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 September 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	¨	Smaller Reporting Company	x

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 November 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 SEPTEMBER 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		7-19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4T.	Controls and Procedures		36
PART II	OTHER INFORMATION		37
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Removed and Reserved		37
Item 5.	Other Information		37
Item 6.	Exhibits		37
	Signatures		38
EXHIBITS
	Section 302 Certifications		39
	Section 906 Certification		41

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	(Unaudited) September 30, 2010			December 31, 2009
Assets
Cash and due from banks	$	1,074		$	973
Interest-bearing demand deposits in banks		3,079			2,594
Securities purchased under agreements to resell		7,850			11,800
Cash and cash equivalents		12,003			15,367
Interest-bearing deposits with other financial institutions		9,235			8,110
Available-for-sale securities		2,809			3,225
Held-to-maturity securities, at amortized cost (estimated fair value of $3,141 and $3,939 at September 30, 2010 and December 31, 2009, respectively)		2,904			3,789
Loans, net of allowance for loan losses of $1,675 and $1,426 at September 30, 2010 and December 31, 2009, respectively		120,145			108,895
Premises and equipment, net		3,653			3,652
Federal Home Loan Bank stock, at cost		6,549			6,549
Foreclosed assets held for sale		521			506
Accrued interest receivable		834			515
Deferred income taxes		1,300			1,231
Bank-owned life insurance		4,062			3,992
Mortgage servicing rights		364			398
Other		736			1,380
Total assets	$	165,115		$	157,609
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	3,557		$	3,939
Savings, NOW and money market		45,043			47,047
Certificates of deposit		75,516			70,564
Brokered certificates of deposit		2,813			2,811
Total deposits		126,929			124,361
Federal Home Loan Bank advances		16,593			18,128
Advances from borrowers for taxes and insurance		194			415
Deferred compensation		2,152			2,096
Accrued interest payable		65			79
Other		647			215
Total liabilities		146,580			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		6,803			—
Unearned ESOP shares, at cost		(602	)		—
Retained earnings		12,300			12,250
Accumulated other comprehensive income, net of tax		26			65
Total stockholders’ equity		18,535			12,315
Total liabilities and equity	$	165,115		$	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 September 30,						(Unaudited) Nine Months  Ended September 30,
	2010			2009			2010			2009
Interest and Dividend Income
Interest and fees on loans	$	1,798		$	1,731		$	5,382		$	5,379
Securities
Taxable		62			94			210			268
Tax-exempt		6			8			20			26
Securities purchased under agreements to resell		22			57			58			185
Other		41			39			132			121
Total interest and dividend income		1,929			1,929			5,802			5,979
Interest Expense
Deposits		596			692			1,818			2,270
Federal Home Loan Bank advances		155			225			488			718
Total interest expense		751			917			2,306			2,988
Net Interest Income		1,178			1,012			3,496			2,991
Provision for Loan Losses		190			754			622			1,048
Net Interest Income After Provision for Loan Losses		988			258			2,874			1,943
Noninterest Income
Customer service fees		56			61			186			179
Brokerage commission income		14			17			31			51
Net realized gains (losses) on loan sales		67			(29	)		76			265
Net realized losses on sales of available-for-sale securities		—			—			(1	)		(7	)
Losses on other than temporary impairment of equity securities		(20	)		(6	)		(26	)		(45	)
Loan servicing fees		43			41			127			124
Bank-owned life insurance income, net		38			51			116			122
Other		3			3			10			10
Total noninterest income		201			138			519			699
Noninterest Expense
Compensation and benefits		596			525			1,820			1,683
Occupancy		132			110			380			395
Data processing		114			159			348			389
Professional fees		60			15			163			54
Marketing		20			29			64			91
Office supplies		8			11			37			41
Federal deposit insurance premiums		53			58			169			227
Indirect automobile servicing fees		31			52			102			164
Foreclosed assets, net		(14	)		33			80			113
Other		89			41			229			125
Total noninterest expense		1,089			1,033			3,392			3,282
Income (Loss) Before Income Taxes		100			(637	)		1			(640	)
Provision (Benefit) for Income Taxes		19			(213	)		(49	)		(224	)
Net Income (Loss)	$	81		$	(424	)	$	50		$	(416	)
Earnings Per Share:
Basic and diluted (Note 5)	$	0.11			N/A		$	0.07			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 nine months ended September 30, 2010 (unaudited)
Balance, January 1, 2010	$	—	$	—		$	—		$	12,250		$	65		$	12,315
Comprehensive income:
Net income		—		—			—			50			—			50
Change in unrealized appreciation on available-for-sale securities, net of tax benefit of $19		—		—			—			—			(39	)		(39	)
Total comprehensive income																11
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		—		(6	)		26			—			—			20
Balance, September 30, 2010	$	8	$	6,803		$	(602	)	$	12,300		$	26		$	18,535
For the nine months ended September 30, 2009 (unaudited)
Balance, January 1, 2009	$	—	$	—		$	—		$	12,512		$	15		$	12,527
Comprehensive loss:
Net loss		—		—			—			(416	)		—			(416	)
Change in unrealized appreciation on available-for-sale securities, net of tax expense of $36		—		—			—			—			69			69
Total comprehensive loss																(347	)
Balance, September 30, 2009	$	—	$	—		$	—		$	12,096		$	84		$	12,180

See accompanying notes to unaudited consolidated financial statements.

