	)
Allowance for loan losses		(1,603	)				(1,426	)
Loans, net	$	121,807				$	108,895

Activity in the allowance for loan losses was as follows (in thousands):

	Six Months Ended June 30,
	2010			2009
Balance, beginning of period	$	1,426		$	1,000
Provision charged to expense		432			294
Losses charged off, net of recoveries of $31 and $24 for 2010 and 2009		(255	)		(94	)
Balance, end of period	$	1,603		$	1,200

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Note 9: Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. The Company owned $6,549 of Federal Home Loan Bank stock as of June 30, 2010 and December 31, 2009. The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from its regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances. With regard to dividends, the FHLB will continue to assess its dividend capacity each quarter and make appropriate request for approval. The FHLB has not declared any dividends on its common stock since the third quarter of 2007. Management performed an analysis as of June 30, 2010 and December 31, 2009 and deemed the cost method investment in FHLB stock was ultimately recoverable.

Note 10: Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes were as follows (in thousands):

	Six Months Ended June  30,
	2010			2009
Net unrealized losses on securities available-for-sale	$	(46	)	$	(6	)
Less reclassification adjustment for realized losses on sales of securities included in income		(1	)		(7	)
Less reclassification adjustment for loss on other than temporary impairment of equity securities		(6	)		(39	)
Other comprehensive income (loss), before tax effect		(39	)		40
Less tax expense (benefit)		(23	)		13
Other comprehensive income (loss)	$	(16	)	$	27

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows (in thousands):

	June 30, 2010			December 31, 2009
Net unrealized gain on securities available-for-sale	$	59		$	97
Tax effect		(10	)		(32	)
Net-of-tax amount	$	49		$	65

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Note 11: Income Taxes

A reconciliation of income tax benefit at the statutory rate to the Company’s actual income tax benefit is shown below (in thousands):

	Six Months Ended June 30,
	2010			2009
Computed at the statutory rate (34%)	$	(34	)	$	(1	)
Decrease resulting from
Tax exempt interest		(4	)		(5	)
Nondeductible expenses		1			1
State income taxes		—			—
Changes in deferred tax valuation allowance		—			—
Cash surrender value of life insurance		(26	)		(24	)
Other		(5	)		18
Actual benefit	$	(68	)	$	(11	)
Tax benefit as a percentage of pre-tax loss		(68.69	)%		(366.67	)%

Note 12: Disclosures About Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities in FNMA and FHLMC common stock as well as shares in publicly traded financial institutions. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE - residential), municipal securities, and mutual funds. Municipal securities are generally priced using a matrix pricing model. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. These securities include municipal securities with no observable market inputs.

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Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2010 and December 31, 2009 (in thousands):

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets  for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2010:
Available-for-sale securities:
US Government and federal agency	$	1,648	$	—	$	1,648	$	—
Mortgage-backed securities – GSE residential		956		—		956		—
State and political subdivisions		362		—		—		362
Equity securities		477		20		457		—
Mortgage servicing rights		360		—		—		360
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2009:
Available-for-sale securities:
US Government and federal agency	$	1,008	$	—	$	1,008	$	—
Mortgage-backed securities – GSE residential		1,134		—		1,134		—
State and political subdivisions		580		—		177		403
Equity securities		503		24		479		—
Mortgage servicing rights		398		—		—		398

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The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (in thousands):

	Available-for- sale  Securities			Mortgage Servicing Rights
Balance, January 1, 2010	$	403		$	398
Total realized and unrealized gains and losses
Included in net income		—			(41	)
Included in other comprehensive income		—			—
Purchases, issuances and settlements		(41	)		3
Transfers in and/or out of Level 3		—			—
Balance, June 30, 2010	$	362		$	360
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—		$	—

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amounts of impairment include estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2010 and December 31, 2009 (in thousands):

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2010:
Impaired loans	$	2,897	$	—	$	—	$	2,897
December 31, 2009:
Impaired loans	$	1,915	$	—	$	—	$	1,915

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The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Interest-Bearing Deposits, Federal Home Loan Bank Stock, Interest Receivable, Interest Payable and Advances from Borrowers for Taxes and Insurance

The carrying amount approximates fair value.

Held-to-maturity Securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these types of deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements, or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

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The following table presents estimated fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009 (in thousands).

	June 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	8,764	$	8,764	$	15,367	$	15,367
Interest-bearing deposits		11,556		11,556		8,110		8,110
Available-for-sale securities		3,443		3,443		3,225		3,225
Held-to-maturity securities		3,211		3,443		3,789		3,939
Loans, net of allowance for loan losses		121,807		123,790		108,895		110,838
Federal Home Loan Bank stock		6,549		6,549		6,549		6,549
Interest receivable		764		764		515		515
Financial liabilities
Deposits		127,976		128,360		124,361		123,574
Federal Home Loan Bank advances		17,512		18,151		18,128		18,683
Advances from borrowers for taxes and insurance		502		502		415		415
Interest payable		67		67		79		79
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

Note 13: Commitments

Commitments to Originate Loans

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

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Note 14: Defined Benefit Retirement Plan

