10-Q

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 March 31, 2012

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.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronic 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  x    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  ¨    No  x

As of May 4, 2012, 816,076 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 MARCH 31, 2012

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Statements of Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to the Consolidated Financial Statements	6-38
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39-53
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II	OTHER INFORMATION	54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
	Signatures	55
EXHIBITS
Exhibit 31.1	Section 302 Certification
Exhibit 31.2	Section 302 Certification
Exhibit 32.1	Section 906 Certification
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	(Unaudited)
	March 31, 2012			December 31, 2011
Assets
Cash and due from banks	$	943		$	941
Interest-bearing demand deposits in banks		3,343			2,804
Securities purchased under agreements to resell		17,249			18,482
Cash and cash equivalents		21,535			22,227
Interest-bearing deposits with other financial institutions		8,022			6,235
Available-for-sale securities		3,807			4,581
Held-to-maturity securities, at amortized cost (estimated fair value of $1,648 and $1,837 at March 31, 2012 and December 31, 2011, respectively)		1,537			1,702
Loans, net of allowance for loan losses $2,675 and $2,575 at March 31, 2012 and December 31, 2011, respectively		120,091			115,698
Premises and equipment, net		3,488			3,525
Federal Home Loan Bank stock, at cost		3,532			6,549
Foreclosed assets held for sale		1,032			1,186
Accrued interest receivable		434			691
Deferred income taxes		1,921			1,803
Bank-owned life insurance		4,264			4,232
Mortgage servicing rights		365			310
Other		378			478
Total assets	$	170,406		$	169,217
Liabilities and Equity
Liabilities
Deposits
Demand	$	5,935		$	5,239
Savings, NOW and money market		51,719			48,990
Certificates of deposit		77,355			79,341
Brokered certificates of deposit		1,499			1,499
Total deposits		136,508			135,069
Federal Home Loan Bank advances		11,330			12,402
Advances from borrowers for taxes and insurance		622			388
Deferred compensation		2,261			2,242
Accrued interest payable		38			37
Other		816			417
Total liabilities		151,575			150,555
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; 816,076 shares issued and outstanding at March 31, 2012 and December 31, 2011		8			8
Additional paid-in capital		6,892			6,852
Unearned ESOP shares, at cost		(534	)		(544	)
Amount reclassified on ESOP shares		(118	)		(80	)
Retained earnings		12,554			12,403
Accumulated other comprehensive income, net of tax		29			23
Total stockholders’ equity		18,831			18,662
Total liabilities and stockholders’ equity	$	170,406		$	169,217

See accompanying notes to the consolidated financial statements.

1

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands)

	(Unaudited) Three Months  Ended March 31,
	2012			2011
Interest and Dividend Income
Interest and fees on loans	$	1,723		$	1,697
Securities
Taxable		45			32
Tax-exempt		—			5
Securities purchased under agreements to resell		42			40
Other		25			37
Total interest and dividend income		1,835			1,811
Interest Expense
Deposits		381			498
Federal Home Loan Bank advances		89			119
Total interest expense		470			617
Net Interest Income		1,365			1,194
Provision for Loan Losses		173			169
Net Interest Income After Provision for Loan Losses		1,192			1,025
Noninterest Income
Customer service fees		69			63
Brokerage commission income		9			7
Net realized gains on loan sales		116			83
Losses on other than temporary impairment of equity securities		(1	)		—
Loan servicing fees		53			47
Bank-owned life insurance income, net		32			34
Other		3			4
Total noninterest income		281			238
Noninterest Expense
Compensation and benefits		676			606
Occupancy		123			139
Data processing		101			124
Professional fees		136			58
Marketing		14			17
Office supplies		13			17
Federal deposit insurance		37			51
Indirect automobile loan servicing fee		25			22
Foreclosed assets, net		119			86
Other		95			78
Total noninterest expense		1,339			1,198
Income Before Income Taxes		134			65
Provision (Benefit) for Income Taxes		(17	)		9
Net Income	$	151		$	56
Earnings Per Share
Basic (Note 4)	$	0.21		$	0.08
Diluted		0.20			0.08

See accompanying notes to the consolidated financial statements.

2

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	(Unaudited) Three Months  Ended March 31,
	2012			2011
Net Income	$	151		$	56
Other Comprehensive Income
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $4 and $(1), for 2012 and 2011, respectively		7			(4	)
Less: reclassification adjustment for loss on other-than-temporary impairment of equity securities included in net income, net of taxes of $0 and $0, for 2012 and 2011, respectively		(1	)		—
Comprehensive Income	$	157		$	52

See accompanying notes to the consolidated financial statements.

3

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

	Common Stock		Additional Paid-in Capital			Unearned ESOP Shares			Amount Reclassified On ESOP Shares			Retained Earnings		Accumulated Other Comprehensive Income			Total
For the Three Months Ended March 31, 2012 (unaudited)
Balance, January 1, 2012	$	8	$	6,852		$	(544	)	$	(80	)	$	12,403	$	23		$	18,662
Net income		—		—			—			—			151		—			151
Other comprehensive income		—		—			—			—			—		6			6
ESOP shares earned, 1,046 shares		—		—			10			—			—		—			10
Stock-based compensation expense		—		40			—			—			—		—			40
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—		—			—			(38	)		—		—			(38	)
Balance, March 31, 2012	$	8	$	6,892		$	(534	)	$	(118	)	$	12,554	$	29		$	18,831
For the Three Months Ended March 31, 2011 (unaudited)
Balance, January 1, 2011	$	8	$	6,799		$	(590	)	$	(26	)	$	12,399	$	(4	)	$	18,586
Net income		—		—			—			—			56		—			56
Other comprehensive loss		—		—			—			—			—		(4	)		(4	)
ESOP shares earned, 1,046 shares		—		(2	)		14			—			—		—			12
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—		—			—			(26	)		—		—			(26	)
Balance, March 31, 2011	$	8	$	6,797		$	(576	)	$	(52	)	$	12,455	$	(8	)	$	18,624

See accompanying notes to consolidated financial statements.

4

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	(Unaudited) Three Months  Ended March 31,
	2012			2011
Operating Activities
Net income	$	151		$	56
Items not requiring (providing) cash
Depreciation		50			51
Provision for loan losses		173			169
Amortization (accretion) of premiums and discounts on securities		(7	)		18
Deferred income taxes		(122	)		(28	)
Net realized gains on loan sales		(116	)		(83	)
Loss on other than temporary impairment of equity securities		1			—
Losses and write down on foreclosed assets held for sale		120			60
Bank-owned life insurance income, net		(32	)		(34	)
Originations of loans held for sale		(4,762	)		(1,674	)
Proceeds from sales of loans held for sale		4,823			1,692
ESOP compensation expense		10			12
Stock-based compensation expense		40			—
Changes in
Accrued interest receivable		257			381
Other assets		100			90
Accrued interest payable		1			(4	)
Deferred compensation		19			18
Other liabilities		361			92
Net cash provided by operating activities		1,067			816
Investing Activities
Net (increase) decrease in interest-bearing deposits		(1,787	)		1,034
Purchases of available-for-sale securities		(2	)		(1	)
Proceeds from maturities and pay-downs of available-for-sale securities		777			593
Proceeds from maturities and pay-downs of held-to-maturity securities		180			301
Net change in loans		(4,584	)		606
Purchase of premises and equipment		(13	)		(11	)
Proceeds from redemption of Federal Home Loan Bank stock		3,017			—
Proceeds from sale of foreclosed assets		52			44
Net cash provided by (used in) investing activities		(2,360	)		2,566
Financing Activities
Net increase (decrease) in demand deposits, money market, NOW and savings accounts		3,425			(13	)
Net decrease in certificates of deposit, including brokered certificates		(1,986	)		(622	)
Net increase in advances from borrowers for taxes and insurance		234			198
Proceeds from Federal Home Loan Bank advances		2,000			500
Repayments of Federal Home Loan Bank advances		(3,072	)		(994	)
Net cash provided by (used in) financing activities		601			(931	)
Net Increase (Decrease) in Cash and Cash Equivalents		(692	)		2,451
Cash and Cash Equivalents, Beginning of Period		22,227			17,963
Cash and Cash Equivalents, End of Period	$	21,535		$	20,414
Supplemental Cash Flows Information
Interest paid	$	469		$	621
Income taxes paid		25			34
Foreclosed assets acquired in settlement of loans		14			736

See accompanying notes to unaudited consolidated financial statements.

5

HARVARD ILLINOIS BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (Dollar amounts in thousands)

Note 1:    Basis of Financial Statement Presentation

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

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 March 31, 2012 and December 31, 2011, and the results of its operations for the three month periods ended March 31, 2012 and 2011. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2011 included as part of Harvard Illinois Bancorp, Inc.’s Form 10-K (File No. 000-53935) (2011 Form 10-K) filed with the Securities and Exchange Commission on March 27, 2012.

The results of operations for the three month period ended March 31, 2012 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 2011 Form 10–K.

Note 2:    New Accounting Pronouncements

Recent and Future Accounting Requirements

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company is assessing the impact of ASU 2011-11 on its disclosures.

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In December 2011, FASB issued ASU No. 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present items that are reclassified from accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. ASU 2011-05 was effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The effect of applying this standard is reflected in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity.

6

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards). ASU 2011-04 was effective prospectively during interim and annual periods beginning on or after December 15, 2011. Early application by public entities was not permitted. The effect of applying this standard is reflected in Note 11 — Fair Value Measurements.

Note 3:    Stock-based Compensation

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 is being 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 are being applied to repay interest on the loan first, then the remainder are being 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 being 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 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 March 31, 2012, 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 is as follows (dollars in thousands):

	March 31, 2012		December 31, 2011
Allocated shares		8,370		4,185
Shares released for allocation		1,046		4,185
Unearned shares		53,359		54,405
Total ESOP shares		62,775		62,775
Fair value of unearned ESOP shares	$	481	$	490

7

On May 26, 2011, the stockholders approved the Harvard Illinois Bancorp, Inc. 2011 Equity Incentive Plan (the “Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 109,856 shares of the Company’s common stock, with no more than 31,387 of shares as restricted stock awards and 78,469 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted. Certain option awards provide for accelerated vesting if there is a change of control (as defined in the Equity Incentive Plan).

On June 23, 2011, the compensation committee of the board of directors approved the awards of 73,761 options to purchase Company stock and 31,387 shares of restricted stock. Of the 73,761 stock options granted, 63,167 were qualified stock options and 10,594 were nonqualified. Stock options and restricted stock vest ratably over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued. At March 31, 2012, there were 4,708 shares available for future option grants under this plan.

The following table summarizes stock option activity for the three months ended March 31, 2012 (dollars in thousands):

	Options		Weighted- Average Exercise Price/Share		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding, January 1, 2012		73,761	$	8.10
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding, March 31, 2012		73,761	$	8.10		9.23	$	4.45	(1)
Exercisable, March 31, 2012		—	$	N/A		N/A	$	—

⁽¹⁾  Based on closing price of $12.55 per share on March 31, 2012.

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

The weighted-average grant-date fair value of options granted during 2011 was $4.11.

The fair value for each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected volatility is based on historical volatility of the Company’s stock and other factors. The expected life of the options is calculated based on the “simplified” method as provided for under Staff Accounting Bulletin No. 110. The expected term of options granted represents the period of time that options are expected to be outstanding.

The weighted-average assumptions used in the Black-Scholes option pricing model for the year indicated was as follows:

	2011
Risk-free interest rate		2.50	%
Expected dividend yield		0.00	%
Expected stock volatility		46.00	%
Expected life (years)		7.00
Fair value (not in thousands)	$	4.11

8

There were no options that vested during the three months ended March 31, 2012. Stock-based compensation expense for stock options for the three months ended March 31, 2012 and 2011 was $15 and $0, respectively. Total unrecognized compensation cost related to nonvested stock options was $258 at March 31, 2012 and is expected to be recognized over a weighted-average period of 4.23 years.

The following table summarizes non-vested restricted stock activity for the three months ended March 31, 2012:

	Shares			Weighted Average Grant-Date Fair Value
Balance, January 1, 2012		31,387		$	8.10
Granted		—			—
Forfeited		—			—
Earned and issued		(1,569	)		8.10
Balance, March 31, 2012		29,818		$	8.10

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (five years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. At the date of grant the par value of the shares granted was recorded in equity as a credit to common stock and a debit to paid-in capital. Stock-based compensation expense for restricted stock for the three months ended March 31, 2012 and 2011 was $25 and $0, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $205 at March 31, 2012 and is expected to be recognized over a weighted average period of 4.23 years.

Note 4:    Earnings Per Common Share (“EPS”)

Basic and diluted earnings per common share are presented for the three-month periods ended March 31, 2012 and 2011. The factors used in the earnings per common share computation follow:

	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
Net income	$	151		$	56
Basic weighted average shares outstanding		789,401			784,689
Less: Average unallocated ESOP shares		(53,707	)		(57,892	)
Basic average shares outstanding		735,694			726,797
Diluted effect of stock options		—			—
Diluted effect of restricted stock awards		2,703			—
Diluted average shares outstanding	$	738,397		$	726,797
Basic earnings per share	$	.21		$	.08
Diluted earnings per share	$	.20		$	.08

Options to purchase 73,761 shares at a weighted-average exercise price of $8.10 were outstanding at March 31, 2012, but were not included in the computation of diluted earnings per share as the options were considered antidilutive for the period ended March 31, 2012.

9

Note 5:    Securities Purchased Under Agreements to Resell

The Company enters into purchases of securities under agreements to resell. The amounts advanced under these agreements were $17,249 and $18,482 at March 31, 2012 and December 31, 2011, respectively, and represent short-term SBA and USDA loans. The securities underlying the agreements are book-entry securities. All securities are delivered by appropriate entry into the third-party custodian’s account designated by the Company under a written custodial agreement that explicitly recognizes the Company’s interest in the securities. These agreements mature by notice by the Company or 30 days by the custodian. The Company’s policy requires that all securities purchased under agreements to resell be fully collateralized.

At March 31, 2012 and December 31, 2011, agreements to resell securities purchased were outstanding with the following entities (in thousands):

	March 31, 2012		December 31, 2011
BCM High Income Fund, LP	$	6,919	$	8,121
HEC Opportunity Fund, LLC		453		453
Coastal Securities		9,877		9,908
Total	$	17,249	$	18,482

Note 6:    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:
March 31, 2012:
U.S. government agencies	$	2,456	$	1	$	—	$	2,457
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		856		22		—		878
Equity securities		451		21		—		472
	$	3,763	$	44	$	—	$	3,807
December 31, 2011:
U.S. Government and federal agency	$	3,212	$	2	$	—	$	3,214
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		884		22		—		906
Equity securities		451		10		—		461
	$	4,547	$	34	$	—	$	4,581

10

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity Securities:
March 31, 2012:
U.S. government agencies	$	500	$	34	$	—	$	534
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		22		—		—		22
Private-label residential		1,015		77		—		1,092
	$	1,537	$	111	$	—	$	1,648
December 31, 2011:
U.S. Government agencies	$	500	$	39	$	—	$	539
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		24		—		—		24
Private-label residential		1,178		96		—		1,274
	$	1,702	$	135	$	—	$	1,837

The Company held no securities at March 31, 2012 or December 31, 2011 with a book value that exceeded 10% of total equity, with the exception of obligations of U.S. Treasury and other U.S. government agencies and corporations.