5

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	(Unaudited) Nine Months  Ended September 30,
	2010			2009
Operating Activities
Net income (loss)	$	50		$	(416	)
Items not requiring (providing) cash
Depreciation		153			161
Provision for loan losses		622			1,048
Amortization of premiums and discounts on securities		(13	)		(10	)
Deferred income taxes		(50	)		(224	)
Net realized gains on loan sales		(76	)		(186	)
Net realized losses on sales of available-for-sale securities		1			7
Loss on other than temporary impairment of equity securities		26			45
Loss on foreclosed assets held for sale		27			66
Bank-owned life insurance income, net		(116	)		(65	)
Originations of loans held for sale		(14,005	)		(24,224	)
Proceeds from sales of loans held for sale		14,115			24,410
ESOP compensation expense		20			—
Changes in
Accrued interest receivable		(319	)		19
Other assets		690			(432	)
Accrued interest payable		(14	)		(46	)
Deferred compensation		56			158
Other liabilities		432			58
Net cash provided by operating activities		1,599			369
Investing Activities
Net increase in interest-bearing deposits		(1,125	)		(7,216	)
Purchases of available-for-sale securities		(3,484	)		(17	)
Proceeds from the sales of available-for-sale securities		927			495
Proceeds from maturities and pay-downs of available-for-sale securities		2,892			1,427
Purchases of held-to-maturity securities		—			(4,460	)
Proceeds from maturities and pay-downs of held-to-maturity securities		894			1,901
Net change in loans		(12,290	)		9,319
Purchase of premises and equipment		(154	)		(140	)
Proceeds from sale of foreclosed assets		376			592
Net cash provided by (used in) investing activities		(11,964	)		1,901
Financing Activities
Net increase (decrease) in demand deposits, money market, NOW and savings accounts		(2,386	)		5,435
Net increase (decrease) in certificates of deposit, including brokered certificates		4,954			(156	)
Net decrease in advances from borrowers for taxes and insurance		(221	)		(273	)
Proceeds from Federal Home Loan Bank advances		2,456			4,928
Repayments of Federal Home Loan Bank advances		(3,991	)		(11,214	)
Proceeds from issuance of common stock, net of costs		6,817			—
Stock issuance from Employee Stock Ownership Plan purchase		(628	)		—
Net cash provided by (used in) financing activities		7,001			(1,280	)
Net Increase (Decrease) in Cash and Cash Equivalents		(3,364	)		990
Cash and Cash Equivalents, Beginning of Period		15,367			14,019
Cash and Cash Equivalents, End of Period	$	12,003		$	15,009
Supplemental Cash Flows Information
Interest paid	$	2,320		$	3,034
Income taxes paid		—			—
Foreclosed assets acquired in settlement of loans		418			156

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 referred to in Note 2 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 statements of operations for the three and nine months ended September 30, 2009, and consolidated statement of cash flows for the nine months ended September 30, 2009 are presented as results of Harvard Savings, MHC and its subsidiaries. The consolidated balance sheet as of September 30, 2010, the consolidated statement of operations for the three and nine months ended September 30, 2010, and consolidated statement of cash flows for the nine months ended September 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 September 30, 2010 and December 31, 2009, and the results of its operations for the nine month periods ended September 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 nine month period ended September 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 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 September 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.

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 September 30, 2010 is as follows (dollars in thousands):

Shares committed for release		2,544
Unearned shares		60,231
Total ESOP shares		62,775
Fair value of unearned ESOP shares	$	422

8

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

Basic earnings per common share are presented for the periods beginning April 8, 2010, the date of conversion, to September 30, 2010. Income per share data is not presented for the three and nine months ended September 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 share computation follow (dollars in thousands):

	Three Months Ended September 30, 2010			April 8, 2010  to September 30, 2010
Basic
Net income	$	81		$	49
Weighted average common shares outstanding		784,689			784,689
Less: Average unallocated ESOP shares		(60,655	)		(61,291	)
Average shares		724,034			723,398
Basic earnings per common share	$	0.11		$	0.07

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

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 $7,850 and $11,800 at September 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 upon 30 days notice by the custodian. The Company’s policy requires that all securities purchased under agreements to resell be fully collateralized.

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

	September 30, 2010		December 31, 2009
BCM High Income Fund, LP	$	—	$	5,350
HEC Opportunity Fund LLC		3,400		—
Coastal Securities		4,450		6,450
Total	$	7,850	$	11,800

9

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:
September 30, 2010:
U.S. government agencies	$	1,329	$	—	$	—		$	1,329
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		616		21		—			637
State and political subdivisions		372		—		—			372
Equity securities		453		18		—			471
	$	2,770	$	39	$	—		$	2,809
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
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-maturity Securities:
September 30, 2010:
U.S. government agencies	$	500	$	54	$	—		$	554
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		32		1		—			33
Private-label residential		2,272		181		—			2,543
State and political subdivisions		100		1		—			101
	$	2,904	$	237	$	—		$	3,141
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

10

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

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 $12 and $5 for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010 and December 31, 2009, the Company held investments in FNMA and FHLMC common stock with amortized cost of $11 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 September 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 amounts of $10 and $29 for the nine month periods ended September 30, 2010 and 2009, respectively. As of September 30, 2010 and December 31, 2009, the Company held investments in the mutual funds with an amortized cost of $423 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 September 30, 2010 and December 31, 2009.

The Company recorded an other-than-temporary impairment on other equity securities of $4 and $11 for the nine month periods ended September 30, 2010 and 2009, respectively. As of September 30, 2010 and December 31, 2009, the Company held investments in other equity securities with an amortized cost of $19 and $23, respectively. Management performed an analysis and deemed the remaining investment in other equity securities was not other than temporarily impaired as of September 30, 2010 and December 31, 2009.