The Company has elected to freeze its defined benefit retirement plan. Effective July 1, 2010, all benefit accruals under the plan ceased.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes thereto.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the asset quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• general economic conditions (including real estate values, loan demand and employment levels), either nationally or in our market areas, that are different than expected;

• competition among depository and other financial institutions;

• our ability to improve our asset quality even as we increase our non-residential lending;

• our success in increasing our commercial real estate and commercial business lending, including and in particular, agricultural and farmland lending;

• changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments and real estate;

• adverse changes in the securities markets;

• changes in laws or government regulations or policies affecting financial institutions, including the Dodd Frank Wallstreet Reform and Consumer Protection Act and changes in deposit insurance premiums, regulatory fees, capital requirements and consumer protection measures, which increase our compliance costs;

• our ability to enter new markets successfully and capitalize on growth opportunities;

• our ability to successfully grow our Morris operations;

• changes in consumer spending, borrowing and savings habits;

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• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

• changes in our organization, compensation and benefit plans;

• loan delinquencies and changes in the underlying cash flows of our borrowers;

• changes in our financial condition or results of operations that reduce capital available to pay dividends; and

• changes in the financial condition or future prospects of issuers of securities that we own, including our stock in the FHLB of Chicago.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

OVERVIEW

Harvard Illinois Bancorp, Inc. (Company) is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision. The Company’s business activities are limited to oversight of its investment in Harvard Savings Bank (Bank).

The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in McHenry, Grundy, and to a lesser extent Boone counties, Illinois and Walworth County in Wisconsin. The Bank is subject to regulation by the Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation.

On April 8, 2010, the Company reorganized from a two-tier mutual holding company to a stock holding company and completed its initial public offering. A total of 784,689 shares, par value of $0.01 per share, were sold at $10 per share, raising $6.8 million of proceeds, net of conversion expenses. The Company established an employee stock ownership plan that purchased 8% of the total shares, or a total of 62,775 shares in the offering, for a total of $627,750. The Company’s common stock began trading on the over-the-counter market under the symbol “HARI” on April 9, 2010.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of customer service fees, brokerage commission income, net realized gains on loan sales, loan servicing fees, and net income on bank-owned life insurance, offset by impairment charges on securities. Noninterest expense consists primarily of compensation and benefits, occupancy, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, indirect automobile servicing fees, and foreclosed assets. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

During recent years, in order to reduce our vulnerability to changes in interest rates and enhance our net interest spread, we increased our originations and purchases of commercial real estate and commercial and industrial loans, purchased indirect automobile loans, sold most of our fixed rate one- to four-family loan production, and increased our core deposits (which we consider to be deposits other than certificates of deposit). In connection with the continued execution of our business strategy, we hired a commercial loan officer with over 20 years of agricultural and commercial lending experience in the Harvard community, in December 2009. With this hire, we intended to, subject to economic, market and regulatory conditions, and have increased our origination of agricultural operating lines of credit and intermediate-term loans, and real estate loans for the purchase of farmland in our market area. Agricultural loans totaled $17.8 million or 14.4% of total loans at June 30, 2010, compared to $1.2 million or 1.1% of total loans at December 31, 2010.

Our net loss for the quarter ended June 30, 2010 was $32,000, compared to net income of $101,000 for the quarter ended June 30, 2009. The decrease in net income was due to a decrease in noninterest income and an increase in noninterest expense, offset by an increase in net interest income and decreases in the provision for loan losses and the provision for income taxes, respectively.

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The following discussion compares the financial condition of Harvard Illinois Bancorp, Inc. (“Company”) and its wholly owned subsidiary, Harvard Savings Bank (“Bank”) at June 30, 2010 to its financial condition at December 31, 2009, and the results of operations for the three months and six months ended June 30, 2010 to the same periods in 2009. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Management believes the following discussion addresses our most critical accounting policies and significant estimates, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Loan Losses. Our allowance for loan losses is the estimated amount considered necessary to reflect probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for the Company. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

Since a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the value of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating classified loans from the remaining loans, and then categorizing each group by type of loan. Loans within each type exhibit common characteristics including terms, collateral type, and other risk characteristics. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. The Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corporation require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

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Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the property is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a charge to operations through noninterest expense is recorded. Operating costs associated with the asset after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.

Additionally, we review our uncertain tax positions annually. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the “more likely than not” test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Investment in Debt and Equity Securities. We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations, and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to credit is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.

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Accounting standards establish a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:

• Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3: Inputs that are unobservable and significant to the fair value measurement.

At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.

FINANCIAL CONDITION

Comparison of Financial Condition at June 30, 2010 and December 31, 2009

Total assets at June 30, 2010 increased $9.3 million or 5.9% to $166.9 million from $157.6 million at December 31, 2009. This increase was primarily the result of an increase in loans of $12.9 million during the six months ended June 30, 2010 from December 31, 2009 due to increases of $14.1 million, $2.5 million and $5.5 million in the agriculture, farmland and commercial real estate loan portfolios, respectively. These increases were partially offset by decreases of $2.4 million, $3.0 million and $3.2 million in the one – to four – family real estate, purchased indirect automobile, and construction and land development loan portfolios, respectively. This activity reflects the Company’s strategy to reduce asset duration and loan concentrations by expanding our commercial and agriculture lending activity to enhance yields and reduce concentrations in our residential mortgage and purchased indirect automobile loan portfolios. The Company hired an experienced agriculture lender in December 2009. The rate of increase of our agricultural and farmland loan growths slowed somewhat in the second quarter due in part to seasonal factors as many borrowers prefer to have their financing in place prior to the planting season. Substantially all the commercial and agriculture loan activity during 2010 were loans in our market area.