Available for sale equity securities consist of shares in the Shay Asset Management mutual funds, shares of FHLMC and FNMA common stock, and shares in other financial institutions. Other than temporary impairments recorded for the three month periods ended March 31, 2012 and 2011 totaled $1 and $0, respectively.

As of March 31, 2012 and December 31, 2011, the Company held investments in Shay Asset Management mutual funds with a fair value of $444 and $442, 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 March 31, 2012 and December 31, 2011.

As of March 31, 2012 and December 31, 2011, the Company held investments in FNMA and FHLMC common stock with a fair value of $11 and $8, 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 March 31, 2012 and December 31, 2011.

As of March 31, 2012 and December 31, 2011, the Company held investments in other equity securities with a fair value of $17 and $11, respectively. The Company recorded other-than-temporary impairments on other equity securities of $1 and $0 for the three month periods ended March 31, 2012 and 2011, respectively. Management performed an analysis and deemed the remaining investment in other equity securities was not other than temporarily impaired as of March 31, 2012 and December 31, 2011.

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $2,305 and $2,032 as of March 31, 2012 and December 31, 2011, respectively.

There were no sales of available-for-sale securities for the three months ended March 31, 2012 and 2011.

11

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2012, 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	$	706	$	707	$	—	$	—
One to five years		1,250		1,250		500		534
Five to ten years		500		500		—		—
After ten years		—		—		—		—
		2,456		2,457		500		534
Mortgage-backed securities		856		878		1,037		1,114
Equity securities		451		472		—		—
Totals	$	3,763	$	3,807	$	1,537	$	1,648

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 March 31, 2012 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.

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 March 31, 2012 (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:

Total temporarily impaired securities

$

—

$

—

$

—

$

—

$

—

$

—

12

Note 7:    Loans

Classes of loans include:

	March 31, 2012			December 31, 2011
Mortgage loans on real estate
One-to-four family	$	44,045		$	44,339
Home equity lines of credit and other 2nd mortgages		9,797			10,284
Multi-family residential		2,074			1,480
Commercial		24,571			25,192
Farmland		9,419			9,531
Construction and land development		2,245			2,522
Total mortgage loans on real estate		92,151			93,348
Commercial and industrial		4,576			4,241
Agricultural		17,990			14,313
Purchased indirect automobile, net of dealer reserve		7,911			6,223
Other consumer		142			152
		122,770			118,277
Less
Loans in process		7			6
Net deferred loan fees and costs		(3	)		(2	)
Allowance for loan losses		2,675			2,575
Net loans	$	120,091		$	115,698

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company’s principal lending activity is the origination of one-to four-family residential mortgage loans but also includes, commercial real estate loans, commercial and industrial, home equity, construction, agricultural and other loans. The primary lending market is McHenry, Grundy and to a lesser extent Boone Counties in Illinois and Walworth County in Wisconsin. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Pursuant to applicable law, the aggregate amount of loans that the Company is permitted to make to any one borrower or a group of related borrowers is generally limited to 25% of our total capital plus the allowance for loan losses.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.

Under our loan policy, the individual processing an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an officer for approval. An officer then reviews these materials and verifies that the requested loan meets our underwriting guidelines described below.

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All one-to-four family residential loans up to $500,000, vacant land loans up to $250,000, and any consumer loans require approval of our retail loan committee consisting of five officers. All such loan approvals are reported at the next board meeting following said approval. All secured commercial loans, including agricultural loans, up to $1,500,000 and unsecured loans up to $250,000 must be approved by our commercial credit management committee, which currently consists of our Chief Executive Officer, Executive Vice President and our Vice President – Commercial Loan Officer. These approvals are reported at the next board meeting following said approval. All other loans must be approved by the board.

Generally, title insurance or title searches on our mortgage loans are required as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

One-to-Four Family Residential Mortgage Loans

The cornerstone of our lending program has long been the origination of long-term permanent loans secured by mortgages on owner-occupied one-to-four family residences. Virtually all of the residential loans originated are secured by properties located in our market area.

Due to consumer demand in the current low market interest rate environment, many of our recent originations are 10- to 30-year fixed-rate loans secured by one-to-four family residential real estate. The Company generally originates fixed-rate one-to-four family residential loans in accordance with secondary market standards to permit their sale. During the last several years, consistent with our asset-liability management strategy, most of the fixed rate one-to-four family residential loans we originated with original terms to maturity in excess of ten years were sold in the secondary market.

During recent years, as a part of our asset/liability management policy, seven-year balloon loans with up to 30-year amortization schedules secured by one-to-four family real estate have been originated.

In order to reduce the term to repricing of the loan portfolio, adjustable-rate one-to-four family residential mortgage loans were originated. However, our ability to originate such loans is limited in the current low interest rate environment due to low consumer demand. Our current adjustable-rate mortgage loans carry interest rates that adjust annually at a margin over the one year U.S. Treasury index. Many of our adjustable-rate one-to-four family residential mortgage loans have fixed rates for initial terms of three to five years. Such loans carry terms to maturity of up to 30 years. The adjustable-rate mortgage loans currently offered by the Company generally provide for a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over the initial rate.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates.

Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on many of our adjustable-rate loans do not adjust for the first three to five years. As a result, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

The Company evaluates both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. One-to-four family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. One-to-four family residential mortgage loans customarily include due-on-sale clauses giving the Company the right to declare the

14

loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. Residential mortgage loans are originated for our portfolio with loan-to-value ratios of up to 75% for one-to-four family homes, with higher limits applicable to loans with private mortgage insurance on owner-occupied residences.

Commercial Real Estate Loans

In recent years, in an effort to enhance the yield and reduce the term to maturity of our loan portfolio, the Company has sought to increase the commercial real estate loans. Most of the commercial real estate loans have balloon loan terms of three to ten years with amortization terms of 15 to 25 years and fixed interest rates. The maximum loan-to-value ratio of the commercial real estate loans is generally 75%.

The Company considers a number of factors in originating commercial real estate loans. The qualifications and financial condition of the borrower are evaluated, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions are considered. In evaluating the property securing the loan, the factors considered include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial real estate loans are appraised by outside independent appraisers approved by the board of directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of commercial real estate loans.

Loans secured by commercial real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.

Multi Family Real Estate Loans

The Company has a limited number of loans on multi-family residences in our market area. Such loans have terms and are underwritten similarly to our commercial real estate loans and are subject to similar risks.

Home Equity Loans

The Company originates variable-rate home equity lines-of-credit and, to a lesser extent, fixed- and variable-rate loans secured by liens on the borrower’s primary residence. Home equity products are generally limited to 75% of the property value less any other mortgages. Prior to 2009, home equity loans were originated up to 90% of the property value to our customers where we serviced their first lien mortgage loan. The same underwriting standards are used for home equity lines-of-credit and loans as used for one-to-four family residential mortgage loans. The home equity line-of-credit product carries an interest rate tied to the prime rate published in the Wall Street Journal. The product has a rate ceiling of 18%. Home equity loans with fixed-rate terms typically amortize over a period of up to 15 years. Home equity lines-of-credit provide for an initial draw period of up to five years, with monthly payments of interest calculated on the outstanding balance. At the end of the initial five years, the line may be paid in full or restructured at our then current home equity program.

Construction and Land Development Loans

The Company has construction loans to builders and developers for the construction of one- to four- and multi-family residential units and to individuals for the construction of their primary or secondary residence. The Company has a limited amount of land loans to developers, primarily for the purpose of developing residential subdivisions.

15

The application process includes a submission of plans, specifications, and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. Outside independent licensed appraisers or title company representatives under a construction loan escrow agreement inspect the progress of the construction of the dwelling before disbursements are made.

The Company occasionally makes loans to builders and developers “on speculation” to finance the construction of residential property where no buyer for the property has been identified. At March 31, 2012, there were no construction loans secured by a one-to-four family residential property built on speculation.

The Company has construction loans for commercial development projects such as multi-family, apartment and other commercial buildings. These loans generally have an interest-only phase during construction then convert to permanent financing. Disbursements of construction loan funds are at our discretion based on the progress of construction. The maximum loan-to-value ratio limit applicable to these loans is generally 75%.

The Company has loans to builders and developers for the development of one-to-four family lots in our market area. These loans have terms of five years or less. Land loans are generally made in amounts up to a maximum loan-to-value ratio of 65% on raw land and up to 75% on developed building lots based upon an independent appraisal. Personal guarantees are obtained for land loans.

Loans to individuals for the construction of their residences typically run for up to seven months and then convert to permanent loans. These construction loans have rates and terms comparable to one-to-four family residential loans offered. During the construction phase, the borrower pays interest only at a fixed rate. The maximum loan-to-value ratio of owner-occupied single-family construction loans is 75%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.

Construction and land lending generally affords the Company an opportunity to receive higher origination and other loan fees. In addition, such loans are generally made for relatively short terms. Nevertheless, construction and land lending to persons other than owner-occupants is generally considered to involve a higher level of credit risk than one-to-four family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on construction projects, real estate developers and managers. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage. When loan payments become due, the cash flow from the property may not be adequate to service the debt. In such cases, the Company may be required to modify the terms of the loan.

Farmland

These loans are primarily secured by farmland located in our market area. Adjustable rate farmland loans have interest rates that generally adjust every one, three or five years in accordance with a designated index and are generally amortized over 15-25 years. Fixed-rate farmland loans generally are for terms of up to 15 years, although many are amortized over longer periods, and include a balloon payment at maturity. Lending policies on such loans generally limit the maximum loan-to-value ratio to 75% of the lesser of the appraised value or purchase price of the property.

While earning higher yields on agricultural mortgage loans than on single-family residential mortgage loans, agricultural-related lending involves a greater degree of risk than single-family residential mortgage loans

16

because of the typically larger loan amounts and potential volatility in the market. In addition, repayments on agricultural loans are substantially dependent on the successful operation of the underlying business and the value of the property collateralizing the loan, both of which are affected by many factors, such as weather and changing market prices, outside the control of the borrower. Finally, some commentators believe that the recent sharp increases in farm land prices could make a price correction more likely.

Substantially all farmland loans are underwritten to conform to agency guidelines to qualify for a government guarantee of up to 90% of the original loan amount, which in turn qualifies them to be sold to a variety of investors in the secondary market. Once the government guarantee is secured from Farmers Home Loan Administration, the guarantee covers up to 90% of any loss on the loan. Longer-term fixed-rate agricultural mortgage loans may be sold in the secondary market, which the Company services for the secondary market purchaser.

Commercial and Industrial Loans

Commercial and industrial loans and lines of credit are originated to small and medium-sized companies in our primary market area. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Commercial and industrial loans generally carry a floating-rate indexed to the prime rate as published in The Wall Street Journal and a one-year term. All commercial and industrial loans are secured.

When making commercial and industrial loans, the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower are considered. Commercial and industrial loans are generally secured by accounts receivable, inventory, equipment and personal guarantees.

Commercial and industrial loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. These risks are minimized through underwriting standards and personal guarantees.

Agricultural Loans

Agricultural operating lines of credit generally have terms of one year and are secured by growing crops, livestock and equipment, and mortgages on the farmland. Intermediate-term loans have terms of 2-7 years and will be secured by machinery and equipment. Generally these loans are extended to farmers in our market area for the purchase of equipment, seed, fertilizer, insecticide and other purposes in connection with agricultural production. The maximum term for equipment secured loans is tied to the useful life of the underlying collateral but generally does not exceed 10 years. The interest rate is generally increased with respect to the longer terms loans due to the rate exposure of these loans. The amount of the commitment is based on management’s review of the borrower’s business plan, prior performance, marketability of crops, and current market prices. Recent financial statements are examined and evaluate cash flow analysis and debt-to-net worth, and liquidity ratios. Loans for crop production generally require 75% or more crop insurance coverage.

The repayment of agricultural business loans generally is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest rates, and changes in weather

17

conditions. These developments may result in smaller harvests and less income for farmers which may adversely affect such borrower’s ability to repay a loan. Many borrowers also have more than one agricultural business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Company to significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan. Finally, if the Company forecloses on an agricultural commercial loan, our holding period for the collateral, if any, typically is longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral.

Consumer Loans

The Company has secured and unsecured loans to consumers. However, during recent years, most consumer lending efforts were focused on purchases of indirect automobile loans.

In an effort to expand and diversify our loan portfolio and increase the overall yield on our loan portfolio, since 1999 the Company has purchased indirect loans on new and used automobiles located primarily in

Cook County, Illinois. Although we do not separately underwrite each purchased loan, we thoroughly review the knowledge and experience of the originators’ management teams, their underwriting standards, and their historical loss rates. In 2008, we dramatically reduced new indirect automobile loan purchases based on the risk concentration in our portfolio, liquidity requirements, and current economic conditions. The Company resumed purchases in April 2011.

Under the loan purchase arrangement, on a monthly basis the seller aggregates indirect automobile loans into separate loan pools. The pools are then segregated into risk categories with each category having predefined limits as to the maximum amounts allowed. Generally, the pools are sold without recourse. The Company receives a listing of the individual loans in the pool, including loan and borrower information prior to funding the purchase but the Company is not generally permitted to substitute loans in a pool or purchase part of a pool.

The seller is responsible for dealer relationships and the monitoring of their performance. The seller performs all servicing functions including the collection of principal, interest, and fees as well as repossessions and recoveries. Thus, the Company is not involved in the sale of repossessed vehicles.