Other than temporary impairment recorded for the nine month periods ended September 30, 2010 and 2009 totaled $26 and $45, respectively, as previously described.

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $3,800 and $2,729 as of September 30, 2010 and December 31, 2009, respectively.

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 nine month periods ended September 30, 2010 and 2009, respectively.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 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	$	853	$	853	$	—	$	—
One to five years		661		661		600		655
Five to ten years		187		187		2,304		2,486
After ten years		—		—		—		—
		1,701		1,701		2,904		3,141
Mortgage-backed securities		616		637		—		—
Equity securities		453		471		—		—
Totals	$	2,770	$	2,809	$	2,904	$	3,141

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 September 30, 2010 was $0, which is approximately 0% 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.

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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 September 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

$

—

$

—

$

—

$

—

$

—

$

—

Total temporarily impaired securities

$

—

$

—

$

—

$

—

$

—

$

—

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 September 30, 2010						At December 31, 2009
	Amount			Percent			Amount			Percent
Real estate loans:
One-to-four family	$	49,955			41.00	%	$	53,733			48.43	%
Home equity line of credit and other 2nd mortgage		11,717			9.62			12,315			11.10
Multifamily		1,438			1.18			175			0.16
Commercial		25,296			20.76			20,133			18.14
Farmland		2,961			2.43			459			0.41
Construction and land development		2,194			1.79			5,323			4.80
Total real estate loans		93,561			76.78			92,138			83.04
Commercial and industrial		5,519			4.53			6,557			5.91
Agriculture		15,494			12.72			778			0.70
Consumer loans:
Purchased indirect automobile		6,948			5.70			11,018			9.93
Other		327			0.27			469			0.42
Total consumer loans		7,275			5.97			11,487			10.35
Total loans		121,849			100.00	%		110,960			100.00	%
Deferred loan costs (fees)		(7	)					(14	)
Loans in process		(22	)					(625	)
Allowance for loan losses		(1,675	)					(1,426	)
Loans, net	$	120,145					$	108,895

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

	Nine Months  Ended September 30,
	2010			2009
Balance, beginning of period	$	1,426		$	1,000
Provision charged to expense		622			1,048
Losses charged off, net of recoveries of $38 and $25 for 2010 and 2009		(373	)		(773	)
Balance, end of period	$	1,675		$	1,275

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 September 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 is expected to 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 September 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):

	Nine Months  Ended September 30,
	2010			2009
Net unrealized losses on securities available-for-sale	$	(85	)	$	53
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		(26	)		(45	)
Other comprehensive income (loss), before tax effect		(58	)		105
Less tax expense (benefit)		(19	)		36
Other comprehensive income (loss)	$	(39	)	$	69

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

	September 30, 2010			December 31, 2009
Net unrealized gain on securities available-for-sale	$	39		$	97
Tax effect		(13	)		(32	)
Net-of-tax amount	$	26		$	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):

	Nine Months Ended September 30,
	2010			2009
Computed at the statutory rate (34%)	$	—		$	(218	)
Decrease resulting from
Tax exempt interest		(7	)		(8	)
Nondeductible expenses		1			1
State income taxes		—			—
Changes in deferred tax valuation allowance		—			(74	)
Cash surrender value of life insurance		(39	)		(42	)
Other		(4	)		117
Actual benefit	$	(49	)	$	(224	)
Tax benefit as a percentage of pre-tax loss		(4900.00	)%		(35.00	)%

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 September 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)
September 30, 2010:
Available-for-sale securities:
US Government and federal agency	$	1,329	$	—	$	1,329	$	—
Mortgage-backed securities – GSE residential		637		—		637		—
State and political subdivisions		372		—		—		372
Equity securities		471		23		448		—
Mortgage servicing rights		364		—		—		364
			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		—			(36	)
Included in other comprehensive income		—			—
Purchases, issuances and settlements		(31	)		2
Transfers in and/or out of Level 3		—			—
Balance, September 30, 2010	$	372		$	364
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 September 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)
September 30, 2010:
Impaired loans	$	3,356	$	—	$	—	$	3,356
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.

17

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

	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	12,003	$	12,003	$	15,367	$	15,367
Interest-bearing deposits		9,235		9,235		8,110		8,110
Available-for-sale securities		2,809		2,809		3,225		3,225
Held-to-maturity securities		2,904		3,141		3,789		3,939
Loans, net of allowance for loan losses		120,145		122,108		108,895		110,838
Federal Home Loan Bank stock		6,549		6,549		6,549		6,549
Interest receivable		834		834		515		515
Financial liabilities
Deposits		126,929		128,349		124,361		123,574
Federal Home Loan Bank advances		16,593		17,322		18,128		18,683
Advances from borrowers for taxes and insurance		194		194		415		415
Interest payable		65		65		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.

Note 15: Regulatory Matters

Effective September 2, 2010, the Board of Directors of the Company entered into a memorandum of understanding (the “MOU”) with the Office of Thrift Supervision (the “OTS”). The MOU, which is an informal enforcement action, requires the Company to take a number of actions, including among other things:

(1) review the business plan of its subsidiary, Harvard Savings Bank, and provide the OTS with a written compliance report identifying any instances of Bank’s material non-compliance with its business plan and establishing a target date for correcting any such non-compliance or indicating that a new business plan will be submitted;

(2) submit a capital plan (the “Capital Plan”) which shall include, among other things, a minimum tangible capital ratio commensurate with the Company’s consolidated risk profile, capital preservation strategies to achieve and maintain the Board-established minimum tangible equity capital ratio, operating strategies to achieve net income levels that will result in adequate cash flow throughout the term of the Capital Plan, and quarterly pro forma consolidated and unconsolidated financial statements for the period covered by the Capital Plan;