Cash and cash equivalents decreased $6.6 million or 43.0% to $8.8 million at June 30, 2010 from $15.4 million at December 31, 2009 primarily due to a decrease of $5.9 million in securities purchased under agreements to resell. The liquidity from this decrease was used to fund the loan growth and the increase of $3.4 million in interest-bearing deposits with other financial institutions.

Deposits increased $3.6 million or 2.9% to $128.0 million at June 30, 2010 from $124.4 million at December 31, 2009. Total equity increased by $6.2 million or 50.0% to $18.5 million at June 30, 2010 from $12.3 million at December 31, 2009. The increase largely resulted from the $6.8 million in cash proceeds on the sale of our common stock, net of the ESOP purchase of $628,000, offset by a decrease in accumulated other comprehensive income of $16,000 to a gain of $49,000, and net loss of $31,000 for the six months ended June 30, 2010. The increase in deposits and equity was due to our strategy to enhance our net interest margin while generating liquidity to fund our loan growth and reduce our Federal Home Loan Bank advances, which decreased by $616,000 or 3.4% to $17.5 million at June 30, 2010 from $18.1 million at December 31, 2009.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009

General. Net loss for the three months ended June 30, 2010 was $32,000, compared to net income of $101,000 for the three months ended June 30, 2009, a decrease in net income of $133,000. The decrease in net income was due to a decrease in noninterest income of $301,000 and an increase in noninterest expense of $152,000, partially offset by an increase in net interest income of $176,000, and decreases in the provision for loan losses and the provision for income taxes of $37,000 and $107,000, respectively.

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Interest and Dividend Income. Total interest and dividend income decreased $77,000 or 3.8% to $1.9 million for the three months ended June 30, 2010 from $2.0 million for the same period in 2009. Although average interest-earning assets were relatively unchanged at $153.9 million for the three months ended June 30, 2010 from $153.8 million for the same quarter in 2009, the average yield decreased 21 basis points to 5.05% from 5.26%. This decrease reflected a decline in the interest rate environment during the period. Interest and fees on loans increased $21,000 during the period as the average balance of loans increased $9.1 million to $123.4 million primarily due to agricultural lending activity, partially offset by the average yield on loans, which decreased 39 basis points to 5.85% from 6.24%. Interest income on securities and other interest-earning assets decreased $98,000 for the three months ended June 30, 2010 compared to the year ago period as average balances decreased $9.0 million, primarily to fund loan growth, and the average yield on those assets decreased 59 basis points to 1.79% from 2.38%, due to the lower interest rate environment.

Interest Expense. Total interest expense decreased $253,000 or 24.7% to $771,000 for the three months ended June 30, 2010 from $1.0 million for the same period in 2009. Interest expense on deposit accounts decreased $173,000 or 22.2% to $608,000 for the three months ended June 30, 2010 from $781,000 for the same period in 2009. This decrease was primarily due to a decrease in interest expense on certificates of deposit and brokered certificate accounts of $101,000 during the period while interest expense on savings, NOW and money market accounts decreased $72,000. The average balances of savings, NOW and money market accounts decreased $5.0 million while the cost of these deposits decreased 51 basis points to 1.02% during the three months ended June 30, 2010 from the three months ended June 30, 2009. The average balance in certificates of deposits and brokered certificates of deposit increased $5.6 million, with the cost of these deposits decreasing 78 basis points. The movement in deposit accounts and reduction in the cost of these funds was the result of our competitive pricing and promotional events pricing, and the declining market interest rates for deposits.

Interest expense on Federal Home Loan Bank advances decreased $80,000 to $163,000 for the three months ended June 30, 2010 from $243,000 for the three months ended June 30, 2009. The average balance of advances decreased $6.2 million while the average cost of this funding decreased 32 basis points for the three months ended June 30, 2010 from the comparable period in 2009. The decrease in the average balance of advances was due to adhering to our capital and liquidity plans to lessen our reliance on advances. The decrease in the cost of these funds was a reflection of the lower market interest rate environment in 2010 compared to 2009.

Net Interest Income. Net interest income increased $176,000 or 17.7% to $1.2 million for the three months ended June 30, 2010 from $997,000 for the three months ended June 30, 2009, primarily as a result of an increase in our net interest rate spread of 41 basis points to 2.85% from 2.44%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 109.88% for the three months ended June 30, 2010 from 105.55% for the same period in 2009. Our net interest margin also increased to 3.05% from 2.59%. The increases in our net interest rate spread and net interest margin reflected the more rapid repricing of our interest-bearing liabilities in a decreasing interest rate environment compared to our interest-earning assets.

Provision for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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We evaluate the allowance for loan losses on a regular basis and the provision is based upon our periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The factors we considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar loan characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements.