The Company performs semi-annual reviews of newly purchased loan files and review operational procedures as part of our internal audit function.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances as well as the economy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

18

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three months ended March 31, 2012 and 2011, and the year ended December 31, 2011:

	Three Months Ended March 31, 2012 Mortgage Loans on Real Estate
	1-4 Family			HELOC and 2nd  Mortgage			Multi-Family Residential		Commercial		Farmland			Construction and Land Development
Allowance for loan losses:
Balance, beginning of period	$	549		$	248		$	287	$	533	$	143		$	374
Provision charged to expense		63			(53	)		24		70		(2	)		(15	)
Losses charged off		(10	)		(2	)		—		—		—			(55	)
Recoveries		—			—			—		—		—			—
Balance, end of period	$	602		$	193		$	311	$	603	$	141		$	304
Ending balance: individually evaluated for impairment	$	261		$	70		$	253	$	67	$	—		$	266
Ending balance: collectively evaluated for impairment	$	341		$	123		$	58	$	536	$	141		$	38
Loans:
Ending balance	$	44,045		$	9,797		$	2,074	$	24,571	$	9,419		$	2,245
Ending balance: individually evaluated for impairment	$	3,591		$	187		$	911	$	1,390	$	—		$	972
Ending balance: collectively evaluated for impairment	$	40,454		$	9,610		$	1,163	$	23,181	$	9,419		$	1,273

	Three Months Ended March 31, 2012 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net			Other Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	125	$	215	$	95		$	6		$	—	$	2,575
Provision charged to expense		2		55		34			(5	)		—		173
Losses charged off		—		—		(7	)		—			—		(74	)
Recoveries		—		—		1			—			—		1
Balance, end of period	$	127	$	270	$	123		$	1		$	—	$	2,675
Ending balance: individually evaluated for impairment	$	20	$	—	$	4		$	—		$	—	$	941
Ending balance: collectively evaluated for impairment	$	107	$	270	$	119		$	1		$	—	$	1,734
Loans:
Ending balance	$	4,576	$	17,990	$	7,911		$	142		$	—	$	122,770
Ending balance: individually evaluated for impairment	$	90	$	—	$	11		$	—		$	—	$	7,152
Ending balance: collectively evaluated for impairment	$	4,486	$	17,990	$	7,900		$	142		$	—	$	115,618

19

	Three Months Ended March 31, 2011 Mortgage Loans on Real Estate
	1-4 Family			HELOC and 2nd  Mortgage			Multi-Family Residential		Commercial			Farmland		Construction and Land Development
Allowance for loan losses:
Balance, beginning of period	$	352		$	150		$	34	$	629		$	5	$	291
Provision charged to expense		177			2			1		(12	)		—		2
Losses charged off		(87	)		(5	)		—		(10	)		—		—
Recoveries		2			—			—		—			—		—
Balance, end of period	$	444		$	147		$	35	$	607		$	5	$	293
Ending balance: individually evaluated for impairment	$	104		$	16		$	—	$	155		$	—	$	265
Ending balance: collectively evaluated for impairment	$	340		$	131		$	35	$	452		$	5	$	28
Loans:
Ending balance	$	44,739		$	11,148		$	1,586	$	25,869		$	3,835	$	2,428
Ending balance: individually evaluated for impairment	$	1,869		$	150		$	—	$	686		$	—	$	665
Ending balance: collectively evaluated for impairment	$	42,870		$	10,998		$	1,586	$	25,183		$	3,835	$	1,763

	Three Months Ended March 31, 2011 (Continued)
	Commercial and Industrial			Agricultural		Purchased Indirect Automobile, Net			Other Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	97		$	206	$	105		$	4		$	—	$	1,873
Provision charged to expense		(1	)		6		(4	)		(2	)		—		169
Losses charged off		—			—		(31	)		—			—		(133	)
Recoveries		—			—		2			—			—		4
Balance, end of period	$	96		$	212	$	72		$	2		$	—	$	1,913
Ending balance: individually evaluated for impairment	$	20		$	—	$	13		$	—		$	—	$	573
Ending balance: collectively evaluated for impairment	$	76		$	212	$	59		$	2		$	—	$	1,340
Loans:
Ending balance	$	4,640		$	14,131	$	4,688		$	267		$	—	$	113,331
Ending balance: individually evaluated for impairment	$	103		$	—	$	50		$	1		$	—	$	3,524
Ending balance: collectively evaluated for impairment	$	4,537		$	14,131	$	4,638		$	266		$	—	$	109,807

20

	Year Ended December 31, 2011 Mortgage Loans on Real Estate
	1-4 Family			HELOC and 2nd  Mortgage			Multi-Family Residential			Commercial			Farmland		Construction and Land Development
Allowance for loan losses:
Balance, beginning of year	$	352		$	150		$	34		$	629		$	5	$	291
Provision charged to expense		453			103			313			28			138		121
Losses charged off		(302	)		(5	)		(60	)		(162	)		—		(50	)
Recoveries		46			—			—			38			—		12
Balance, end of year	$	549		$	248		$	287		$	533		$	143	$	374
Ending balance: individually evaluated for impairment	$	239		$	120		$	259		$	—		$	—	$	329
Ending balance: collectively evaluated for impairment	$	310		$	128		$	28		$	533		$	143	$	45
Loans:
Ending balance	$	44,339		$	10,284		$	1,480		$	25,192		$	9,531	$	2,522
Ending balance: individually evaluated for impairment	$	3,775		$	268		$	917		$	1,390		$	—	$	1,027
Ending balance: collectively evaluated for impairment	$	40,564		$	10,016		$	563		$	23,802		$	9,531	$	1,495

	Year Ended December 31, 2011 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net			Other Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of year	$	97	$	206	$	105		$	4		$	—	$	1,873
Provision charged to expense		28		9		122			4			—		1,319
Losses charged off		—		—		(139	)		(2	)		—		(720	)
Recoveries		—		—		7			—			—		103
Balance, end of year	$	125	$	215	$	95		$	6		$	—	$	2,575
Ending balance: individually evaluated for impairment	$	21	$	—	$	2		$	5		$	—	$	975
Ending balance: collectively evaluated for impairment	$	104	$	215	$	93		$	1		$	—	$	1,600
Loans:
Ending balance	$	4,241	$	14,313	$	6,223		$	152		$	—	$	118,277
Ending balance: individually evaluated for impairment	$	50	$	—	$	9		$	5		$	—	$	7,441
Ending balance: collectively evaluated for impairment	$	4,191	$	14,313	$	6,214		$	147		$	—	$	110,836

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

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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. The Company also analyzes 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.

Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size for impairment as part of the review for establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified loans.

There have been no changes to the Company’s accounting policies or methodology from the prior periods.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All commercial, agricultural and land development loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of

22

reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings:

Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Watch – Loans classified as watch represent loans with the minimum level of acceptable credit risk and servicing requirements and the borrower has the capacity to perform according to the terms and repayment is expected. However, one or more elements of uncertainty exist.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged-off.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2012 and December 31, 2011, respectively:

	March 31, 2012 Mortgage Loans on Real Estate
	1-4 Family		HELOC and 2nd Mortgage		Multi-Family Residential		Commercial		Farmland		Construction and Land Development
Pass	$	38,469	$	9,417	$	1,163	$	20,533	$	9,419	$	1,273
Watch		1,698		157		—		2,330		—		—
Special Mention		287		36		—		318		—		—
Substandard		3,591		187		911		1,390		—		972
Total	$	44,045	$	9,797	$	2,074	$	24,571	$	9,419	$	2,245

	March 31, 2012 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net		Other Consumer		Total
Pass	$	3,234	$	17,990	$	7,900	$	142	$	109,540
Watch		1,083		—		—		—		5,268
Special Mention		169		—		—		—		810
Substandard		90		—		11		—		7,152
Total	$	4,576	$	17,990	$	7,911	$	142	$	122,770

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	December 31, 2011 Mortgage Loans on Real Estate
	1-4 Family		HELOC and 2nd Mortgage		Multi-Family Residential		Commercial		Farmland		Construction and Land Development
Pass	$	38,473	$	9,841	$	563	$	21,905	$	9,531	$	1,495
Watch		1,801		138		—		1,557		—		—
Special Mention		290		37		—		340		—		—
Substandard		3,775		268		917		1,390		—		1,027
Total	$	44,339	$	10,284	$	1,480	$	25,192	$	9,531	$	2,522

	December 31, 2011 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net		Other Consumer		Total
Pass	$	2,967	$	14,313	$	6,214	$	147	$	105,449
Watch		1,051		—		—		—		4,547
Special Mention		173		—		—		—		840
Substandard		50		—		9		5		7,441
Total	$	4,241	$	14,313	$	6,223	$	152	$	118,277

The accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at the earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged-off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2012 and December 31, 2011, respectively:

	March 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total  Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Real estate loans:
One-to-four family	$	2,210	$	675	$	1,460	$	4,345	$	39,700	$	44,045	$	—
Home equity lines of credit and other 2nd mortgages		169		—		172		341		9,456		9,797		—
Multi-family		—		—		—		—		2,074		2,074		—
Commercial		—		74		—		74		24,497		24,571		—
Farmland		222		—		—		222		9,197		9,419		—
Construction and land development		—		—		—		—		2,245		2,245		—
Total real estate loans		2,601		749		1,632		4,982		87,169		92,151		—
Commercial and industrial		90		68		—		158		4,418		4,576		—
Agriculture		—		—		—		—		17,990		17,990		—
Consumer loans:
Purchased indirect automobile		10		1		—		11		7,900		7,911		—
Other		4		—		—		4		138		142		—
Total consumer loans		14		1		—		15		8,038		8,053		—
Total	$	2,705	$	818	$	1,632	$	5,155	$	117,615	$	122,770	$	—

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	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total  Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Real estate loans:
One-to-four family	$	2,321	$	1,366	$	1,590	$	5,277	$	39,062	$	44,339	$	—
Home equity lines of credit and other 2nd mortgages		88		—		239		327		9,957		10,284		—
Multi-family		—		—		—		—		1,480		1,480		—
Commercial		—		74		—		74		25,118		25,192		—
Farmland		—		—		—		—		9,531		9,531		—
Construction and land development		—		—		—		—		2,522		2,522		—
Total real estate loans		2,409		1,440		1,829		5,678		87,670		93,348		—
Commercial and industrial		—		—		—		—		4,241		4,241		—
Agriculture		—		—		—		—		14,313		14,313		—
Consumer loans:
Purchased indirect automobile		9		—		—		9		6,214		6,223		—
Other		—		—		5		5		147		152		—
Total consumer loans		9		—		5		14		6,361		6,375		—
Total	$	2,418	$	1,440	$	1,834	$	5,692	$	112,585	$	118,277	$	—

At March 31, 2012 and December 31, 2011, the Company held $17,990 and $14,313 in agricultural production loans and $9,419 and $9,531, respectively in farmland loans in the Company’s geographic lending area. Generally, those loans are collateralized by assets of the borrower. The loans are expected to be repaid from cash flows or from proceeds of sale of related assets of the borrower. Declines in prices for corn, beans, livestock and farmland could significantly affect the repayment ability for many agricultural loan customers.

At March 31, 2012 and December 31, 2011, the Company held $24,571 and $25,192 in commercial real estate loans and $2,245 and $2,522 in loans collateralized by construction and development real estate primarily in the Company’s geographic lending area. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed.

Loans contractually delinquent 30 days or more decreased $537,000 from December 31, 2011 to $5.2 million at March 31, 2012 primarily as a result of a decrease in delinquent one-to-four family real estate loans of $932,000.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Factors considered by management 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. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans 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 by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

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The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.

The Company will restructure loans when the borrower demonstrates the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are initially classified as impaired.

The following tables present impaired loans at March 31, 2012, March 31, 2011 and December 31, 2011, respectively:

	March 31, 2012
	(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific allowance
Real estate loans:
One-to-four family	$	991	$	1,081	$	—	$	1,050	$	8	$	8
Home equity lines of credit and other 2nd mortgages		108		110		—		109		1		1
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		695		6		6
Farmland		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Total real estate loans		1,099		1,191		—		1,854		15		15
Commercial and industrial		40		40		—		20		—		—
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total consumer loans		—		—		—		—		—		—
Total loans	$	1,139	$	1,231	$	—	$	1,874	$	15	$	15
Loans with a specific allowance
Real estate loans:
One-to-four family	$	2,600	$	2,670	$	261	$	2,633	$	21	$	21
Home equity lines of credit and other 2nd mortgages		79		79		70		118		1		1
Multi-family		911		971		253		914		7		7
Commercial		1,390		1,390		67		695		6		6
Farmland		—		—		—		—		—		—
Construction and land development		972		1,107		266		999		8		8
Total real estate loans		5,952		6,217		917		5,359		43		43
Commercial and industrial		50		50		20		50		—		—
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		11		11		4		10		—		—
Other		—		—		—		3		—		—
Total consumer loans		11		11		4		13		—		—
Total loans		6,013		6,278		941		5,422		43		43
Total	$	7,152	$	7,509	$	941	$	7,296	$	58	$	58

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	March 31, 2011
	(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific allowance
Real estate loans:
One-to-four family	$	1,228	$	1,248	$	—	$	1,048	$	13
Home equity lines of credit and other 2nd mortgages		117		127		—		88		1
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Farmland		—		—		—		—		—
Construction and land development		—		—		—		—		—
Total real estate loans		1,345		1,375		—		1,136		14
Commercial and industrial		5		5		—		2		—
Agriculture		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		—		—		—		—		—
Other		1		1		—		1		—
Total consumer loans		1		1		—		1		—
Total loans	$	1,351	$	1,381	$	—	$	1,139	$	14
Loans with a specific allowance
Real estate loans:
One-to-four family	$	641	$	654	$	104	$	490	$	6
Home equity lines of credit and other 2nd mortgages		33		33		16		34		—
Multi-family		—		—		—		—		—
Commercial		686		786		155		884		—
Farmland		—		—		—		—		—
Construction and land development		665		707		265		665		—
Total real estate loans		2,025		2,180		540		2,073		6
Commercial and industrial		98		98		20		99		1
Agriculture		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		50		50		13		88		1
Other		—		—		—		—		—
Total consumer loans		50		50		13		88		1
Total loans		2,173		2,328		573		2,260		7
Total	$	3,524	$	3,709	$	573	$	3,399	$	21

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	December 31, 2011
	(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific allowance
Real estate loans:
One-to-four family	$	1,109	$	1,245	$	—	$	988	$	47	$	47
Home equity lines of credit and other 2nd mortgages		111		111		—		85		4		4
Multi-family		1,390		1,390		—		695		33		33
Commercial		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Total real estate loans		2,610		2,746		—		1,768		84		84
Commercial and industrial		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		—		—		—		—		—		—
Other		—		—		—		1		—		—
Total consumer loans		—		—		—		1		—		—
Total	$	2,610	$	2,746	$	—	$	1,769	$	84	$	84
Loans with a specific allowance
Real estate loans:
One-to-four family	$	2,666	$	2,716	$	239	$	1,503	$	72	$	72
Home equity lines of credit and other 2nd mortgages		157		157		120		95		5		5
Multi-family		917		977		259		459		22		22
Commercial		—		—		—		541		26		26
Farmland		—		—		—		—		—		—
Construction and land development		1,027		1,107		329		846		41		41
Total real estate loans		4,767		4,957		947		3,444		166		166
Commercial and industrial		50		50		21		75		4		4
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		9		9		2		67		3		3
Other		5		5		5		3		—		—
Total consumer loans		14		14		7		70		3		3
Total loans		4,831		5,021		28		3,589		173		173
Total	$	7,441	$	7,767	$	975	$	5,358	$	257	$	257

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.

Included in certain loan categories in the impaired loans are troubled debt restructurings (“TDR”), where economic concessions have been granted to borrowers who have experienced financial difficulties that were

28

classified as impaired. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of at least twelve months.

When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or based on the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.

During the quarter ended September 30, 2011, the Company adopted ASU 2011-02. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those receivables newly identified as impaired. As a result of adopting ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011, for identification as TDRs. The Company identified no loans as troubled debt restructurings for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology. Thereafter there was no additional impact to the allowance for loan losses as a result of the adoption.