(3) submit any material modifications to the Capital Plan to the OTS for its non-objection;

(4) update the Capital Plan on an annual basis;

(5) prepare and submit quarterly reports comparing projected operating results contained in the Capital Plan to actual results;

(6) implement a risk management program which shall, among other things, appoint one or more individuals responsible for implementing and maintaining the program, clearly define the duties of the appointed individual(s), and identify the means and methods to be used to identify and monitor significant risks and trends impacting the Company’s consolidated risk and compliance profile;

(7) to not declare or pay any dividends or purchase, repurchase, or redeem, or commit to purchase, repurchase, or redeem any Company stock without the prior written non-objection of the OTS; and

(8) to not incur any additional debt at the holding company without the prior written non-objection of the OTS.

The Company has taken the relevant actions to comply with the terms of the agreement and believes it will be able to maintain compliance, although compliance will be determined by the OTS and not by the Company. The requirements of the MOU will remain in effect until the OTS decides to terminate, suspend or modify it.

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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;

• 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;

20

• 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 $18.5 million or 15.2% of total loans at September 30, 2010, compared to $1.2 million or 1.1% of total loans at December 31, 2009.

As further discussed in Note 15 to the financial statements and footnotes included herein, the Company entered into a memorandum of understanding (the “MOU”) with the Office of Thrift Supervision (the “OTS”). Among other provisions, this informal enforcement action prohibits the Company from declaring or paying dividends, or repurchasing any Company stock without the prior written non-objection of the OTS. The Company has taken the relevant actions to comply with the terms of the agreement and believes it will be able to maintain compliance. The requirements of the MOU will remain in effect until the OTS decides to terminate, suspend or modify it.

Our net income for the quarter ended September 30, 2010 was $81,000, compared to our net loss of $424,000 for the quarter ended September 30, 2009. The increase in net income was due to an increase in net interest income and noninterest income and a decrease in the provision for loan losses, partially offset by an increase in noninterest expense and the provision for income taxes, respectively.

21

The following discussion compares the financial condition of Harvard Illinois Bancorp, Inc. and its wholly owned subsidiary, Harvard Savings Bank at September 30, 2010 to its financial condition at December 31, 2009, and the results of operations for the three months and nine months ended September 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.

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.

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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.

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.

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FINANCIAL CONDITION

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

Total assets at September 30, 2010 increased $7.5 million or 4.8% to $165.1 million from $157.6 million at December 31, 2009. This increase was primarily the result of an increase in loans of $11.3 million during the nine months ended September 30, 2010 due to increases of $14.7 million, $2.5 million and $5.2 million in the agriculture, farmland and commercial real estate loan portfolios, respectively. These increases were partially offset by decreases of $3.8 million, $4.1 million and $3.1 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 have slowed significantly since the first 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 $3.4 million or 21.9% to $12.0 million at September 30, 2010 from $15.4 million at December 31, 2009 primarily due to a decrease of $4.0 million in securities purchased under agreements to resell. Securities decreased $1.3 million or 18.5% to $5.7 million at September 30, 2010 from $7.0 million at December 31, 2010 due to maturities and pay-downs. The liquidity from these decreases was used to fund the loan growth and the increase of $1.1 million in interest-bearing deposits with other financial institutions.

Deposits increased $2.6 million or 2.1% to $126.9 million at September 30, 2010 from $124.4 million at December 31, 2009. Total equity increased by $6.2 million or 50.5% to $18.5 million at September 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, and net income of $50,000 for the nine months ended September 30, 2010, partially offset by a decrease in accumulated other comprehensive income of $39,000 to a gain of $26,000. The increases in deposits and equity were 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 $1.5 million or 8.5% to $16.6 million at September 30, 2010 from $18.1 million at December 31, 2009. The increase in deposits was partially offset by a decrease in savings, NOW and money market accounts of $2.0 million primarily due to customers seeking higher yields in short-term certificate of deposit promotions.

RESULTS OF OPERATIONS

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

General. Net income for the three months ended September 30, 2010 was $81,000, compared to net loss of $424,000 for the three months ended September 30, 2009, an increase in net income of $505,000. The increase in net income was due to an increase in net interest income of $166,000, an increase in noninterest income of $63,000 and a decrease in the provision for loan losses of $564,000, partially offset by increases in noninterest expense and the provision for income taxes of $56,000 and $232,000, respectively.

Interest and Dividend Income. Total interest and dividend income was unchanged at $1.9 million for the three months ended September 30, 2010 and 2009. Although average interest-earning assets increased $5.8 million to $153.8 million for the three months ended September 30, 2010 from $148.1 million for the same quarter in 2009, the average yield decreased 19 basis points to 5.02% from 5.21%. This decrease reflected a decline in the interest rate environment during the period. Interest and fees on loans increased $67,000 during the period as the average balance of loans increased $9.3 million to $123.4 million primarily due to agricultural lending activity, partially offset by the average yield on loans, which decreased 24 basis points to 5.83% from 6.07%. Interest income on securities and other interest-earning assets decreased $67,000 for the three months ended September 30, 2010 compared to the year ago period as average balances decreased $3.5 million, primarily to fund loan growth, and the average yield on those assets decreased 61 basis points to 1.72% from 2.33%, due to the lower interest rate environment.