Based upon our evaluation of these factors, a provision of $216,000 was recorded for the three months ended June 30, 2010, a decrease of $37,000 or 14.6% from $253,000 for the three months ended June 30, 2009. The provision for loan losses reflected net charge offs of $180,000 for the three months ended June 30, 2010, compared to $53,000 for the three months ended June 30, 2009. The allowance for loan losses was $1.6 million, or 1.30% of total loans at June 30, 2010, compared to $1.4 million, or 1.29% of total loans at December 31, 2009. At June 30, 2010, we had identified substandard loans totaling $3.3 million, all of which were considered impaired, and established an allowance for loan losses of $402,000. At December 31, 2009, we considered all substandard loans totaling $3.8 million impaired and established an allowance for loan losses of $431,000. We used the same methodology in assessing the allowance for each period. We increased the impact of qualitative factors to reflect further deterioration in the economy during 2010, and the higher level of charge offs during the period which resulted in an increase in the general allowance for loan losses for most loan categories and larger provision for loan losses for the quarter ended June 30, 2010 from June 30, 2009.

For real estate loans secured by farmland and other agricultural loans for which we had little or no specific loss experience, we utilized loss factors associated with our commercial real estate and other commercial loans, respectively, until specific loss experience is determined.

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The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each loan category to the total allowance, and the percent of loans in each loan category to total loans as of June 30, 2010 and December 31, 2009 (dollars in thousands).

	June 30, 2010						December 31, 2009
	Amount		Percent of Allowance to Total Allowance		Percent of Loans in Category to Total Loans		Amount		Percent of Allowance to Total Allowance		Percent of Loans in Category to Total Loans
Real estate loans:
One-to-four-family	$	348	21.71	%	41.58	%	$	504	35.34	%	48.43	%
Home equity line of credit and other 2nd mortgage		133	8.30		9.51			83	5.82		11.10
Multi-family		34	2.12		1.17			4	0.28		0.16
Commercial		498	31.07		20.80			437	30.65		18.14
Farmland		5	0.30		2.37			5	0.35		0.41
Construction and land development		49	3.06		1.74			74	5.19		4.80
Total real estate loans		1,067	66.56		77.17			1,107	77.63		83.04
Commercial and industrial		151	9.42		4.01			120	8.42		5.91
Agriculture		222	13.85		12.01			12	0.84		0.70
Consumer loans:
Purchased indirect automobile		159	9.92		6.51			183	12.83		9.93
Other		4	0.25		0.30			4	0.28		0.42
Total consumer loans		163	10.17		6.81			187	13.11		10.35
Unallocated		—	0.00		0.00			—	0.00		0.00
Total allowance for loan losses	$	1,603	100.00	%	100.00	%	$	1,426	100.00	%	100.00	%

Loan losses allocated to one-to-four-family real estate loans totaled $348,000 at June 30, 2010, a decrease of $156,000 from $504,000 at December 31, 2009 due to decreases in total one-to-four-family real estate loans outstanding, nonperforming loans in that category and impairment allowances associated with those loans. In addition, the allowance for these loans was offset by the priority obligation of our investor on loans sold with recourse in the secondary mortgage market totaling $68,000.

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The following table sets forth information regarding nonperforming assets at the dates indicated (dollars in thousands):

	At June 30, 2010			At December  31, 2009
Non-accrual loans:
Real estate loans:
One-to four-family	$	1,576		$	1,857
Home equity lines of credit and other 2nd mortgage		21			11
Commercial		688			171
Total real estate loans		2,285			2,039
Commercial and industrial		52			95
Consumer loans:
Purchased indirect automobile		31			27
Other		2			16
Total consumer loans		33			43
Total non-accrual loans		2,370			2,177
Accruing loans past due 90 days or more:
Real estate loans:
Home equity line of credit and other 2nd mortgage		—			50
Total real estate loans		—			50
Commercial and industrial		—			75
Consumer loans:
Purchased indirect automobile		—			18
Other		—			1
Total consumer loans		—			19
Total accruing loans past due 90 days or more		—			144
Total of nonaccrual and 90 days or more past due loans		2,370			2,321
Other real estate owned:
One-to four family		674			432
Total other real estate owned		674			432
Repossessed automobiles		46			74
Total non-performing assets		3,090			2,827
Troubled debt restructurings (not included in nonaccrual loans above)		153			947
Total non-performing assets and troubled debt restructurings	$	3,243		$	3,774
Total non-performing loans to total loans		1.92	%		2.09	%
Total non-performing assets to total assets		1.85	%		1.79	%
Total non-performing loans and troubled debt restructurings to total loans		2.04	%		2.95	%
Total non-performing assets and troubled debt restructurings to total assets		1.94	%		2.39	%

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The decrease in nonaccrual one-to-four real estate loans is primarily due to the transfer of three loans to other real estate owned during the first six months of 2010. One troubled debt restructuring, a commercial real estate loan secured by a retail strip mall located in McHenry County, in which only 25% of the mall is currently leased, was placed on nonaccrual as of June 30, 2010, although the loan has remained current based on the original terms and terms of all modifications. The loan had a balance of $688,000 at June 30, 2010, net of a partial charge-off in June 2010 of $100,000. We consider the loan an impaired loan and have established an impairment allowance of $181,000, based on a new appraisal obtained in 2009 of $930,000, adjusted for certain factors.