Given the current adverse economic environment and negative outlook in the residential real estate market, the Company includes in its methodology for the valuation of loans in its real estate portfolio a methodology that applies downward “qualitative” adjustments to the real estate appraised values for residential loans that are deemed impaired. We believe that these qualitative appraisal adjustments more accurately reflect real estate values in light of the sales experience and economic conditions that we have recently observed. As a result of the increased TDR’s in residential real estate, the specific and general allowance have been increased in this category since December 31, 2010.

The following table presents the recorded balance, at original cost, of troubled debt restructurings, all of which were performing according to the terms of the restructuring, as of March 31, 2012 and December 31, 2011:

(Dollars in thousands)	March 31, 2012		December 31, 2011
Real estate loans:
One-to-four family	$	1,678	$	1,890
Home equity lines of credit and other 2nd mortgages		—		—
Multi-family		911		917
Commercial		1,390		—
Farmland		—		—
Construction and land development		972		1,027
Total real estate loans		4,951		3,834
Commercial and industrial		—		—
Agriculture		—		—
Consumer loans:
Purchased indirect automobile		—		—
Other		—		—
Total consumer loans		—		—
Total	$	4,951	$	3,834

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The following table represents loans modified as troubled debt restructures during the three month period ended March 31, 2012:

	Three Months Ended March 31, 2012
(Dollars in thousands)	Number of Modifications		Recorded Investment
Real estate loans:
One-to-four family		1	$	65
Home equity lines of credit and other 2nd mortgages		—		—
Multi-family		—		—
Commercial		1		1,390
Farmland		—		—
Construction and land development		—		—
Total real estate loans		2		1,455
Commercial and industrial		—		—
Agriculture		—		—
Consumer loans:
Purchased indirect automobile		—		—
Other		—		—
Total consumer loans		—		—
Total		2	$	1,455

During the three month period ended March 31, 2012, the Company modified one residential real estate loan, with a recorded investment of $65 prior to modification, which was deemed a TDR. The modification involved both an interest rate and maturity concession, which resulted in an impairment loss of $1 based upon the present value of expected future cash flows. During the three months ended March 31, 2012, the Company modified one commercial real estate loan totaling $1,390 involving a maturity concession only, which resulted in no impairment loss and specific allowances of $67 based upon the fair value of the collateral.

As of March 31, 2012 there were no loans in default that had been modified within the previous 12 months as a troubled debt restructuring.

The following table presents the Company’s nonaccrual loans at March 31, 2012 and December 31, 2011. Nonaccrual loans include troubled debt restructurings of $4,792 and $3,834 at March 31, 2012 and December 31, 2011, respectively, all of which are performing according to the terms of the restructuring.

	March 31, 2012		December 31, 2011
Mortgages on real estate:
One-to-four family	$	3,591	$	3,775
Home equity lines of credit and other 2nd mortgages		180		268
Multi-family residential		911		917
Commercial		1,390		1,390
Construction and land development		972		1,027
Commercial and industrial		90		50
Purchased indirect automobile		—		—
Other consumer		—		5
Total	$	7,134	$	7,432

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Note 8:    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 $3,532 and $6,549 or 35,320 and 65,489 shares, respectively, of Federal Home Loan Bank stock of the Federal Home Loan Bank of Chicago (FHLB) as of March 31, 2012 and December 31, 2011. Management performed an analysis and deemed the cost method investment in FHLB stock was ultimately recoverable.

In 2012 and 2011, the FHLB declared and paid quarterly dividends at an annualized rate of 10 basis points per share.

On February 15, 2012, the Company redeemed approximately 51% or $3,017 of its excess stock at its carrying amount. On April 16, 2012, the FHLB announced that it will be repurchasing approximately $150,000 in excess capital stock held by its members or approximately 25% of the excess capital stock outstanding, effective May 15, 2012. At March 31, 2012, the Company had excess stock of $2,966.

On April 18, 2012, the FHLB announced that its Board of Directors and its regulator, the Federal Housing Finance Agency (FHFA), had agreed to terminate the Consent Cease and Desist Order, effective immediately. The FHLB can now declare quarterly dividends without the consent of the FHFA subject to two stipulations:

• The dividend payment must be at or below the average of the three-month LIBOR for that quarter.

• Paying the dividend will not result in the FHLB’s retained earnings falling below the level at the previous year-end.

Note 9:    Comprehensive Income (Loss)

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

	Three Months Ended March  31,
	2012			2011
Net unrealized gains (losses) on securities available-for-sale	$	9		$	(5	)
Less reclassification adjustment for loss on other than temporary impairment of equity securities		(1	)		—
Other comprehensive income (loss), before tax effect		10			(5	)
Less tax expense (benefit)		4			(1	)
Other comprehensive income (loss)	$	6		$	(4	)

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

	March 31, 2012		December 31, 2011
Net unrealized gain on securities available-for-sale	$	44	$	34
Tax effect		15		11
Net-of-tax amount	$	29	$	23

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Note 10:    Income Taxes

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

	Three Months Ended March  31,
	2011			2011
Computed at the statutory rate (34%)	$	46		$	22
Decrease resulting from
Tax exempt interest		—			(1	)
Changes in deferred tax valuation allowance		(47	)		—
Cash surrender value of life insurance		(11	)		(12	)
Other		(5	)		—
Actual expense (benefit)	$	(17	)	$	9
Tax benefit as a percentage of pre-tax income (loss)		(12.7	)%		13.8	%

The decrease in the valuation allowance of $47 in 2012 is due to the reversal of a portion of the previous valuation allowance related to the capital losses. As further discussed in Note 8, the Federal Home Loan Bank of Chicago announced on April 16, 2012 that it will be repurchasing approximately 25% of the excess capital stock outstanding, effective May 15, 2012. Management believes the Company has capital gains to enable a portion of the capital losses to be utilized prior to expiration.

Note 11:    Disclosures About Fair Value of Assets and Liabilities

Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of 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

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Recurring Measurements

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 March 31, 2012 and December 31, 2011 (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)
March 31, 2012:
Available-for-sale securities:
US Government and federal agency	$	2,457	$	—	$	2,457	$	—
Mortgage-backed securities – GSE residential		878		—		878		—
Equity securities		472		11		461		—
Mortgage servicing rights		365		—		—		365

			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, 2011:
Available-for-sale securities:
US Government and federal agency	$	3,214	$	—	$	3,214	$	—
Mortgage-backed securities – GSE residential		906		—		906		—
Equity securities		461		11		450		—
Mortgage servicing rights		310		—		—		310

Following is a description of the valuation methodologies and inputs used for assets 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. There have been no significant changes in the valuation techniques during the period ended March 31, 2012. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. 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. As of March 31, 2012 and December 31, 2011, there were no securities classified as Level 3.

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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.

Level 3 Reconciliation

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):

	Mortgage Servicing Rights
Balance, January 1, 2012	$	310
Total realized and unrealized gains and losses included in net income		50
Servicing rights that result from asset transfers		27
Loans refinanced		(22	)
Balance, March 31, 2012	$	365
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	$	—

Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as noninterest income.

Nonrecurring Measurements

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 March 31, 2012 and December 31, 2011 (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)
March 31, 2012:
Impaired loans (collateral dependent)	$	6,211	$	—	$	—	$	6,211
Foreclosed assets		525		—		—		525
December 31, 2011:
Impaired loans (collateral dependent)	$	3,706	$	—	$	—	$	3,706
Foreclosed assets		932		—		—		932

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. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

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The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Controller’s office. Appraisals are reviewed for accuracy and consistency by the Controller’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Controller’s office by comparison to historical results.

Foreclosed Assets

Foreclosed assets consist primarily of real estate owned. Real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Controller’s office. Appraisals are reviewed for accuracy and consistency by the Controller’s office. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (dollars in thousands).

	Fair Value at March 31, 2012		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Foreclosed assets	$	6,211	Market comparable properties	Comparability adjustments (%)	Not available
Collateral-dependent impaired loans		525	Market comparable properties	Marketability discount	10% – 30% (22%)
Mortgage servicing rights		365	Discounted cash flow	Discount rate PSA standard prepayment model rate	9% – 11% (10%) 383 – 561 (476)

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Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 (in thousands).

	Carrying Amount		Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2012:
Financial assets
Cash and cash equivalents	$	21,535	$	21,535	$	—	$	—
Interest-bearing deposits with other financial institutions		8,022		8,022		—		—
Held-to-maturity securities		1,537		—		1,648		—
Loans, net of allowance for loan losses		120,091		—		—		122,027
Federal Home Loan Bank stock		3,532		—		3,532		—
Accrued interest receivable		434		—		434		—
Financial liabilities
Deposits		136,508		—		—		138,481
Federal Home Loan Bank advances		11,330		—		11,787		—
Advances from borrowers for taxes and insurance		622		—		622		—
Accrued interest payable		38		—		38		—
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

	December 31, 2011
	Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	22,227	$	22,227
Interest-bearing deposits with other financial institutions		6,235		6,235
Available-for-sale securities		4,581		4,581
Held-to-maturity securities		1,702		1,837
Loans, net of allowance for loan losses		115,698		117,598
Federal Home Loan Bank stock		6,549		6,549
Mortgage servicing rights		310		310
Interest receivable		691		691
Financial liabilities
Deposits		135,069		135,870
Federal Home Loan Bank advances		12,402		12,885
Advances from borrowers for taxes and insurance		388		388
Interest payable		37		37
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—
Letters of credit		—		—
Lines of credit		—		—

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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 with Other Institutions, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued 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 securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, defaults, cumulative loss projections and cash flows.

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.

Note 12:    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.

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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.

Note 13:    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:

(A) 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;

(B) 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;

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

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

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

(F) 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;

(G) 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

(H) 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 Federal Reserve Board (FRB) which now supervises the Company, and not by the Company. The requirements of the MOU will remain in effect until the FRB 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:

• our ability to manage our operations under the current adverse economic conditions (including real estate values, loan demand, inflation, commodity prices and employment levels) nationally and in our market areas;

• adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

• increased competition among depository and other financial institutions;

• our ability to successfully diversify our loan portfolio by increasing commercial and industrial, agricultural and farmland lending while reducing our reliance on residential and commercial real estate lending without experiencing a significant decrease in asset quality;

• expenses and diversion of management’s time and attention resulting from our efforts to oppose stockholder nominations;

• significant restrictions on our operations imposed by a memorandum of understanding to which we are subject, and our ability to alter our business plan or obtain waivers to such restrictions from our regulators;

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

• declines in the yield on our assets resulting from the current low interest rate environment;

• risks related to increasing our commercial and industrial, agricultural and farmland loan portfolios, including increased risk of adverse changes in the local, national and international agricultural markets, including weather, pests and government regulation and support, which impact the value of our farmland and agricultural loans, and economic conditions in our market areas, which impact the value of commercial and industrial loans;

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• risks related to high concentration of loans secured by real estate located in our market areas;

• increases in deposit and premium assessments;

• legislative or regulatory changes, including increased compliance costs resulting from the recently enacted financial reform legislation, that adversely affect our business and earnings;

• changes in the level of government support of housing finance;

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

• our ability to successfully grow our Morris operations;

• our reliance on a small executive staff;

• 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;

• risks and costs related to operating as a publicly traded company;

• changes in our organization, compensation and benefit plans;

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

• 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. (the “Company”) is a savings and loan holding company and is subject to regulation by the Board of Governors of the Federal Reserve System. The Company’s business activities are limited to oversight of its investment in Harvard Savings Bank (the “Bank”).

The Bank is primarily engaged in providing a full range of banking and mortgage services to consumer and business customers in McHenry County, Grundy County, and to a lesser extent Boone County, 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.

In recent years, we have adopted a strategy focused on limiting the growth of our balance sheet given the current economic environment, and increasing the yield of our loans, shortening asset duration and reducing our exposure to loans collateralized by real estate in our market area, which has experienced significant declines in value, reducing our reliance on borrowed funds, and increasing our core deposits (which we consider to be deposits other than certificates of deposit).

The implementation of this strategy involves achieving and maintaining a portfolio balance that is less dependent on one- to four-family residential and commercial real estate loans and more focused on commercial and industrial, agricultural and farmland loans, with an appropriate balance of home equity lines of credit and other second mortgage loans, purchased indirect automobile loans, consumer loans and construction and land

40

development loans. In December 2009, we hired an experienced agricultural lending officer and commenced an agricultural lending program as part of that strategy. We have focused our efforts in commercial and industrial lending, agriculture lending and farmland lending, on borrowers seeking loans in the $2.0 million or less range. We have also sought to reduce our activity and concentration in commercial real estate loans, due to continued significant weakness in commercial real estate values in our market area. During the last fiscal year, we curtailed our commercial real estate loan origination and continued to sell most of the one- to four-family residential loans that we originate. Our efforts to curtail commercial real estate origination were offset by our determination to originate selected commercial real estate loans (other than farmland loans) in order to maintain high-quality agricultural and farmland lending customers of our new agricultural lending officer. The majority of our loan activity historically has been, and continues to be, loan origination activity in our market area. As a long-standing community lender, we believe we can effectively compete for this business by emphasizing superior customer service and local underwriting, which differentiates us from larger commercial banks in our primary market area. Historically, we also have purchased a significant number of indirect automobile loans, although during 2008 we determined to substantially reduce our purchases due to loan concentration issues and economic conditions. We began purchasing indirect automobile loans again in April 2011, with a target portfolio of $8-$9 million. Subject to future market, economic and regulatory conditions, we expect commercial and industrial, farmland, agricultural, and purchased indirect automobile loans will continue to be areas of sound loan growth.

On May 26, 2011, the stockholders approved the Harvard Illinois Bancorp, Inc. 2011 Equity Incentive Plan (the “Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 109,856 shares of the Company’s common stock, with no more than 31,387 of shares as restricted stock awards and 78,469 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

On June 23, 2011, the compensation committee of the board of directors approved the awards of 73,761 options to purchase Company stock and 31,387 shares of restricted stock. Stock options and restricted stock vest ratably over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued. At March 31, 2012, there were 4,708 shares available for future option grants under this plan.

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.

As further discussed in Note 13 to the financial statements included herein, the Company entered into a memorandum of understanding (the “MOU”) with the Office of Thrift Supervision (the “OTS”). Effective July 21, 2011, supervisory authority with respect to the MOU was transferred from the OTS to the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Among other provisions, this informal enforcement action prohibits the Company from declaring or paying dividends, or repurchasing any Company stock without the prior written consent of the Federal Reserve Board. The Company has taken the relevant

41

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 Federal Reserve Board decides to terminate, suspend or modify it.

The national economy, and the local economies within our market areas, remain weak. The economy has been marked by high unemployment rates, rising numbers of foreclosures, and contractions in business and consumer credit. The national and local unemployment rates have shown some improvement in 2011 and 2012, but remain high. These conditions have had a significant negative impact on real estate and related industries, which has led to decreases in commercial and residential real estate sales, construction and property values over the past several quarters. We have experienced high levels of non-performing loans and net charge-offs, although net charge-offs were lower for the most recent quarter ended March 31, 2012.