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Interest Expense. Total interest expense decreased $166,000 or 18.1% to $751,000 for the three months ended September 30, 2010 from $917,000 for the same period in 2009. Interest expense on deposit accounts decreased $96,000 or 13.9% to $596,000 for the three months ended September 30, 2010 from $692,000 for the same period in 2009. This decrease was primarily due to a decrease in interest expense on savings, NOW and money market accounts of $66,000, while interest expense on certificates of deposit and brokered certificate accounts decreased $30,000 during the period. The average balances of savings, NOW and money market accounts decreased $4.4 million while the cost of these deposits decreased 49 basis points to 0.42% during the three months ended September 30, 2010 from the three months ended September 30, 2009. The average balance in certificates of deposits and brokered certificates of deposit increased $8.9 million, with the cost of these deposits decreasing 53 basis points to 2.79% for the three months ended September 30, 2010 compared to the same period in 2009. 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 $70,000 to $155,000 for the three months ended September 30, 2010 from $225,000 for the three months ended September 30, 2009. The average balance of advances decreased $4.7 million while the average cost of this funding decreased 47 basis points for the three months ended September 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 $166,000 or 16.4% to $1.2 million for the three months ended September 30, 2010 from $1.0 million for the three months ended September 30, 2009, primarily as a result of an increase in our net interest rate spread of 27 basis points to 2.87% from 2.60%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 109.63% for the three months ended September 30, 2010 from 105.34% for the same period in 2009. Our net interest margin also increased to 3.06% from 2.73%. 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.

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.

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Based upon our evaluation of these factors, a provision of $190,000 was recorded for the three months ended September 30, 2010, a decrease of $564,000 or 74.8% from $754,000 for the three months ended September 30, 2009. The provision for loan losses reflected lower net charge offs of $118,000 for the three months ended September 30, 2010, compared to $679,000 for the three months ended September 30, 2009. The allowance for loan losses was $1.7 million, or 1.37% of total loans at September 30, 2010, compared to $1.4 million, or 1.29% of total loans at December 31, 2009. At September 30, 2010, we had identified substandard loans totaling $3.7 million, all of which were considered impaired, and established an allowance for loan losses of $339,000. 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, which resulted in an increase in the general allowance for loan losses for most loan categories.

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.

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 September 30, 2010 and December 31, 2009 (dollars in thousands).

	September 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	$	343		20.48	%		41.00	%	$	504		35.34	%		48.43	%
Home equity line of credit and other 2nd mortgage		172		10.27			9.62			83		5.82			11.10
Multi-family		34		2.03			1.18			4		0.28			0.16
Commercial		586		34.99			20.76			437		30.65			18.14
Farmland		5		0.29			2.43			5		0.35			0.41
Construction and land development		43		2.57			1.79			74		5.19			4.80
Total real estate loans		1,183		70.63			76.78			1,107		77.63			83.04
Commercial and industrial		109		6.51			4.53			120		8.42			5.91
Agriculture		232		13.85			12.72			12		0.84			0.70
Consumer loans:
Purchased indirect automobile		148		8.84			5.70			183		12.83			9.93
Other		3		0.17			0.27			4		0.28			0.42
Total consumer loans		151		9.01			5.97			187		13.11			10.35
Unallocated		—		0.00			0.00			—		0.00			0.00
Total allowance for loan losses	$	1,675		100.00	%		100.00	%	$	1,426		100.00	%		100.00	%

Loan losses allocated to one-to-four-family real estate loans totaled $343,000 at September 30, 2010, a decrease of $161,000 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 $70,000. Although the home equity line of credit and second mortgage loan portfolio decreased 4.9% during the nine months ended September 30, 2010, loan losses allocated to that portfolio increased $89,000 or 107.2% to $172,000 at September 30, 2010 due to increases in nonperforming loans in that category and impairment allowances associated with those loans, and a 67% increase in the allowance percentage assigned to non-classified loans in that category at September 30, 2010 to reflect the higher level of net charge-offs and impact of certain other qualitative factors.

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

	At September  30, 2010			At December  31, 2009
Non-accrual loans:
Real estate loans:
One-to four-family	$	1,640		$	1,857
Home equity lines of credit and other 2nd mortgage		105			11
Commercial		1,244			171
Construction and land development		450			—
Total real estate loans		3,439			2,039
Commercial and industrial		99			95
Consumer loans:
Purchased indirect automobile		8			27
Other		13			16
Total consumer loans		21			43
Total non-accrual loans		3,559			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		3,559			2,321
Other real estate owned:
One-to four family		496			432
Total other real estate owned		496			432
Repossessed automobiles		25			74
Total non-performing assets		4,080			2,827
Troubled debt restructurings (not included in nonaccrual loans above)		—			947
Total non-performing assets and troubled debt restructurings	$	4,080		$	3,774
Total non-performing loans to total loans		2.92	%		2.09	%
Total non-performing assets to total assets		2.47	%		1.79	%
Total non-performing loans and troubled debt restructurings to total loans		2.92	%		2.95	%
Total non-performing assets and troubled debt restructurings to total assets		2.47	%		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 nine months of 2010. Nonaccrual commercial real estate loans totaled $1.2 million at September 30, 2010, an increase of $1.1 million during 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 in June 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 September 30, 2010, net of a partial charge-off in 2010 of $100,000. We consider the loan an impaired loan and have established an impairment allowance of $170,000, based on a new appraisal obtained in 2009 of $930,000, adjusted for certain factors. In September 2010, another commercial real estate loan secured by an owner-occupied retail strip center in McHenry County was placed on nonaccrual after the borrower stated that no more payments would be made and foreclosure proceedings were initiated. The loan has been determined to be impaired and had a balance of $386,000 at September 30, 2010, net of a partial charge-off taken in September 2010 of $95,000.