The following table shows the aggregate principal amount of potential problem loans on the Company’s watch list at June 30, 2010 and December 31, 2009. Substantially all non-accruing loans, troubled debt restructurings and loans past due 60 days or more are placed on the watch list (in thousands).

	June 30, 2010		December 31, 2009
Watch loans	$	3,658	$	5,292
Special Mention loans		2,833		518
Substandard loans		3,299		3,755
Total watch list loans	$	9,790	$	9,565

As of June 30, 2010, a residential subdivision real estate loan totaling $1.1 million was added to loans classified special mention. The loan is performing and has strong guarantor support, but no lots have been sold since the loan was originated in 2008, and the loan balance exceeds the value of the underlying collateral based on a new appraisal obtained in July 2010. As of June 30, 2010, a real estate loan participation totaling $991,000, secured by a new senior assisted living center outside our market area, was also added to loans classified special mention. The loan is performing and has strong guarantor support, but units leased as well as the average lease rate are short of the original projections for the project. The guarantors for both loans have adequate cash flow to amortize the loan over a reasonable term. In 2010, a performing commercial real estate loan secured by a retail strip center in our market area totaling $1.5 million was removed from the list of watch loans after it was refinanced with added collateral support.

Noninterest Income. Noninterest income decreased $301,000 or 68.7% to $137,000 for the three months ended June 30, 2010 from $438,000 for the three months ended June 30, 2009. The decrease was primarily related to net gains on loan sales which decreased $314,000 to net losses of $25,000 for the three months ended June 30, 2010, compared to net gains of $289,000 for the same period in 2009. Gains on loan sales included the net decrease in fair value of mortgage servicing rights of $50,000 in 2010 and the net increase in fair value of mortgage servicing rights of $226,000 in 2009, a decrease of $276,000 primarily due to the larger volume of loans sales and larger size of our mortgage servicing portfolio in 2009, as well as higher prepayment speeds at June 30, 2010 due to lower market interest rates for mortgage loans. The loan sales were executed to generate additional liquidity and manage interest rate risk for the Bank.

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Noninterest Expense. Noninterest expense increased $152,000 or 14.8% to $1.2 million for the three months ended June 30, 2010 from $1.0 million for the three months ended June 30, 2009. The increase was primarily due to compensation and benefit expenses which increased $134,000 or 27.5% to $621,000 in the 2010 period compared to $487,000 in the 2009 period. Compensation and benefit expenses were higher in 2010, in part, due to higher benefit plan costs, including the adoption of an ESOP plan, and higher costs associated with hiring additional accounting and lending personnel. Professional fees increased $52,000 to $66,000 for the three months ended June 30, 2010 from $14,000 for the same period in 2009. The increase in professional fees in 2010 was due primarily to the obligations of being a new public company, including substantial new public reporting obligations. Other noninterest expense increased $54,000 to $76,000 for the three months ended June 30, 2010 from $22,000 for the quarter ended June 30, 2009. The higher expense in 2010 was due primarily to the obligations of being a new public company as well as a refund of state supervisory fees received in 2009 of $34,000. These increases were offset by a decrease in FDIC insurance premiums of $78,000 to $62,000 for the three months ended June 30, 2010 from $140,000 for the same period in 2009, primarily due to a special assessment of $74,000 charged in the second quarter of 2009.

Provision (Benefit) for Income Taxes. The benefit for income taxes was $54,000 for the three months ended June 30, 2010 compared to a provision of $53,000 for the same period in 2009, a decrease of $107,000 or 201.9%. The lower income tax expense for the second quarter of 2010 reflects a lower level of pre-tax income, compared to 2009. The effective tax benefit as a percent of pre-tax loss was 62.8% for the three months ended June 30, 2010, compared to an effective tax expense as a percent of pre-tax income of 34.4% for the three months ended June 30, 2009.

Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009

General. Net loss for the six months ended June 30, 2010 was $31,000, compared to net income of $8,000 for the six months ended June 30, 2009, a decrease of $39,000. The decrease in net income was due to increases in net interest income and benefit for income taxes of $339,000 and $57,000, respectively, partially offset by increases in the provision for loan losses and noninterest expense of $138,000 and $54,000, respectively, and by a decrease in noninterest income of $243,000.

Interest and Dividend Income. Total interest and dividend income decreased $177,000 or 4.4% to $3.9 million for the six months ended June 30, 2010 from $4.1 million for the same period in 2009. Average interest-earning assets decreased $1.2 million to $150.4 million for the six months ended June 30, 2010 from $151.6 million for the same period in 2009, and the average yield decreased 19 basis points to 5.15% from 5.34%. The decrease in the average yield reflected a decline in the interest rate environment during the period. Interest and fees on loans decreased $64,000 during the period as the average yield on loans, which decreased 28 basis points to 5.97% from 6.25%, more than offset the average balance of loans, which increased $3.2 million to $120.0 million primarily due to agricultural lending activity. Interest income on securities purchased under agreement to resell decreased $92,000 for the six months ended June 30, 2010 compared to the year ago period as average balances decreased $8.2 million, as the Company generated liquidity to fund loans and reduce advances from the Federal Home Loan Bank during the period, and the average yield on those assets decreased 51 basis points to 1.43% from 1.94%, due to the lower interest rate environment.