Should the housing market and economic conditions in our market area stagnate or continue to deteriorate, it will continue to have a material negative effect on the Company’s business and results of operation.

At March 31, 2012, the Bank was categorized as “well capitalized” under regulatory capital requirements.

The following discussion compares the financial condition of Harvard Illinois Bancorp, Inc. and its wholly owned subsidiary, Harvard Savings Bank, at March 31, 2012 to its financial condition at December 31, 2011, and the results of operations for the three months ended March 31, 2012 to the same period in 2011. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES

There are no material changes to the critical accounting policies disclosed in the Company’s annual Report on Form 10-K for the year ended December 31, 2011.

FINANCIAL CONDITION

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets at March 31, 2012 increased $1.2 million or 0.7% to $170.4 million from $169.2 million at December 31, 2011. Total liabilities increased $1.0 or 0.7% to $151.6 million at March 31, 2012 from $150.6 million at December 31, 2011. The modest changes in total assets and liabilities were consistent with our strategy to limit growth of our balance sheet in the current economic environment.

Cash and cash equivalents decreased $692,000 to $21.5 million at March 31, 2012 from $22.2 million at December 31, 2011. Cash and cash equivalents includes securities purchased under agreements to resell which decreased $1.2 million to $17.3 million at March 31, 2012 from $18.5 million at December 31, 2011. These agreements represent short-term cash investment alternatives that are over-collateralized with collateral that is guaranteed by the “full faith and credit” of the United States government. Other interest-bearing deposits increased $1.8 million to $8.0 million at March 31, 2012 from $6.2 million at December 31, 2011. These deposits are certificates of deposit we have placed with other financial institutions with terms from three months to five years and are fully covered by FDIC deposit insurance. Available-for-sale securities decreased $774,000 to $3.8 million at March 31, 2012 from $4.6 million at December 31, 2011. This decrease was primarily due to pay-downs and maturities of U.S. government and federal agency debt securities. Held-to-maturity securities totaled $1.5 million at March 31, 2012, a decrease of $165,000 from $1.7 million at December 31, 2011 as a result of maturities and pay-downs on those securities and no purchases. The investment in those deposits and securities were based on liquidity and yield considerations.

Loans, net increased $4.4 million to $120.1 million at March 31, 2012 from $115.7 million at December 31, 2011. During the first three months of 2012, loan originations, advances and purchases were $25.1 million, which were offset by $4.8 million in loans sold, $15.7 million of loan repayments and payoffs, net of $74,000 in charge

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offs, a net increase in allowance for loan losses of $100,000 and transfers to foreclosed assets of $14,000. The increase in loans during 2012 was due primarily to increases of $3.7 million, $1.7 million, $594,000 and $335,000 in the agriculture, purchased indirect automobile, multi-family residential real estate, and commercial and industrial loan portfolios, respectively. This increase reflects the execution of our strategy to reduce asset duration and loan concentrations by expanding our agriculture, farmland and commercial and industrial lending activity, and reducing the concentration of residential real estate and commercial real estate loans in our portfolio. These increases were offset primarily by decreases in total one- to four-family loans of $294,000, home equity lines of credit and other second mortgages of $487,000, and commercial real estate loans of $621,000. The decrease in our one- to four-family loans during 2012 was primarily due to repayments, early payoffs and $3.8 million in loans sold to Fannie Mae, which generated $61,000 in net gains on loan sales, offset by loan originations of $5.4 million. Our portfolio of one- to four-family loans serviced for others increased $386,000 to $64.3 million at March 31, 2012 from $63.9 million at December 31, 2011.

All other assets, consisting of premises and equipment, Federal Home Loan Bank stock, foreclosed assets held for sale, accrued interest receivable, deferred income taxes, bank-owned life insurance, mortgage servicing rights and other assets decreased $3.3 million to $15.4 million at March 31, 2012 from $18.7 million at December 31, 2011. The largest component of other assets was our investment in bank-owned life insurance, which increased $32,000 to $4.26 million at March 31, 2012 from $4.23 million at December 31, 2011. The largest change was in Federal Home Loan Bank stock, which decreased $3.0 million to $3.5 million at March 31, 2012 from $6.5 million at December 31, 2011; on February 15, 2012, the Company redeemed approximately 51% or $3.0 million of its excess stock at its carrying amount. At March 31, 2012, the Company’s deferred tax asset relating to unused capital loss carryovers and unrealized capital losses on other than temporary impairment of equity securities totaled $415,000. Management has established a valuation allowance for portions of that deferred tax asset of $290,000 at March 31, 2012, a non-recurring decrease of $47,000 over the December 31, 2011 balance of $337,000. The decrease in the valuation allowance in 2012 was due to the reversal of a previous valuation allowance related to capital losses. The Company now believes it has capital gains to enable a portion of those capital losses to be utilized prior to expiration.

Deposits increased $1.4 million to $136.5 million at March 31, 2012 from $135.1 million at December 31, 2011. Demand deposits increased $696,000 to $5.9 million at March 31, 2012 from $5.2 million at December 31, 2011, primarily due to commercial account growth. Savings, NOW and money market accounts totaled $51.7 million at March 31, 2012 compared to $49.0 million at December 31, 2011, an increase of $2.7 million. Certificates of deposit, including brokered certificates, decreased $2.0 million to $78.9 million at March 31, 2012 from $80.9 million at December 31, 2011. The net increase in deposits was due to competitive pricing and promotional interest rates offered during the first quarter of 2012 to generate more liquidity, primarily through the growth of our core deposits, to fund our operations in the current interest rate environment, and lessen our reliance on borrowed funds while still managing interest rate risk. Federal Home Loan Bank advances decreased to $11.3 million from $12.4 million at March 31, 2012 from December 31, 2011, a decrease of $1.1 million. The Bank maintained sufficient liquidity levels to allow more advances to mature without renewal. Non-interest bearing liabilities increased $653,000 to $3.74 million at March 31, 2012 from $3.08 million at December 31, 2011. The largest component of non-interest bearing liabilities is deferred compensation which increased $19,000 in 2012 to $2.26 million at March 31, 2012 from $2.24 million at December 31, 2011.

Total stockholders’ equity increased by $169,000 to $18.83 million at March 31, 2012 from $18.66 million at December 31, 2011. The increase resulted primarily from net income of $151,000 for the three months ended March 31, 2012.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

General. Net income for the three months ended March 31, 2012 was $151,000 compared to net income of $56,000 for the three months ended March 31, 2011, an increase in net income of $95,000. The increase in net

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income was due to increases in net interest income and noninterest income of $171,000 and $43,000, and a decrease in the provision for income taxes of $26,000, partially offset by increases in the provision for loan losses and noninterest expense of $4,000 and $141,000.

Interest and Dividend Income. Total interest and dividend income increased $24,000 or 1.3% to $1.84 million for the three months ended March 31, 2012 from $1.81 million for the same period in 2011. Average interest-earning assets increased $3.4 million to $159.0 million for the three months ended March 31, 2012 from $155.6 million for the same quarter in 2011, partially offset by the average yield which decreased 4 basis points to 4.61% from 4.65%. This decrease reflected the lower reinvestment rates and the reallocation of interest-earning assets between asset categories and the decreases in yield on those assets during the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011. Interest and fees on loans increased $26,000 during the period as the average balance of loans increased $4.8 million to $120.1 million primarily due to originations and purchases of loans outpacing repayments and sales of loans, offset partially by lower average yield on loans, which decreased 15 basis points to 5.74% from 5.89%. Interest income on securities and other interest-earning assets decreased $2,000 for the three months ended March 31, 2012 compared to the year ago period as average balances decreased $1.4 million, primarily due to stronger loan demand, partially offset by the average yield on those assets which increased 2 basis points to 1.15% from 1.13%.

Interest Expense. Total interest expense decreased $147,000 or 23.8% to $470,000 for the three months ended March 31, 2012 from $617,000 for the same period in 2011. Interest expense on deposit accounts decreased $117,000 or 23.5% to $381,000 for the three months ended March 31, 2012 from $498,000 for the same period in 2011. This decrease was primarily due to a decrease in interest expense on certificates of deposit and brokered certificate accounts of $99,000 during the period while interest expense on savings, NOW and money market accounts decreased $18,000. The average balances of savings, NOW and money market accounts increased $2.1 million while the cost of these deposits decreased 15 basis points to 0.16% during the three months ended March 31, 2012 from the three months ended March 31, 2011. The average balance in certificates of deposits and brokered certificates of deposit decreased $200,000, with the cost of these deposits decreasing 49 basis points to 1.81%. The movement in deposit accounts and reduction in the cost of these funds was the result of our competitive pricing and the declining market interest rates for deposits.

Interest expense on Federal Home Loan Bank advances decreased $30,000 to $89,000 for the three months ended March 31, 2012 from $119,000 for the three months ended March 31, 2011. The average balance of advances decreased $805,000 while the average cost of this funding decreased 71 basis points to 2.73% for the three months ended March 31, 2012 from the comparable period in 2011. The decrease in the average balance of advances was due to adhering to our capital and liquidity plans to lessen our reliance on borrowed funds. The decrease in the cost of these funds was a reflection of the lower market interest rate environment in 2012 compared to 2011.

Net Interest Income. Net interest income increased $171,000 or 14.3% to $1.37 million for the three months ended March 31, 2012 from $1.19 million for the three months ended March 31, 2011, primarily as a result of an increase in our net interest rate spread of 38 basis points to 3.30% from 2.92%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 111.12% for the three months ended March 31, 2012 from 109.58% for the same period in 2011. Our net interest margin increased to 3.43% for the three months ended March 31, 2012 from 3.07% for the three months ended March 31, 2011. The increases in our net interest rate spread and net interest margin reflected the more rapid re-pricing of all deposit products at lower rates, and the maturity of higher cost long-term fixed-rate Federal Home Loan Bank advances.

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

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The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011 (dollars in thousands):

	2012			2011
Allowance at beginning of period	$	2,575		$	1,873
Provision for loan losses		173			169
Charge-offs:
Real estate loans:
One-to four family		10			87
Home equity line of credit and other 2nd mortgage		2			5
Commercial		—			10
Construction and land development		55			—
Total charge-offs, real estate loans		67			102
Consumer loans:
Purchased indirect automobile		7			31
Other		—			—
Total charge-offs, consumer loans		7			31
Total charge-offs		74			133
Recoveries:
Real estate loans:
One-to four family		—			2
Total recoveries, real estate loans		—			2
Commercial and industrial		—			—
Consumer loans:
Purchased indirect automobile		1			2
Total recoveries, consumer loans		1			2
Total recoveries		1			4
Net charge-offs		(73	)		(129	)
Allowance at end of period	$	2,675		$	1,913
Allowance to non-performing loans		37.50	%		54.96	%
Allowance to total loans outstanding at the end of the period		2.18	%		1.69	%
Net charge-offs to average total loans outstanding during the period, annualized		0.24	%		0.45	%

We evaluate the allowance for loan losses on a regular basis and the provision is based upon our periodic review of the collectability 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

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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 loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

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

Based upon our evaluation of these factors, a provision of $173,000 was recorded for the three months ended March 31, 2012, an increase of $4,000 or 2.4% from $169,000 for the three months ended March 31, 2011. The provision for loan losses reflected net charge offs of $73,000 for the three months ended March 31, 2012, compared to $129,000 for the three months ended March 31, 2011. The allowance for loan losses was $2.7 million, or 2.18% of total loans at March 31, 2012, compared to $2.6 million, or 2.18% of total loans at December 31, 2011. At March 31, 2012, we had identified substandard loans totaling $7.2 million, all of which were considered impaired, and established an allowance for loan losses of $941,000 allocated to these loans. At December 31, 2011, we considered all substandard loans totaling $7.4 million impaired and established an allowance for loan losses of $975,000 allocated to these loans. We used the same methodology in assessing the allowance for each period.

The allowance as a percent of nonperforming loans decreased to 37.50% at March 31, 2012 from 54.96% at March 31, 2011. Nonperforming loans increased to $7.1 million at March 31, 2012, compared to $3.5 million at March 31, 2011, an increase of $3.6 million or 104.94%. All nonperforming loans were considered impaired at March 31, 2012 and 2011, and allowances for impaired loans increased $402,000 or 106.13% to $975,000 at March 31, 2012 from $573,000 at March 31, 2011. Net charge-offs as a percent of average total loans outstanding decreased to 0.24% for the quarter ended March 31, 2012 from 0.45% for the same quarter in 2011, due to a decrease in net charge-offs of $56,000 to $73,000, partially offset by a $4.8 million increase in average loans outstanding to $120.1 million.

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended March 31, 2012 and 2011, respectively.

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The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each loan category to the total allowance, and the percent of loans in each loan category to total loans as of March 31, 2012 and December 31, 2011 (dollars in thousands).

	March 31, 2012								December 31, 2011
	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	$	602		22.50	%		35.88	%	$	549		21.32	%		37.49	%
Home equity line of credit and other 2nd mortgage		193		7.21			7.98			248		9.63			8.69
Multi-family		311		11.63			1.69			287		11.15			1.25
Commercial		603		22.54			20.01			533		20.70			21.30
Farmland		141		5.27			7.67			143		5.55			8.06
Construction and land development		304		11.36			1.83			374		14.52			2.13
Total real estate loans		2,154		80.51			75.06			2,134		82.87			78.92
Commercial and industrial		127		4.76			3.73			125		4.86			3.59
Agriculture		270		10.09			14.65			215		8.35			12.10
Consumer loans:
Purchased indirect automobile		123		4.60			6.44			95		3.69			5.26
Other		1		0.04			0.12			6		0.23			0.13
Total consumer loans		124		4.64			6.56			101		3.92			5.39
Unallocated		—		—			—			—		—			—
Total allowance for loan losses	$	2,675		100.00	%		100.00	%	$	2,575		100.00	%		100.00	%

The increase in the allowance for loan losses allocated to one-to-four family real estate loans was primarily due to higher required level of reserves for both loans individually and collectively evaluated for impairment. The decrease in the allowance for loan losses allocated to home equity lines of credit and other second mortgage loans was primarily due to a decrease in the balance and required reserves for impaired loans of $81,000 and $50,000, respectively, from December 31, 2011 to March 31, 2012. The increase in the allowance for loan losses allocated to commercial real estate loans was primarily due to one impaired loan secured by an office building in our market area with a balance of $1.4 million, which required a higher specific reserve of $67,000 and was deemed a troubled debt restructuring during the quarter ended March 31, 2012.

The decrease in the allowance for loan losses allocated to construction and land development real estate loans was largely due to an additional charge-off of $55,000 taken on a troubled debt restructuring secured by a residential subdivision in our market area with a balance of $559,000 during the quarter ended March 31, 2012. The increase in the allowance for loan losses allocated to agriculture and purchased indirect automobile loans was primarily due to the increase in the balance of performing loans of $3.7 million and $1.7 million, respectively.