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

	September 30, 2010		December 31, 2009
Watch loans	$	2,338	$	5,292
Special Mention loans		3,949		518
Substandard loans		3,695		3,755
Total watch list loans	$	9,982	$	9,565

In June 2010, a residential subdivision real estate loan with a balance at September 30, 2010 of $1.2 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. In June 2010, a real estate loan participation with a balance at September 30, 2010 of $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 adequate 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 currently have adequate cash flow to amortize the loan over a reasonable term.

In September 2010, several loans with one customer, which were primarily secured by non-owner-occupied residential real estate totaling $1.3 million at September 30, 2010 were added to loans classified special mention after becoming 30 days delinquent. The loans have marginal collateral and cash flow support.

All three loan relationships were not on the watch loan list as of December 31, 2009.

Noninterest Income. Noninterest income increased $63,000 or 45.7% to $201,000 for the three months ended September 30, 2010 from $138,000 for the three months ended September 30, 2009. The increase was primarily related to net gains on loan sales which increased $96,000 to net gains of $67,000 for the three months ended September 30, 2010, compared to net losses of $29,000 for the same period in 2009. Proceeds from loan sales increased $2.8 million to $6.5 million for the three months ended September 30, 2010 from $3.7 million for the same period in 2009. Gains on loan sales included the net increase in fair value of mortgage servicing rights of $4,000 in 2010 and the net decrease in fair value of mortgage servicing rights of $55,000 in 2009, an increase of $59,000 primarily due to the significant increase in prepayment speeds during the quarter ended September 30, 2009 resulting from decreasing market interest rates for mortgage loans. The loan sales were executed to generate additional liquidity and manage interest rate risk for the Bank.

Noninterest Expense. Noninterest expense increased $56,000 or 5.4% to $1.1 million for the three months ended September 30, 2010 from $1.0 million for the three months ended September 30, 2009. Compensation and benefit expenses increased $71,000 or 13.5% to $596,000 in the 2010 period compared to $525,000 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 $45,000 to $60,000 for the three months ended September 30, 2010 from $15,000 for the same period in 2009. Other noninterest expense increased $48,000 to $89,000 for the three months ended September 30, 2010 from $41,000 for the quarter ended September 30, 2009. The increases in professional fees and other noninterest expense in 2010 were due primarily to the obligations of being a new public company, including substantial new public reporting obligations. These increases were partially offset by a decrease in losses on foreclosed assets, net of $47,000 to a net gain of $14,000 for the three months ended September 30, 2010 from a net loss of $33,000 for the same period in 2009, primarily due to the gain realized on the sale of one foreclosed single-family home in September 2010 of $37,000.

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Provision (Benefit) for Income Taxes. The provision for income taxes was $19,000 for the three months ended September 30, 2010 compared to a benefit of $213,000 for the same period in 2009, an increase of $232,000. The higher income tax expense for the third quarter of 2010 reflected a higher level of pre-tax income, compared to 2009. The effective tax expense as a percent of pre-tax income was 19.0% for the three months ended September 30, 2010, compared to an effective tax benefit as a percent of pre-tax loss of 33.4% for the three months ended September 30, 2009.

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009

General. Net income for the nine months ended September 30, 2010 was $50,000, compared to net loss of $416,000 for the nine months ended September 30, 2009, an increase of $466,000. The increase in net income was due to an increase in net interest income of $505,000 and a decrease in the provision for loan losses of $426,000, partially offset by an increase in noninterest expense of $110,000, and decreases in noninterest income and the benefit for income taxes of $180,000 and $175,000, respectively.

Interest and Dividend Income. Total interest and dividend income decreased $177,000 or 3.0% to $5.8 million for the nine months ended September 30, 2010 from $6.0 million for the same period in 2009. Average interest-earning assets increased $1.2 million to $151.6 million for the nine months ended September 30, 2010 from $150.4 million for the same period in 2009, and the average yield decreased 20 basis points to 5.10% from 5.30%. The decrease in the average yield reflected a decline in the interest rate environment during the period. Interest and fees on loans increased $3,000 during the period as the average balance of loans, which increased $5.2 million to $121.1 million primarily due to agricultural lending activity, more than offset the impact of the average yield on loans, which decreased 27 basis points to 5.92% from 6.19%. Interest income on securities and other interest-earning assets decreased $180,000 for the nine months ended September 30, 2010 compared to the year ago period as average balances decreased $4.1 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 48 basis points to 1.84% from 2.32%, due to the lower interest rate environment.

Interest Expense. Total interest expense decreased $682,000 or 22.8% to $2.3 million for the nine months ended September 30, 2010 from $3.0 million for the same period in 2009. Interest expense on deposit accounts decreased $452,000 or 19.9% to $1.8 million for the nine months ended September 30, 2010 from $2.3 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 $242,000 during the period while interest expense on savings, NOW and money market accounts decreased $210,000. Average savings, NOW and money market accounts decreased $3.1 million to $46.0 million while the cost of these deposits decreased 54 basis points to 0.52% during the nine months ended September 30, 2010 from the same period in 2009. The average balance in certificates of deposits and brokered certificates of deposit increased $6.1 million to $77.1 million between the nine months ended September 30, 2010 and 2009, respectively, while the cost of these deposits decreased 70 basis points to 2.83% 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 $230,000 to $488,000 for the nine months ended September 30, 2010 from $718,000 for the nine months ended September 30, 2009. The average balance of the advances decreased $5.8 million to $16.9 million for the nine months ended September 30, 2010 from the comparable period in 2009, while the average cost of the advances decreased 36 basis points to 3.86%. 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.