Interest Expense. Total interest expense decreased $516,000 or 24.9% to $1.6 million for the six months ended June 30, 2010 from $2.1 million for the same period in 2009. Interest expense on deposit accounts decreased $356,000 or 22.6% to $1.2 million for the six months ended June 30, 2010 from $1.6 million for the same period in 2009. This decrease was primarily due to a decrease in interest expense on certificates of deposit and brokered certificate accounts of $212,000 during the period while interest expense on savings, NOW and money market accounts decreased $144,000. Average savings, NOW and money market accounts decreased $2.4 million to $46.3 million while the cost of these deposits decreased 56 basis points to 0.57% during the six months ended June 30, 2010 from the six months ended June 30, 2009. The average balance in certificates of deposits and brokered certificates of deposit increased $4.8 million between the six months ended June 30, 2010 and 2009, respectively, with the cost of these deposits decreasing 78 basis points during the same periods. The movement in deposit accounts was the result of our competitive pricing and promotional events pricing to increase our liquidity while decreasing our utilization of Federal Home Loan Bank advances. Interest expense on Federal Home Loan Bank advances decreased $160,000 to $333,000 for the six months ended June 30, 2010 from $493,000 for the six months ended June 30, 2009. The average balance for the advances decreased $6.5 million while the average cost of the advances decreased 28 basis points for the six months ended June 30, 2010 from the comparable period in 2009. The decrease in the average balance of advances was due to adhering to our capital and liquidity plans to lessen our reliance on advances. The decrease in the cost of these funds was a reflection of the interest rate environment at that time.

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Net Interest Income. Net interest income increased $339,000 or 17.1% to $2.3 million for the six months ended June 30, 2010 from $2.0 million for the six months ended June 30, 2009, primarily as a result of an increase in our net interest rate spread of 46 basis points to 2.92% from 2.46% during the comparable periods of 2010 and 2009, respectively. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 107.63% for the six months ended June 30, 2010 from 105.35% for the same period in 2009. Our net interest margin also increased to 3.08% from 2.61%. The increases in our net interest rate spread and net interest margin reflected the more rapid repricing of our interest-bearing liabilities in a decreasing interest rate environment compared to our interest-earning assets.

Provision for Loan Losses.

The following table shows the activity in the allowance for loan losses for the six months ended June 30, 2010 and 2009 (dollars in thousands):

	2010			2009
Allowance at beginning of period	$	1,426		$	1,000
Provision for loan losses		432			294
Charge-offs:
Real estate loans:
One-to four family		73			—
Home equity line of credit and other 2nd mortgage		25			—
Commercial		100			—
Construction and land development		1			—
Total charge-offs, real estate loans		199			—
Consumer loans:
Purchased indirect automobile		86			118
Other		1			—
Total charge-offs, consumer loans		87			118
Total charge-offs		286			118
Recoveries:
Real estate loans:
One-to four family		8			—
Total recoveries, real estate loans		8			—
Commercial and industrial		5			—
Consumer loans:
Purchased indirect automobile		18			20
Other		—			4
Total recoveries, consumer loans		18			24
Total recoveries		31			24
Net charge-offs		(255	)		(94	)
Allowance at end of period	$	1,603		$	1,200
Allowance to non-performing loans		67.64	%		68.42	%
Allowance to total loans outstanding at the end of the period		1.30	%		1.05	%
Net charge-offs to average total loans outstanding during the period		0.43	%		0.16	%

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A provision of $432,000 was recorded for the six months ended June 30, 2010, an increase of $138,000 or 46.9% from $294,000 for the six months ended June 30, 2009. The provision for loan losses reflected net charge offs of $255,000 for the six months ended June 30, 2010, compared to $94,000 for the six months ended June 30, 2009. We used the same methodology in assessing the allowance for each period. We increased the impact of qualitative factors to reflect further deterioration in the economy during 2010, and the higher level of charge offs during the period which resulted in an increase in the general allowance for loan losses for most loan categories and larger provision for loan losses for the six months ended June 30, 2010 from June 30, 2009.

Noninterest Income. Noninterest income decreased $243,000 or 43.3% to $318,000 for the six months ended June 30, 2010 from $561,000 for the six months ended June 30, 2009. The decrease was primarily related to net gains on loan sales which decreased $285,000 to $9,000 for the six months ended June 30, 2010, compared to $294,000 for the same period in 2009. Gains on loan sales included the net decrease in fair value of mortgage servicing rights of $38,000 in 2010 and the net increase in fair value of mortgage servicing rights of $134,000 in 2009, a decrease of $172,000 primarily due to the larger volume of loans sales and increase in size of our mortgage servicing portfolio in 2009, and decreased in value in 2010. The loan sales were executed to generate additional liquidity and manage interest rate risk for the Bank. Losses on other than temporary impairment of equity securities decreased $33,000 to $6,000 for the six months ended June 30, 2010, compared to $39,000 for the same period in 2009. The other than temporary impairment of equity securities in 2010 and 2009 were related to our investment in common stock of other community banks, Fannie Mae and Freddie Mac common stock, and Shay Asset Management mutual funds.