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

	At March  31, 2012			At December  31, 2011
Non-accrual loans:
Real estate loans:
One-to four-family	$	3,591		$	3,775
Home equity lines of credit and other 2nd mortgage		180			268
Multi-family residential		911			917
Commercial		1,390			1,390
Construction and land development		972			1,027
Total real estate loans		7,044			7,377
Commercial and industrial		90			50
Consumer loans:
Purchased indirect automobile		—			—
Other		—			5
Total consumer loans		—			5
Total non-accrual loans		7,134			7,432
Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more		—			—
Total of nonaccrual and 90 days or more past due loans		7,134			7,432
Other real estate owned:
One-to four family		258			335
Commercial		740			825
Total other real estate owned		998			1,160
Repossessed automobiles		34			26
Total non-performing assets		8,166			8,618
Troubled debt restructurings (not included in nonaccrual loans above)		159			—
Total non-performing assets and troubled debt restructurings	$	8,325		$	8,618
Total non-performing loans to total loans		5.81	%		6.28	%
Total non-performing assets to total assets		4.79	%		5.09	%
Total non-performing loans and troubled debt restructurings to total loans		5.94	%		6.28	%
Total non-performing assets and troubled debt restructurings to total assets		4.89	%		5.09	%

Total non-performing assets, including troubled debt restructurings, decreased $293,000 or 3.40% to $8.3 million at March 31, 2012, compared to $8.6 million at December 31, 2011. Total non-performing assets, including troubled debt restructurings, to total assets was 4.89% and 5.09% at March 31, 2012 and December 31, 2011, respectively. Troubled debt restructurings included in nonaccrual loans totaled $4.8 million at March 31, 2012, compared to $3.8 million at December 31, 2011.

Non-accrual one- to four-family real estate loans totaled $3.6 million at March 31, 2012 and consisted of 27 loans secured by properties located in our market area. Those loans included 4 loans that totaled $1.5 million that are troubled debt restructurings, which resulted in charge-offs of $1,000 during the quarter end March 31, 2012. Those troubled debt restructurings were all performing according to the terms of the restructuring. Non-accrual one- to four-family real estate loans at March 31, 2012 included 5 loans totaling $456,000 that were in the process of foreclosure, and resulted in charge-offs of $3,000 during the quarter ended March 31, 2012. We have established impairment allowances of $261,000 on the non-performing one- to four-family real estate loans at March 31, 2012.

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Non-accrual home equity lines of credit and other second mortgage loans totaled $180,000 at March 31, 2012 and consisted of 7 loans secured by properties located in our market area. We have established impairment allowances of $64,000 on the non-performing home equity lines of credit and other second mortgage loans at March 31, 2012.

Non-accrual multi-family real estate loans totaled $911,000 at March 31, 2012 and consisted of one loan secured by a senior-assisted living center in our market area that was modified in a troubled debt restructuring in 2011. That troubled debt restructuring was performing according to the terms of the restructuring at March 31, 2012. We have established impairment allowances of $253,000 on the non-performing multi-family loan at March 31, 2012.

Non-accrual commercial real estate loans totaled $1.4 million at March 31, 2012 and consisted of one loan secured by non-owner occupied property located in our market area. Although contractually current at March 31, 2012, the loan has not established a stable payment history and was deemed a troubled debt restructuring during the quarter ended March 31, 2012. The anchor tenant of the property is a state agency. We have established an impairment allowance of $67,000 on the non-performing commercial real estate loan at March 31, 2012.

Non-accrual construction and land development loans totaled $972,000 at March 31, 2012 and consisted of two troubled debt restructurings secured by properties located in our market area, both performing according to the terms of the restructuring as of March 31, 2012. A residential subdivision real estate loan with a balance at March 31, 2012 of $559,000 was refinanced in a troubled debt restructuring in 2010, and resulted in a $55,000 charge-off during the quarter ended March 31, 2012. Only one lot has been sold since the loan was restructured in 2010. We have established an impairment allowance of $235,000 on that non-performing land development loan at March 31, 2012. A commercial land development loan secured by property with a balance at March 31, 2012 of $413,000 was refinanced in a troubled debt restructuring in 2011. We have established an impairment allowance of $31,000 on that non-performing land development loan at March 31, 2012.

Other nonperforming loans totaled $90,000 at March 31, 2012. We have established impairment allowances of $20,000 on those loans at March 31, 2012.

Other real estate owned totaled $998,000 at March 31, 2012, which consisted of three single-family homes and two commercial real estate properties located in our market area. The properties are carried at estimated fair value less costs to sell, based upon new appraisals obtained in 2010-2011. Losses related to write-downs on those properties totaled $117,000 during the quarter ended March 31, 2012. In addition, we had $34,000 of repossessed automobiles at March 31, 2012.

A one- to four-family real estate loan, refinanced in a troubled debt restructuring in 2011, with a balance of $159,000 was returned to accrual status during the quarter ended March 31, 2012.

The following table shows the aggregate principal amount of potential problem loans on the Company’s watch list at March 31, 2012 and December 31, 2011. Substantially all non-accruing loans, troubled debt restructurings and loans past due 60 days or more are placed on the watch list (in thousands).

	March 31, 2012		December 31, 2011
Watch loans	$	5,268	$	4,547
Special Mention loans		810		840
Substandard loans		7,152		7,441
Total watch list loans	$	13,230	$	12,828

The $721,000 net increase in watch list loans during the quarter ended March 31, 2012 is primarily due to one purchased commercial real estate loan participation secured by nonowner-occupied property located outside our market area with a balance of $787,000 that was downgraded during the quarter ended March 31, 2012.

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Noninterest Income. Noninterest income increased $43,000 or 18.1% to $281,000 for the three months ended March 31, 2012 from $238,000 for the three months ended March 31, 2011. The decrease was primarily due to an increase in net realized gains on loan sales of $33,000 for the three months ended March 31, 2012, compared to the same period in 2011. Net realized gains of $61,000 and $18,000 were recognized on loans sold of $4.8 million and $1.7 million for the three months ended March 31, 2012 and 2011, respectively. Net realized gains on loans sales also included the net increase in fair value of mortgage servicing rights of $55,000 and $65,000 for the three months ended March 31, 2012 and 2011, respectively.

Noninterest Expense. Noninterest expense increased $141,000 or 11.8% to $1.34 million for the three months ended March 31, 2012 from $1.20 million for the three months ended March 31, 2011. Increases in compensation and benefits, professional fees, indirect automobile loan servicing fee, foreclosed assets net, and other expenses in 2012 compared to 2011 of $70,000, $78,000, $3,000, $33,000 and $17,000, respectively, were partially offset by decreases in occupancy, data processing, marketing, office supplies and federal deposit insurance of $16,000, $23,000, $3,000, $4,000 and $14,000, respectively. The increase in compensation and benefits was primarily due to higher benefit costs, including the impact of the 2011 Equity Incentive Plan approved in the second quarter of 2011 and the subsequent grants of options and restricted stock under the Plan. The increase in professional fees is primarily due to fees incurred to defend the Company in the proxy fight with a dissident shareholder. The increase in foreclosed assets, net, was due primarily to higher losses and write-downs on foreclosed assets held for sale of $120,000 for the three months ended March 31, 2012, compared to $60,000 for the same period in 2011. The largest decrease was data processing which was due primarily to lower costs associated with the long-term contract renewal with our data center in 2012.

Provision (Benefit) for Income Taxes. The benefit for income taxes was $17,000 for the three months ended March 31, 2012 compared to a provision of $9,000 for the same period in 2011, an increase in benefit of $26,000. The effective tax benefit as a percent of pre-tax income was 12.7% for the three months ended March 31, 2012, compared to the effective tax provision as a percent of pre-tax income of 13.8% for the same period in 2011. The larger benefit for income taxes in 2012 reflects the impact of a $47,000 non-recurring decrease in valuation allowances recorded for deferred tax assets related to capital losses on equity securities, offset partially by a higher level of pre-tax income as compared to 2011. The Company believes it has capital gains to enable a portion of those capital losses to be utilized prior to expiration.

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 $1.1 million and $816,000 for the three months ended March 31, 2012 and 2011, respectively. Net cash used in investing activities consisted primarily of disbursements for loan originations and the purchase of securities and interest-bearing deposits, offset by net cash provided by principal collections on loans, and proceeds from maturing securities and interest-bearing deposits and pay downs on mortgage-backed securities. For the three months ended March 31, 2012, net cash provided by investing activities included $3.0 million of proceeds from the redemption of Federal Home Loan Bank stock. Net cash provided by (used in) investing activities were $(2.4) million and $2.6 million for the three months ended March 31, 2012 and 2011, respectively. Net cash provided by (used in) financing activities consisted primarily of the activity in deposit accounts and Federal Home Loan Bank borrowings. The net cash provided by (used in) financing activities was $601,000 and $(931,000) for the three months ended March 31, 2012 and 2011, 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 March 31, 2012 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 March 31, 2012. Management is not aware of any conditions or events since the most recent notification that would change our category.

	March 31, 2012 Actual			December  31, 2011 Actual			Minimum Required
Tier 1 capital to average assets		10.0	%		9.9	%		4	%
Tier 1 capital to risk-weighted assets		12.8	%		12.8	%		4	%
Total capital to risk-weighted assets		14.1	%		14.0	%		8	%

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 March 31, 2012 and December 31, 2011 (in thousands).

	March 31, 2012		December 31, 2011
Commitments to fund loans	$	16,710	$	11,653
Standby letters of credit		6		6

Certificates of deposit that are scheduled to mature in less than one year from March 31, 2012 totaled $32.9 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.

51

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 March 31,
	2012							2011
	Average Balance		Interest Income/ Expense		Yield/ Cost			Average Balance		Interest Income/ Expense		Yield/ Cost
Assets
Interest-earning assets:
Interest-earning deposits	$	8,711	$	23		1.06	%	$	11,248	$	35		1.24	%
Securities purchased under agreements to resell		19,506		42		0.86	%		15,443		40		1.04	%
Securities, tax-exempt		—		—		0.00	%		467		5		4.28	%
Securities, taxable		5,631		45		3.20	%		6,613		32		1.94	%
Loans		120,121		1,723		5.74	%		115,323		1,697		5.89	%
Federal Home Loan Bank stock		5,058		2		0.16	%		6,549		2		0.12	%
Total interest earning assets		159,027		1,835		4.61	%		155,643		1,811		4.65	%
Non-interest earning assets		11,253							12,288
Total assets	$	170,280						$	167,931
Liabilities and equity
Interest-bearing liabilities:
Savings accounts	$	16,715		5		0.12	%	$	15,355		11		0.29	%
NOW and money market accounts		33,678		15		0.18	%		32,957		27		0.33	%
Certificates of deposit		78,181		342		1.75	%		78,381		441		2.25	%
Brokered certificates of deposit		1,499		19		5.04	%		1,499		19		5.07	%
Federal Home Loan Bank advances		13,036		89		2.73	%		13,841		119		3.44	%
Total interest-bearing Liabilities		143,109		470		1.31	%		142,033		617		1.74	%
Non-interest-bearing deposits		5,056							4,069
Other non-interest-bearing liabilities		3,302							3,105
Total liabilities		151,467							149,207
Equity		18,813							18,724
Total liabilities and equity	$	170,280						$	167,931
Net interest income			$	1,365						$	1,194
Interest rate spread						3.30	%						2.92	%
Net interest margin						3.43	%						3.07	%
Average interest earning assets to average interest-bearing liabilities						111.12	%						109.58	%

52

The following table sets forth the changes in interest income and interest expense resulting from the changes in interest rate and changes in volume of the Company’s interest-earning assets and interest-bearing liabilities (in thousands).

	Three Months Ended March 31, 2012 Compared to 2011 Increase (Decrease) Due to
	Rate			Volume			Net
Interest income:
Interest-earning deposits	$	(5	)	$	(7	)	$	(12	)
Securities purchased under agreements to resell		(4	)		6			2
Securities, tax-exempt		(3	)		(2	)		(5	)
Securities, taxable		17			(4	)		13
Loans		(40	)		66			26
Federal Home Loan Bank stock		—			—			—
Total		(35	)		59			24
Interest Expense:
Savings accounts		(7	)		1			(6	)
NOW and money market accounts		(13	)		1			(12	)
Certificates of deposit		(98	)		(1	)		(99	)
Brokered certificates of deposit		—			—			—
Federal Home Loan Bank advances		(23	)		(7	)		(30	)
Total		(141	)		(6	)		(147	)
Increase in net interest income	$	106		$	65		$	171

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4 - CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2012. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting. During the quarter ended March 31, 2012, 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.

53

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 1A. 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. Mine Safety Disclosures

None.

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

101.INS – XBRL Instance Document

101.SCH – XBRL Taxonomy Extension Schema Document

101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF – XBRL Taxonomy Extension Definition Linkbase Document

101.LAB – XBRL Taxonomy Extension Label Linkbase Document

101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document

54

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: May 4, 2012	/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

55

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Duffield J. Seyller III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Harvard Illinois Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

May 4, 2012	/s/ Duffield J. Seyller III
Date	Duffield Seyller III
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Executive Vice President and Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Donn L. Claussen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Harvard Illinois Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

May 4, 2012	/s/ Donn L. Claussen
Date	Donn L. Claussen
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification pursuant to

18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Harvard Illinois Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Duffield J. Seyller III, President and Chief Executive Officer of the Company, and I, Donn L. Claussen, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that, to the best of our knowledge:

(1) the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 4, 2012	/s/ Duffield J. Seyller III
Date	Duffield Seyller III
	President and Chief Executive Officer
May 4, 2012	/s/ Donn L. Claussen
Date	Donn L. Claussen
	Executive Vice President and Chief Financial Officer

XML

Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Operating Activities
Net income	$ 151	$ 56
Items not requiring (providing) cash
Depreciation	50	51
Provision for loan losses	173	169
Amortization (accretion) of premiums and discounts on securities	(7)	18
Deferred income taxes	(122)	(28)
Net realized gains on loan sales	(116)	(83)
Loss on other than temporary impairment of equity securities	1
Losses and write down on foreclosed assets held for sale	120	60
Bank-owned life insurance income, net	(32)	(34)
Originations of loans held for sale	(4,762)	(1,674)
Proceeds from sales of loans held for sale	4,823	1,692
ESOP compensation expense	10	12
Stock-based compensation expense	40
Changes in
Accrued interest receivable	257	381
Other assets	100	90
Accrued interest payable	1	(4)
Deferred compensation	19	18
Other liabilities	361	92
Net cash provided by operating activities	1,067	816
Investing Activities
Net (increase) decrease in interest-bearing deposits	(1,787)	1,034
Purchases of available-for-sale securities	(2)	(1)
Proceeds from maturities and pay-downs of available-for-sale securities	777	593
Proceeds from maturities and pay-downs of held-to-maturity securities	180	301
Net change in loans	(4,584)	606
Purchase of premises and equipment	(13)	(11)
Proceeds from redemption of Federal Home Loan Bank stock	3,017
Proceeds from sale of foreclosed assets	52	44
Net cash provided by (used in) investing activities	(2,360)	2,566
Financing Activities
Net increase (decrease) in demand deposits, money market, NOW and savings accounts	3,425	(13)
Net decrease in certificates of deposit, including brokered certificates	(1,986)	(622)
Net increase in advances from borrowers for taxes and insurance	234	198
Proceeds from Federal Home Loan Bank advances	2,000	500
Repayments of Federal Home Loan Bank advances	(3,072)	(994)
Net cash provided by (used in) financing activities	601	(931)
Net Increase (Decrease) in Cash and Cash Equivalents	(692)	2,451
Cash and Cash Equivalents, Beginning of Period	22,227	17,963
Cash and Cash Equivalents, End of Period	21,535	20,414
Supplemental Cash Flows Information
Interest paid	469	621
Income taxes paid	25	34
Foreclosed assets acquired in settlement of loans	$ 14	$ 736