Net Interest Income. Net interest income increased $505,000 or 16.9% to $3.5 million for the nine months ended September 30, 2010 from $3.0 million for the nine months ended September 30, 2009, primarily as a result of an increase in our net interest rate spread of 40 basis points to 2.91% from 2.51%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 108.28% for the nine months ended September 30, 2010 from 105.34% for the same period in 2009. Our net interest margin also increased to 3.08% from 2.65%. 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.

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Provision for Loan Losses

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

	2010			2009
Allowance at beginning of period	$	1,426		$	1,000
Provision for loan losses		622			1,048
Charge-offs:
Real estate loans:
One-to four family		90			242
Home equity line of credit and other 2nd mortgage		25			—
Commercial		195			—
Construction and land development		2			162
Total charge-offs, real estate loans		312			404
Commercial and industrial		—			196
Consumer loans:
Purchased indirect automobile		98			198
Other		1			—
Total charge-offs, consumer loans		99			198
Total charge-offs		411			798
Recoveries:
Real estate loans:
One-to four family		12			—
Total recoveries, real estate loans		12			—
Commercial and industrial		5			—
Consumer loans:
Purchased indirect automobile		21			21
Other		—			4
Total recoveries, consumer loans		21			25
Total recoveries		38			25
Net charge-offs		(373	)		(773	)
Allowance at end of period	$	1,675		$	1,275
Allowance to non-performing loans		47.06	%		48.11	%
Allowance to total loans outstanding at the end of the period		1.37	%		1.14	%
Net charge-offs to average total loans outstanding during the period		0.41	%		0.89	%

A provision of $622,000 was recorded for the nine months ended September 30, 2010, a decrease of $426,000 or 40.6% from $1.0 million for the nine months ended September 30, 2009. The provision for loan losses reflected significantly lower net charge offs of $373,000 or 0.41% of average loans for the nine months ended September 30, 2010, compared to $773,000 or 0.89% of average loans for the nine months ended September 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 economic conditions adversely impacting the quality of the loan portfolio during 2010, which resulted in an increase in the general allowance for loan losses for most loan categories.

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Noninterest Income. Noninterest income decreased $180,000 or 25.8% to $519,000 for the nine months ended September 30, 2010 from $699,000 for the nine months ended September 30, 2009. The decrease was primarily related to net gains on loan sales which decreased $189,000 to $76,000 for the nine months ended September 30, 2010, compared to $265,000 for the same period in 2009. Gains on loan sales included the net decrease in fair value of mortgage servicing rights of $34,000 in 2010 and the net increase in fair value of mortgage servicing rights of $79,000 in 2009, a decrease of $113,000 primarily due to the larger volume of loans sales and increase in size of our mortgage servicing portfolio in 2009, and decrease in value in 2010. Proceeds from loan sales decreased $10.3 million to $14.1 million for the nine months ended September 30, 2010 from $24.4 million for the same period in 2009. 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 $19,000 to $26,000 for the nine months ended September 30, 2010, compared to $45,000 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 $110,000 or 3.4% to $3.4 million for the nine months ended September 30, 2010 from $3.3 million for the nine months ended September 30, 2009. The increase in noninterest expense was primarily due to increases in compensation and benefits, professional fees and other noninterest expense of $137,000, $109,000 and $104,000, respectively for the nine months ended September 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. These increases were partially offset by decreases in FDIC insurance premiums, indirect automobile servicing fees and losses on foreclosed assets, net of $58,000, $62,000 and $33,000, respectively for the nine months ended September 30, 2010, compared to the same period in 2009. The decrease in FDIC insurance premiums was due to a special assessment of $74,000 charged in the second quarter of 2009. The decrease in indirect automobile servicing fees was due to the decrease in our purchased indirect automobile loan portfolio which resulted from normal amortization, payoffs and our strategy to reduce our concentration in that portfolio under current market conditions. The decrease in losses on foreclosed assets, net in 2010 was primarily due to less repossession activity in our shrinking indirect auto loan portfolio.

Provision (Benefit) for Income Taxes. The benefit for income taxes was $49,000 for the nine months ended September 30, 2010 compared to $224,000 for the same period in 2009. The higher income tax benefit for the nine months ended September 30, 2009 reflected a higher pre-tax loss of $640,000, compared to pre-tax income of $1,000 for the same period in 2010.

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 $1.6 million and $369,000 for the nine months ended September 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 provided by (used in) investing activities were $(12.0) million and $1.9 million for the nine months ended September 30, 2010 and 2009, respectively. For the nine months ended September 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 (used in) financing activities also consisted primarily of the activity in deposit accounts and Federal Home Loan Bank borrowings. The net cash provided by (used in) financing activities was $7.0 million and $(1.3) million for the nine months ended September 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 September 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 September 30, 2010. Management is not aware of any conditions or events since the most recent notification that would change our category.

	September 30, 2010			December 31, 2009			Minimum
	Actual			Actual			Required
Tier 1 capital to average assets		10.10	%		7.17	%		4.00	%
Tier 1 capital to risk-weighted assets		13.97	%		10.29	%		4.00	%
Total capital to risk-weighted assets		15.23	%		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 September 30, 2010 and December 31, 2009 (in thousands).