Noninterest Expense. Noninterest expense increased $54,000 or 2.4% to $2.3 million for the six months ended June 30, 2010 from $2.2 million for the six months ended June 30, 2009. The increase in noninterest expense was primarily due to increases in compensation and benefits, professional fees and other noninterest expense of $66,000, $64,000 and $56,000, respectively for the six months ended June 30, 2010 compared to the same period in 2009. The increase in compensation and benefits was primarily due to higher benefit costs, including a new ESOP plan, and higher compensation costs related to a larger staff. The increases in professional fees and other noninterest expense were primarily due to the Company becoming a public company in 2010. Noninterest expense was also lower for the first half of 2009 as a result of a refund of state supervisory fees received of $34,000. These increases were partially offset by a decrease in FDIC insurance premiums of $53,000 for the six months ended June 30, 2010, compared to the same period in 2009, due to a special assessment of $74,000 charged in the second quarter of 2009.

Provision (Benefit) for Income Taxes. The benefit for income taxes was $68,000 for the six months ended June 30, 2010 compared to $11,000 for the same period in 2009. The higher income tax benefit for the first half of 2010 reflects a higher pre-tax loss, compared to 2009.

Liquidity and Capital Resources

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from maturities and calls of securities, and Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including securities repurchase agreements. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities were $1.0 million and $476,000 for the six months ended June 30, 2010 and 2009, respectively. Net cash used in investing activities consisted primarily of disbursements for loan originations and the purchase of securities, offset by net cash provided by principal collections on loans, and proceeds from maturing securities and pay downs on mortgage-backed securities. Net cash used in investing activities were $16.9 million and $2.0 million for the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, net cash provided by financing activities included $6.8 million in proceeds from issuance of common stock net of ESOP purchase of $628,000. Net cash provided by financing activities also consisted primarily of the activity in deposit accounts and Federal Home Loan Bank borrowings. The net cash provided by financing activities was $9.3 million and $1.2 million for the six months ended June 30, 2010 and 2009, respectively.

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The Bank is required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. The Bank’s actual ratios at June 30, 2010 and the required minimums to be considered adequately capitalized are shown in the table below. In order to be considered well-capitalized, the Bank must maintain: (i) Tier 1 Capital to Average Assets of 5.0%, (ii) Tier 1 Capital to Risk-Weighted Assets of 6.0%, and (iii) Total Capital to Risk-Weighted Assets of 10.0%. Accordingly, Harvard Savings Bank was categorized as well capitalized at June 30, 2010. Management is not aware of any conditions or events since the most recent notification that would change our category.

	June 30, 2010 Actual		December 31, 2009 Actual		Minimum Required
Tier 1 capital to average assets	9.98	%	7.17	%	4.00	%
Tier 1 capital to risk-weighted assets	13.66	%	10.29	%	4.00	%
Total capital to risk-weighted assets	14.91	%	11.56	%	8.00	%

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at June 30, 2010 and December 31, 2009 (in thousands).

	June 30, 2010		December 31, 2009
Commitments to fund loans	$	13,375	$	15,718
Standby letters of credit		125		388

Certificates of deposit that are scheduled to mature in less than one year from June 30, 2010 totaled $45.2 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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Analysis of Net Interest Income and Average Balance Sheet

The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated (dollars in thousands):

	Three Months Ended June 30,
	2010						2009
	Average Balance		Interest Income/ Expense		Yield/Cost		Average Balance		Interest Income/ Expense		Yield/Cost
Assets
Interest- earning assets:
Interest -earning deposits	$	13,195	$	46	1.39	%	$	8,119	$	48	2.36	%
Securities purchased under agreements to resell		3,235		11	1.36	%		14,948		72	1.93	%
Securities, tax-exempt		600		6	4.00	%		683		8	4.69	%
Securities, taxable		6,581		72	4.38	%		8,885		105	4.73	%
Loans		123,742		1,809	5.85	%		114,630		1,788	6.24	%
Federal Home Loan Bank stock		6,549		—	0.00	%		6,549		—	0.00	%
Total interest earning assets		153,902		1,944	5.05	%		153,814		2,021	5.26	%
Non-interest earning assets		12,150						11,416
Total assets	$	166,052					$	165,230
Liabilities and equity
Interest-bearing liabilities:
Savings accounts	$	14,195		14	0.39	%	$	13,493		13	0.39	%
NOW and money market accounts		31,559		44	0.56	%		37,265		117	1.26	%
Certificates of deposit		74,985		518	2.76	%		69,398		618	3.56	%
Brokered certificates of deposit		2,812		32	4.55	%		2,825		33	4.67	%
Federal Home Loan Bank advances		16,517		163	3.95	%		22,742		243	4.27	%
Total interest-bearing liabilities		140,068		771	2.20	%		145,723		1,024	2.81	%
Non-interest-bearing deposits		5,801						3,667
Other non-interest-bearing liabilities		3,810						3,339
Total liabilities		149,679						152,729
Equity		16,373						12,501
Total liabilities and equity	$	166,052					$	165,230
Net interest income			$	1,173					$	997
Interest rate spread					2.85	%					2.44	%
Net interest margin					3.05	%					2.59	%
Average interest earning assets to average interest-bearing liabilities					109.88	%					105.55	%

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The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities (in thousands).