XML

Consolidated Statements Of Stockholders' Equity (Parenthetical)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements Of Stockholders' Equity [Abstract]
ESOP shares earned, shares	1,046	1,046

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Assets
Cash and due from banks	$ 943	$ 941
Interest-bearing demand deposits in banks	3,343	2,804
Securities purchased under agreements to resell	17,249	18,482
Cash and cash equivalents	21,535	22,227
Interest-bearing deposits with other financial institutions	8,022	6,235
Available-for-sale securities	3,807	4,581
Held-to-maturity securities, at amortized cost (estimated fair value of $1,648 and $1,837 at March 31, 2012 and December 31, 2011, respectively)	1,537	1,702
Loans, net of allowance for loan losses $2,675 and $2,575 at March 31, 2012 and December 31, 2011, respectively	120,091	115,698
Premises and equipment, net	3,488	3,525
Federal Home Loan Bank stock, at cost	3,532	6,549
Foreclosed assets held for sale	1,032	1,186
Accrued interest receivable	434	691
Deferred income taxes	1,921	1,803
Bank-owned life insurance	4,264	4,232
Mortgage servicing rights	365	310
Other	378	478
Total assets	170,406	169,217
Liabilities and Equity
Demand	5,935	5,239
Savings, NOW and money market	51,719	48,990
Certificates of deposit	77,355	79,341
Brokered certificates of deposit	1,499	1,499
Total deposits	136,508	135,069
Federal Home Loan Bank advances	11,330	12,402
Advances from borrowers for taxes and insurance	622	388
Deferred compensation	2,261	2,242
Accrued interest payable	38	37
Other	816	417
Total liabilities	151,575	150,555
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; 816,076 shares issued and outstanding at March 31, 2012 and December 31, 2011	8	8
Additional paid-in capital	6,892	6,852
Unearned ESOP shares, at cost	(534)	(544)
Amount reclassified on ESOP shares	(118)	(80)
Retained earnings	12,554	12,403
Accumulated other comprehensive income, net of tax	29	23
Total stockholders' equity	18,831	18,662
Total liabilities and stockholders' equity	$ 170,406	$ 169,217

XML

Consolidated Statements Of Comprehensive Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements Of Comprehensive Income [Abstract]
Unrealized appreciation (depreciation) on available-for-sale securities, tax	$ 4	$ (1)
Reclassification adjustment for realized gains (losses) included in net income, tax	$ 0	$ 0

XML

Regulatory Matters

3 Months Ended

Mar. 31, 2012

Regulatory Matters [Abstract]

Regulatory Matters

Note 13:    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:

(A) 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;

(B) 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;

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

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

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

(F) 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;

(G) 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

(H) 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 Federal Reserve Board (FRB) which now supervises the Company, and not by the Company. The requirements of the MOU will remain in effect until the FRB decides to terminate, suspend or modify it.

XML

Consolidated Statements Of Stockholders' Equity (USD $) In Thousands	Common Stock [Member]	Additional Paid-In Capital [Member]	Unearned ESOP Shares [Member]	Amount Reclassified On ESOP Shares [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income [Member]	Total
Balance at Dec. 31, 2010	$ 8	$ 6,799	$ (590)	$ (26)	$ 12,399	$ (4)	$ 18,586
Net income					56		56
Other comprehensive income (loss)						(4)	(4)
ESOP shares earned		(2)	14				12
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation				(26)			(26)
Balance at Mar. 31, 2011	8	6,797	(576)	(52)	12,455	(8)	18,624
Balance at Dec. 31, 2011	8	6,852	(544)	(80)	12,403	23	18,662
Net income					151		151
Other comprehensive income (loss)						6	6
Stock-based compensation expense		40					40
ESOP shares earned			10				10
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation				(38)			(38)
Balance at Mar. 31, 2012	$ 8	$ 6,892	$ (534)	$ (118)	$ 12,554	$ 29	$ 18,831

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Held-to-maturity securities, fair value	$ 1,648	$ 1,837
Allowance for loan losses	$ 2,675	$ 2,575
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	816,076	816,076
Common stock, shares outstanding	816,076	816,076

XML

Federal Home Loan Bank Stock

3 Months Ended

Mar. 31, 2012

Federal Home Loan Bank Stock [Abstract]

Federal Home Loan Bank Stock

Note 8:    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 $3,532 and $6,549 or 35,320 and 65,489 shares, respectively, of Federal Home Loan Bank stock of the Federal Home Loan Bank of Chicago (FHLB) as of March 31, 2012 and December 31, 2011. Management performed an analysis and deemed the cost method investment in FHLB stock was ultimately recoverable.

In 2012 and 2011, the FHLB declared and paid quarterly dividends at an annualized rate of 10 basis points per share.

On February 15, 2012, the Company redeemed approximately 51% or $3,017 of its excess stock at its carrying amount. On April 16, 2012, the FHLB announced that it will be repurchasing approximately $150,000 in excess capital stock held by its members or approximately 25% of the excess capital stock outstanding, effective May 15, 2012. At March 31, 2012, the Company had excess stock of $2,966.

On April 18, 2012, the FHLB announced that its Board of Directors and its regulator, the Federal Housing Finance Agency (FHFA), had agreed to terminate the Consent Cease and Desist Order, effective immediately. The FHLB can now declare quarterly dividends without the consent of the FHFA subject to two stipulations:

• The dividend payment must be at or below the average of the three-month LIBOR for that quarter.

• Paying the dividend will not result in the FHLB's retained earnings falling below the level at the previous year-end.

XML

Document And Entity Information	3 Months Ended
	Mar. 31, 2012	May 04, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Entity Registrant Name	Harvard Illinois Bancorp, Inc.
Entity Central Index Key	0001471266
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		816,076

XML

Comprehensive Income (Loss)

3 Months Ended

Mar. 31, 2012

Comprehensive Income (Loss) [Abstract]

Comprehensive Income (Loss)

Note 9:    Comprehensive Income (Loss)

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

	Three Months Ended March  31,
	2012			2011
Net unrealized gains (losses) on securities available-for-sale	$	9		$	(5	)
Less reclassification adjustment for loss on other than temporary impairment of equity securities		(1	)		—
Other comprehensive income (loss), before tax effect		10			(5	)
Less tax expense (benefit)		4			(1	)
Other comprehensive income (loss)	$	6		$	(4	)

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

	March 31, 2012		December 31, 2011
Net unrealized gain on securities available-for-sale	$	44	$	34
Tax effect		15		11
Net-of-tax amount	$	29	$	23

XML

Consolidated Statements Of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Interest and Dividend Income
Interest and fees on loans	$ 1,723	$ 1,697
Securities
Taxable	45	32
Tax-exempt		5
Securities purchased under agreements to resell	42	40
Other	25	37
Total interest and dividend income	1,835	1,811
Interest Expense
Deposits	381	498
Federal Home Loan Bank advances	89	119
Total interest expense	470	617
Net Interest Income	1,365	1,194
Provision for Loan Losses	173	169
Net Interest Income After Provision for Loan Losses	1,192	1,025
Noninterest Income
Customer service fees	69	63
Brokerage commission income	9	7
Net realized gains on loan sales	116	83
Losses on other than temporary impairment of equity securities	(1)
Loan servicing fees	53	47
Bank-owned life insurance income, net	32	34
Other	3	4
Total noninterest income	281	238
Noninterest Expense
Compensation and benefits	676	606
Occupancy	123	139
Data processing	101	124
Professional fees	136	58
Marketing	14	17
Office supplies	13	17
Federal deposit insurance	37	51
Indirect automobile loan servicing fee	25	22
Foreclosed assets, net	119	86
Other	95	78
Total noninterest expense	1,339	1,198
Income Before Income Taxes	134	65
Provision (Benefit) for Income Taxes	(17)	9
Net Income	$ 151	$ 56
Earnings Per Share
Basic (Note 4)	$ 0.21	$ 0.08
Diluted	$ 0.20	$ 0.08

XML

Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 3:    Stock-based Compensation

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 is being 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 are being applied to repay interest on the loan first, then the remainder are being 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 being 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 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 March 31, 2012, 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 is as follows (dollars in thousands):

	March 31, 2012		December 31, 2011
Allocated shares		8,370		4,185
Shares released for allocation		1,046		4,185
Unearned shares		53,359		54,405
Total ESOP shares		62,775		62,775
Fair value of unearned ESOP shares	$	481	$	490

On May 26, 2011, the stockholders approved the Harvard Illinois Bancorp, Inc. 2011 Equity Incentive Plan (the "Equity Incentive Plan") for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 109,856 shares of the Company's common stock, with no more than 31,387 of shares as restricted stock awards and 78,469 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted. Certain option awards provide for accelerated vesting if there is a change of control (as defined in the Equity Incentive Plan).

On June 23, 2011, the compensation committee of the board of directors approved the awards of 73,761 options to purchase Company stock and 31,387 shares of restricted stock. Of the 73,761 stock options granted, 63,167 were qualified stock options and 10,594 were nonqualified. Stock options and restricted stock vest ratably over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued. At March 31, 2012, there were 4,708 shares available for future option grants under this plan.

The following table summarizes stock option activity for the three months ended March 31, 2012 (dollars in thousands):

	Options		Weighted- Average Exercise Price/Share		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding, January 1, 2012		73,761	$	8.10
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding, March 31, 2012		73,761	$	8.10		9.23	$	4.45	(1)
Exercisable, March 31, 2012		—	$	N/A		N/A	$	—

⁽¹⁾  Based on closing price of $12.55 per share on March 31, 2012.

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

The weighted-average grant-date fair value of options granted during 2011 was $4.11.

The fair value for each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company's common stock at the date of grant. Expected volatility is based on historical volatility of the Company's stock and other factors. The expected life of the options is calculated based on the "simplified" method as provided for under Staff Accounting Bulletin No. 110. The expected term of options granted represents the period of time that options are expected to be outstanding.

The weighted-average assumptions used in the Black-Scholes option pricing model for the year indicated was as follows:

	2011
Risk-free interest rate		2.50	%
Expected dividend yield		0.00	%
Expected stock volatility		46.00	%
Expected life (years)		7.00
Fair value (not in thousands)	$	4.11

There were no options that vested during the three months ended March 31, 2012. Stock-based compensation expense for stock options for the three months ended March 31, 2012 and 2011 was $15 and $0, respectively. Total unrecognized compensation cost related to nonvested stock options was $258 at March 31, 2012 and is expected to be recognized over a weighted-average period of 4.23 years.

The following table summarizes non-vested restricted stock activity for the three months ended March 31, 2012:

	Shares			Weighted Average Grant-Date Fair Value
Balance, January 1, 2012		31,387		$	8.10
Granted		—			—
Forfeited		—			—
Earned and issued		(1,569	)		8.10
Balance, March 31, 2012		29,818		$	8.10

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (five years) and is based on the market price of the Company's common stock at the date of grant multiplied by the number of shares granted that are expected to vest. At the date of grant the par value of the shares granted was recorded in equity as a credit to common stock and a debit to paid-in capital. Stock-based compensation expense for restricted stock for the three months ended March 31, 2012 and 2011 was $25 and $0, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $205 at March 31, 2012 and is expected to be recognized over a weighted average period of 4.23 years.

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New Accounting Pronouncements

3 Months Ended

Mar. 31, 2012

New Accounting Pronouncements [Abstract]

New Accounting Pronouncements

Note 2:    New Accounting Pronouncements

Recent and Future Accounting Requirements

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company is assessing the impact of ASU 2011-11 on its disclosures.

In June 2011, the FASB issued ASU No. 2011-05 "Comprehensive Income (Topic 220) - Presentation of Comprehensive Income." ASU 2011-05 requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In December 2011, FASB issued ASU No. 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present items that are reclassified from accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. ASU 2011-05 was effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The effect of applying this standard is reflected in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders' Equity.

In May 2011, the FASB issued ASU No. 2011-04 "Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." ASU 2011-04 changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards). ASU 2011-04 was effective prospectively during interim and annual periods beginning on or after December 15, 2011. Early application by public entities was not permitted. The effect of applying this standard is reflected in Note 11 — Fair Value Measurements.

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Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes [Abstract]

Income Taxes

Note 10:    Income Taxes

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

	Three Months Ended March  31,
	2011			2011
Computed at the statutory rate (34%)	$	46		$	22
Decrease resulting from
Tax exempt interest		—			(1	)
Changes in deferred tax valuation allowance		(47	)		—
Cash surrender value of life insurance		(11	)		(12	)
Other		(5	)		—
Actual expense (benefit)	$	(17	)	$	9
Tax benefit as a percentage of pre-tax income (loss)		(12.7	)%		13.8	%

The decrease in the valuation allowance of $47 in 2012 is due to the reversal of a portion of the previous valuation allowance related to the capital losses. As further discussed in Note 8, the Federal Home Loan Bank of Chicago announced on April 16, 2012 that it will be repurchasing approximately 25% of the excess capital stock outstanding, effective May 15, 2012. Management believes the Company has capital gains to enable a portion of the capital losses to be utilized prior to expiration.

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Securities

3 Months Ended

Mar. 31, 2012

Securities [Abstract]

Securities

Note 6:    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:
March 31, 2012:
U.S. government agencies	$	2,456	$	1	$	—	$	2,457
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		856		22		—		878
Equity securities		451		21		—		472
	$	3,763	$	44	$	—	$	3,807
December 31, 2011:
U.S. Government and federal agency	$	3,212	$	2	$	—	$	3,214
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		884		22		—		906
Equity securities		451		10		—		461
	$	4,547	$	34	$	—	$	4,581

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity Securities:
March 31, 2012:
U.S. government agencies	$	500	$	34	$	—	$	534
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		22		—		—		22
Private-label residential		1,015		77		—		1,092
	$	1,537	$	111	$	—	$	1,648
December 31, 2011:
U.S. Government agencies	$	500	$	39	$	—	$	539
Mortgage-backed:
Government-sponsored enterprises (GSE) – residential		24		—		—		24
Private-label residential		1,178		96		—		1,274
	$	1,702	$	135	$	—	$	1,837

The Company held no securities at March 31, 2012 or December 31, 2011 with a book value that exceeded 10% of total equity, with the exception of obligations of U.S. Treasury and other U.S. government agencies and corporations.