	September 30, 2010		December 31, 2009
Commitments to fund loans	$	11,255	$	15,718
Standby letters of credit		125		388

Certificates of deposit that are scheduled to mature in less than one year from September 30, 2010 totaled $43.8 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 September 30,
	2010							2009
	Average Balance		Interest Income/ Expense		Yield/Cost			Average Balance		Interest Income/ Expense		Yield/Cost
Assets
Interest-earning assets:
Interest-earning deposits	$	10,819	$	41		1.52	%	$	6,923	$	39		2.25	%
Securities purchased under agreements to resell		6,579		22		1.34	%		12,021		57		1.90	%
Securities, tax-exempt		462		6		5.19	%		682		8		4.69	%
Securities, taxable		6,032		62		4.11	%		7,784		94		4.83	%
Loans		123,406		1,798		5.83	%		114,102		1,731		6.07	%
Federal Home Loan Bank stock		6,549		—		0.00	%		6,549		—		0.00	%
Total interest earning assets		153,847		1,929		5.02	%		148,061		1,929		5.21	%
Non-interest earning assets		12,198							11,426
Total assets	$	166,045						$	159,487
Liabilities and equity
Interest-bearing liabilities:
Savings accounts	$	14,215		12		0.34	%	$	13,412		14		0.42	%
NOW and money market accounts		31,327		36		0.46	%		36,513		100		1.10	%
Certificates of deposit		75,690		516		2.73	%		66,776		546		3.27	%
Brokered certificates of deposit		2,812		32		4.55	%		2,825		32		4.53	%
Federal Home Loan Bank advances		16,294		155		3.81	%		21,036		225		4.28	%
Total interest-bearing liabilities		140,338		751		2.14	%		140,562		917		2.61	%
Non-interest-bearing deposits		4,130							3,294
Other non-interest-bearing liabilities		2,994							2,976
Total liabilities		147,462							146,832
Equity		18,583							12,655
Total liabilities and equity	$	166,045						$	159,487
Net interest income			$	1,178						$	1,012
Interest rate spread						2.87	%						2.60	%
Net interest margin						3.06	%						2.73	%
Average interest earning assets to average interest-bearing liabilities						109.63	%						105.34	%

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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 September 30,
	2010 Compared to 2009
	Increase (Decrease) Due to
	Rate			Volume			Net
Interest income:
Interest-earning deposits	$	(3	)	$	5		$	2
Securities purchased under agreements to resell		(14	)		(21	)		(35	)
Securities, tax-exempt		1			(3	)		(2	)
Securities, taxable		(13	)		(19	)		(32	)
Loans		(63	)		130			67
Total		(92	)		92			—
Interest Expense:
Savings accounts		(3	)		1			(2	)
NOW and money market accounts		(51	)		(13	)		(64	)
Certificates of deposit		(152	)		122			(30	)
Brokered certificates of deposit		—			—			—
Federal Home Loan Bank advances		(23	)		(47	)		(70	)
Total		(229	)		63			(166	)
Increase (decrease) in net interest income	$	137		$	29		$	166

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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):

	Nine Months Ended September 30,
	2010							2009
	Average Balance		Interest Income/ Expense		Yield/Cost			Average Balance		Interest Income/ Expense		Yield/Cost
Assets
Interest-earning assets:
Interest-earning deposits	$	11,371	$	132		1.55	%	$	7,006	$	121		2.30	%
Securities purchased under agreements to resell		5,551		58		1.39	%		12,804		185		1.93	%
Securities, tax-exempt		580		20		4.60	%		763		26		4.54	%
Securities, taxable		6,408		210		4.37	%		7,407		268		4.82	%
Loans		121,120		5,382		5.92	%		115,897		5,379		6.19	%
Federal Home Loan Bank stock		6,549		—		0.00	%		6,549		—		0.00	%
Total interest earning assets		151,579		5,802		5.10	%		150,426		5,979		5.30	%
Non-interest earning assets		12,316							11,619
Total assets	$	163,895						$	162,045
Liabilities and equity
Interest-bearing liabilities:
Savings accounts	$	14,171		39		0.37	%	$	13,356		43		0.43	%
NOW and money market accounts		31,826		141		0.59	%		35,777		347		1.29	%
Certificates of deposit		74,310		1,542		2.77	%		68,052		1,780		3.49	%
Brokered certificates of deposit		2,812		96		4.55	%		2,926		100		4.56	%
Federal Home Loan Bank advances		16,867		488		3.86	%		22,683		718		4.22	%
Total interest-bearing liabilities		139,986		2,306		2.20	%		142,794		2,988		2.79	%
Non-interest-bearing deposits		4,914							3,496
Other non-interest-bearing liabilities		3,061							3,194
Total liabilities		147,961							149,484
Equity		15,934							12,561
Total liabilities and equity	$	163,895						$	162,045
Net interest income			$	3,496						$	2,991
Interest rate spread						2.91	%						2.51	%
Net interest margin						3.08	%						2.65	%
Average interest earning assets to average interest-bearing liabilities						108.28	%						105.34	%

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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).

	Nine Months Ended September 30,
	2010 Compared to 2009
	Increase (Decrease) Due to
	Rate			Volume			Net
Interest income:
Interest-earning deposits	$	(12	)	$	23		$	11
Securities purchased under agreements to resell		(42	)		(85	)		(127	)
Securities, tax-exempt		—			(6	)		(6	)
Securities, taxable		(24	)		(34	)		(58	)
Loans		(52	)		55			3
Total		(130	)		(47	)		(177	)
Interest Expense:
Savings accounts		(7	)		3			(4	)
NOW and money market accounts		(171	)		(35	)		(206	)
Certificates of deposit		(429	)		191			(238	)
Brokered certificates of deposit		—			(4	)		(4	)
Federal Home Loan Bank advances		(58	)		(172	)		(230	)
Total		(665	)		(17	)		(682	)
Increase (decrease) in net interest income	$	535		$	(30	)	$	505

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 September 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: November 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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