	Three Months Ended June 30, 2010 Compared to 2009 Increase (Decrease) Due to
	Rate			Volume			Net
Interest income:
Interest-earning deposits	$	4		$	(6	)	$	(2	)
Securities purchased under agreements to resell		(17	)		(44	)		(61	)
Securities, tax-exempt		(1	)		(1	)		(2	)
Securities, taxable		(7	)		(26	)		(33	)
Loans		(79	)		100			21
Total		(100	)		23			(77	)
Interest Expense:
Savings accounts		—			1			1
NOW and money market accounts		(57	)		(16	)		(73	)
Certificates of deposit		(156	)		56			(100	)
Brokered certificates of deposit		—			(1	)		(1	)
Federal Home Loan Bank advances		(17	)		(63	)		(80	)
Total		(230	)		(23	)		(253	)
Increase (decrease) in net interest income	$	130		$	46		$	176

35

The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated (dollars in thousands):

	Six Months Ended June 30,
	2010						2009
	Average Balance		Interest Income/ Expense		Yield/Cost		Average Balance		Interest Income/ Expense		Yield/Cost
Assets
Interest- earning assets:
Interest -earning deposits	$	11,647	$	91	1.56	%	$	7,048	$	82	2.33	%
Securities purchased under agreements to resell		5,037		36	1.43	%		13,195		128	1.94	%
Securities, tax-exempt		639		14	4.38	%		803		18	4.48	%
Securities, taxable		6,572		148	4.50	%		7,220		174	4.82	%
Loans		119,976		3,584	5.97	%		116,797		3,648	6.25	%
Federal Home Loan Bank stock		6,549		—	0.00	%		6,549		—	0.00	%
Total interest earning assets		150,420		3,873	5.15	%		151,612		4,050	5.34	%
Non-interest earning assets		12,359						11,728
Total assets	$	162,779					$	163,340
Liabilities and equity
Interest-bearing liabilities:
Savings accounts	$	14,149		27	.38	%	$	13,328		29	.44	%
NOW and money market accounts		32,149		105	.65	%		35,410		247	1.40	%
Certificates of deposit		73,619		1,026	2.79	%		68,693		1,234	3.59	%
Brokered certificates of deposit		2,812		64	4.55	%		2,976		68	4.57	%
Federal Home Loan Bank advances		17,021		333	3.91	%		23,507		493	4.19	%
Total interest-bearing liabilities		139,750		1,555	2.23	%		143,914		2,071	2.88	%
Non-interest-bearing deposits		5,308						3,597
Other non-interest-bearing liabilities		3,381						3,302
Total liabilities		148,439						150,813
Equity		14,340						12,527
Total liabilities and equity	$	162,779					$	163,340
Net interest income			$	2,318					$	1,979
Interest rate spread					2.92	%					2.46	%
Net interest margin					3.08	%					2.61	%
Average interest earning assets to average interest-bearing liabilities					107.63	%					105.35	%

36

The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities (in thousands).

	Six Months Ended June 30, 2010 Compared to 2009 Increase (Decrease) Due to
	Rate			Volume			Net
Interest income:
Interest-earning deposits	$	(9	)	$	18		$	9
Securities purchased under agreements to resell		(27	)		(65	)		(92	)
Securities, tax-exempt		—			(4	)		(4	)
Securities, taxable		(11	)		(15	)		(26	)
Loans		(170	)		106			(64	)
Total		(217	)		40			(177	)
Interest Expense:
Savings accounts		(4	)		2			(2	)
NOW and money market accounts		(121	)		(21	)		(142	)
Certificates of deposit		(306	)		98			(208	)
Brokered certificates of deposit		—			(4	)		(4	)
Federal Home Loan Bank advances		(31	)		(129	)		(160	)
Total		(462	)		(54	)		(516	)
Increase (decrease) in net interest income	$	245		$	94		$	339

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4T – CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company has adopted interim disclosure controls and procedures designed to facilitate financial reporting. The Company’s interim disclosure controls currently consist of communications among the Company’s Chief Executive Officer, the Company’s Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to its operations. These disclosure controls also contain certain elements of the Company’s internal controls adopted in connection with applicable accounting and regulatory guidelines. In addition, the Company’s Chief Executive Officer, Chief Financial Officer, Audit Committee and independent registered public accounting firm meet on a quarterly basis to discuss disclosure matters. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s interim disclosure controls and procedures as of the end of the period covered by this report and found them to be effective.

During the quarter ended June 30, 2010, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are subject to various legal actions that are considered ordinary routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

Item 1.A. Risk Factors

Not required for smaller reporting companies

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

31.1 – Certification of the Chief Executive Officer Pursuant to Rule 13a-15(e)/15d-15(e)

31.2 – Certification of the Chief Financial Officer Pursuant to Rule 13a-15(e)/15d-15(e)

32.1 – Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HARVARD ILLINOIS BANCORP, INC.
	Registrant
Date: August 12, 2010	/s/ Duffield J. Seyller III
	Duffield Seyller III
	President and Chief Executive Officer
	/s/ Donn L. Claussen
	Donn L. Claussen
	Executive Vice President and Chief Financial Officer

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