Available for sale equity securities consist of shares in the Shay Asset Management mutual funds, shares of FHLMC and FNMA common stock, and shares in other financial institutions. Other than temporary impairments recorded for the three month periods ended March 31, 2012 and 2011 totaled $1 and $0, respectively.

As of March 31, 2012 and December 31, 2011, the Company held investments in Shay Asset Management mutual funds with a fair value of $444 and $442, 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 March 31, 2012 and December 31, 2011.

As of March 31, 2012 and December 31, 2011, the Company held investments in FNMA and FHLMC common stock with a fair value of $11 and $8, 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 March 31, 2012 and December 31, 2011.

As of March 31, 2012 and December 31, 2011, the Company held investments in other equity securities with a fair value of $17 and $11, respectively. The Company recorded other-than-temporary impairments on other equity securities of $1 and $0 for the three month periods ended March 31, 2012 and 2011, respectively. Management performed an analysis and deemed the remaining investment in other equity securities was not other than temporarily impaired as of March 31, 2012 and December 31, 2011.

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $2,305 and $2,032 as of March 31, 2012 and December 31, 2011, respectively.

There were no sales of available-for-sale securities for the three months ended March 31, 2012 and 2011.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2012, 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	$	706	$	707	$	—	$	—
One to five years		1,250		1,250		500		534
Five to ten years		500		500		—		—
After ten years		—		—		—		—
		2,456		2,457		500		534
Mortgage-backed securities		856		878		1,037		1,114
Equity securities		451		472		—		—
Totals	$	3,763	$	3,807	$	1,537	$	1,648

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 March 31, 2012 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.

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 March 31, 2012 (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:

Total temporarily impaired securities

$

—

$

—

$

—

$

—

$

—

$

—

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Earnings Per Common Share ("EPS")

3 Months Ended

Mar. 31, 2012

Earnings Per Common Share ("EPS") [Abstract]

Earnings Per Common Share ("EPS")

Note 4:    Earnings Per Common Share ("EPS")

Basic and diluted earnings per common share are presented for the three-month periods ended March 31, 2012 and 2011. The factors used in the earnings per common share computation follow:

	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
Net income	$	151		$	56
Basic weighted average shares outstanding		789,401			784,689
Less: Average unallocated ESOP shares		(53,707	)		(57,892	)
Basic average shares outstanding		735,694			726,797
Diluted effect of stock options		—			—
Diluted effect of restricted stock awards		2,703			—
Diluted average shares outstanding	$	738,397		$	726,797
Basic earnings per share	$	.21		$	.08
Diluted earnings per share	$	.20		$	.08

Options to purchase 73,761 shares at a weighted-average exercise price of $8.10 were outstanding at March 31, 2012, but were not included in the computation of diluted earnings per share as the options were considered antidilutive for the period ended March 31, 2012.

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Securities Purchased Under Agreements To Resell

3 Months Ended

Mar. 31, 2012

Securities Purchased Under Agreements To Resell [Abstract]

Securities Purchased Under Agreements To Resell

Note 5:    Securities Purchased Under Agreements to Resell

The Company enters into purchases of securities under agreements to resell. The amounts advanced under these agreements were $17,249 and $18,482 at March 31, 2012 and December 31, 2011, respectively, and represent short-term SBA and USDA loans. The securities underlying the agreements are book-entry securities. All securities are delivered by appropriate entry into the third-party custodian's account designated by the Company under a written custodial agreement that explicitly recognizes the Company's interest in the securities. These agreements mature by notice by the Company or 30 days by the custodian. The Company's policy requires that all securities purchased under agreements to resell be fully collateralized.

At March 31, 2012 and December 31, 2011, agreements to resell securities purchased were outstanding with the following entities (in thousands):

	March 31, 2012		December 31, 2011
BCM High Income Fund, LP	$	6,919	$	8,121
HEC Opportunity Fund, LLC		453		453
Coastal Securities		9,877		9,908
Total	$	17,249	$	18,482

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Loans

3 Months Ended

Mar. 31, 2012

Loans [Abstract]

Loans

Note 7:    Loans

Classes of loans include:

	March 31, 2012			December 31, 2011
Mortgage loans on real estate
One-to-four family	$	44,045		$	44,339
Home equity lines of credit and other 2nd mortgages		9,797			10,284
Multi-family residential		2,074			1,480
Commercial		24,571			25,192
Farmland		9,419			9,531
Construction and land development		2,245			2,522
Total mortgage loans on real estate		92,151			93,348
Commercial and industrial		4,576			4,241
Agricultural		17,990			14,313
Purchased indirect automobile, net of dealer reserve		7,911			6,223
Other consumer		142			152
		122,770			118,277
Less
Loans in process		7			6
Net deferred loan fees and costs		(3	)		(2	)
Allowance for loan losses		2,675			2,575
Net loans	$	120,091		$	115,698

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company's obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company's principal lending activity is the origination of one-to four-family residential mortgage loans but also includes, commercial real estate loans, commercial and industrial, home equity, construction, agricultural and other loans. The primary lending market is McHenry, Grundy and to a lesser extent Boone Counties in Illinois and Walworth County in Wisconsin. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Pursuant to applicable law, the aggregate amount of loans that the Company is permitted to make to any one borrower or a group of related borrowers is generally limited to 25% of our total capital plus the allowance for loan losses.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower's ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.

Under our loan policy, the individual processing an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an officer for approval. An officer then reviews these materials and verifies that the requested loan meets our underwriting guidelines described below.

All one-to-four family residential loans up to $500,000, vacant land loans up to $250,000, and any consumer loans require approval of our retail loan committee consisting of five officers. All such loan approvals are reported at the next board meeting following said approval. All secured commercial loans, including agricultural loans, up to $1,500,000 and unsecured loans up to $250,000 must be approved by our commercial credit management committee, which currently consists of our Chief Executive Officer, Executive Vice President and our Vice President – Commercial Loan Officer. These approvals are reported at the next board meeting following said approval. All other loans must be approved by the board.

Generally, title insurance or title searches on our mortgage loans are required as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

One-to-Four Family Residential Mortgage Loans

The cornerstone of our lending program has long been the origination of long-term permanent loans secured by mortgages on owner-occupied one-to-four family residences. Virtually all of the residential loans originated are secured by properties located in our market area.

Due to consumer demand in the current low market interest rate environment, many of our recent originations are 10- to 30-year fixed-rate loans secured by one-to-four family residential real estate. The Company generally originates fixed-rate one-to-four family residential loans in accordance with secondary market standards to permit their sale. During the last several years, consistent with our asset-liability management strategy, most of the fixed rate one-to-four family residential loans we originated with original terms to maturity in excess of ten years were sold in the secondary market.

During recent years, as a part of our asset/liability management policy, seven-year balloon loans with up to 30-year amortization schedules secured by one-to-four family real estate have been originated.

In order to reduce the term to repricing of the loan portfolio, adjustable-rate one-to-four family residential mortgage loans were originated. However, our ability to originate such loans is limited in the current low interest rate environment due to low consumer demand. Our current adjustable-rate mortgage loans carry interest rates that adjust annually at a margin over the one year U.S. Treasury index. Many of our adjustable-rate one-to-four family residential mortgage loans have fixed rates for initial terms of three to five years. Such loans carry terms to maturity of up to 30 years. The adjustable-rate mortgage loans currently offered by the Company generally provide for a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over the initial rate.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates.

Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on many of our adjustable-rate loans do not adjust for the first three to five years. As a result, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

The Company evaluates both the borrower's ability to make principal, interest and escrow payments and the value of the property that will secure the loan. One-to-four family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. One-to-four family residential mortgage loans customarily include due-on-sale clauses giving the Company the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. Residential mortgage loans are originated for our portfolio with loan-to-value ratios of up to 75% for one-to-four family homes, with higher limits applicable to loans with private mortgage insurance on owner-occupied residences.

Commercial Real Estate Loans

In recent years, in an effort to enhance the yield and reduce the term to maturity of our loan portfolio, the Company has sought to increase the commercial real estate loans. Most of the commercial real estate loans have balloon loan terms of three to ten years with amortization terms of 15 to 25 years and fixed interest rates. The maximum loan-to-value ratio of the commercial real estate loans is generally 75%.

The Company considers a number of factors in originating commercial real estate loans. The qualifications and financial condition of the borrower are evaluated, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with the Company and other financial institutions are considered. In evaluating the property securing the loan, the factors considered include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial real estate loans are appraised by outside independent appraisers approved by the board of directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of commercial real estate loans.

Loans secured by commercial real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.

Multi Family Real Estate Loans

The Company has a limited number of loans on multi-family residences in our market area. Such loans have terms and are underwritten similarly to our commercial real estate loans and are subject to similar risks.

Home Equity Loans

The Company originates variable-rate home equity lines-of-credit and, to a lesser extent, fixed- and variable-rate loans secured by liens on the borrower's primary residence. Home equity products are generally limited to 75% of the property value less any other mortgages. Prior to 2009, home equity loans were originated up to 90% of the property value to our customers where we serviced their first lien mortgage loan. The same underwriting standards are used for home equity lines-of-credit and loans as used for one-to-four family residential mortgage loans. The home equity line-of-credit product carries an interest rate tied to the prime rate published in the Wall Street Journal. The product has a rate ceiling of 18%. Home equity loans with fixed-rate terms typically amortize over a period of up to 15 years. Home equity lines-of-credit provide for an initial draw period of up to five years, with monthly payments of interest calculated on the outstanding balance. At the end of the initial five years, the line may be paid in full or restructured at our then current home equity program.

Construction and Land Development Loans

The Company has construction loans to builders and developers for the construction of one- to four- and multi-family residential units and to individuals for the construction of their primary or secondary residence. The Company has a limited amount of land loans to developers, primarily for the purpose of developing residential subdivisions.

The application process includes a submission of plans, specifications, and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. Outside independent licensed appraisers or title company representatives under a construction loan escrow agreement inspect the progress of the construction of the dwelling before disbursements are made.

The Company occasionally makes loans to builders and developers "on speculation" to finance the construction of residential property where no buyer for the property has been identified. At March 31, 2012, there were no construction loans secured by a one-to-four family residential property built on speculation.

The Company has construction loans for commercial development projects such as multi-family, apartment and other commercial buildings. These loans generally have an interest-only phase during construction then convert to permanent financing. Disbursements of construction loan funds are at our discretion based on the progress of construction. The maximum loan-to-value ratio limit applicable to these loans is generally 75%.

The Company has loans to builders and developers for the development of one-to-four family lots in our market area. These loans have terms of five years or less. Land loans are generally made in amounts up to a maximum loan-to-value ratio of 65% on raw land and up to 75% on developed building lots based upon an independent appraisal. Personal guarantees are obtained for land loans.

Loans to individuals for the construction of their residences typically run for up to seven months and then convert to permanent loans. These construction loans have rates and terms comparable to one-to-four family residential loans offered. During the construction phase, the borrower pays interest only at a fixed rate. The maximum loan-to-value ratio of owner-occupied single-family construction loans is 75%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.

Construction and land lending generally affords the Company an opportunity to receive higher origination and other loan fees. In addition, such loans are generally made for relatively short terms. Nevertheless, construction and land lending to persons other than owner-occupants is generally considered to involve a higher level of credit risk than one-to-four family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on construction projects, real estate developers and managers. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property's value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage. When loan payments become due, the cash flow from the property may not be adequate to service the debt. In such cases, the Company may be required to modify the terms of the loan.

Farmland

These loans are primarily secured by farmland located in our market area. Adjustable rate farmland loans have interest rates that generally adjust every one, three or five years in accordance with a designated index and are generally amortized over 15-25 years. Fixed-rate farmland loans generally are for terms of up to 15 years, although many are amortized over longer periods, and include a balloon payment at maturity. Lending policies on such loans generally limit the maximum loan-to-value ratio to 75% of the lesser of the appraised value or purchase price of the property.

While earning higher yields on agricultural mortgage loans than on single-family residential mortgage loans, agricultural-related lending involves a greater degree of risk than single-family residential mortgage loans because of the typically larger loan amounts and potential volatility in the market. In addition, repayments on agricultural loans are substantially dependent on the successful operation of the underlying business and the value of the property collateralizing the loan, both of which are affected by many factors, such as weather and changing market prices, outside the control of the borrower. Finally, some commentators believe that the recent sharp increases in farm land prices could make a price correction more likely.

Substantially all farmland loans are underwritten to conform to agency guidelines to qualify for a government guarantee of up to 90% of the original loan amount, which in turn qualifies them to be sold to a variety of investors in the secondary market. Once the government guarantee is secured from Farmers Home Loan Administration, the guarantee covers up to 90% of any loss on the loan. Longer-term fixed-rate agricultural mortgage loans may be sold in the secondary market, which the Company services for the secondary market purchaser.

Commercial and Industrial Loans

Commercial and industrial loans and lines of credit are originated to small and medium-sized companies in our primary market area. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Commercial and industrial loans generally carry a floating-rate indexed to the prime rate as published in The Wall Street Journal and a one-year term. All commercial and industrial loans are secured.

When making commercial and industrial loans, the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower are considered. Commercial and industrial loans are generally secured by accounts receivable, inventory, equipment and personal guarantees.

Commercial and industrial loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. These risks are minimized through underwriting standards and personal guarantees.

Agricultural Loans

Agricultural operating lines of credit generally have terms of one year and are secured by growing crops, livestock and equipment, and mortgages on the farmland. Intermediate-term loans have terms of 2-7 years and will be secured by machinery and equipment. Generally these loans are extended to farmers in our market area for the purchase of equipment, seed, fertilizer, insecticide and other purposes in connection with agricultural production. The maximum term for equipment secured loans is tied to the useful life of the underlying collateral but generally does not exceed 10 years. The interest rate is generally increased with respect to the longer terms loans due to the rate exposure of these loans. The amount of the commitment is based on management's review of the borrower's business plan, prior performance, marketability of crops, and current market prices. Recent financial statements are examined and evaluate cash flow analysis and debt-to-net worth, and liquidity ratios. Loans for crop production generally require 75% or more crop insurance coverage.

The repayment of agricultural business loans generally is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest rates, and changes in weather conditions. These developments may result in smaller harvests and less income for farmers which may adversely affect such borrower's ability to repay a loan. Many borrowers also have more than one agricultural business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Company to significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan. Finally, if the Company forecloses on an agricultural commercial loan, our holding period for the collateral, if any, typically is longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral.

Consumer Loans

The Company has secured and unsecured loans to consumers. However, during recent years, most consumer lending efforts were focused on purchases of indirect automobile loans.

In an effort to expand and diversify our loan portfolio and increase the overall yield on our loan portfolio, since 1999 the Company has purchased indirect loans on new and used automobiles located primarily in

Cook County, Illinois. Although we do not separately underwrite each purchased loan, we thoroughly review the knowledge and experience of the originators' management teams, their underwriting standards, and their historical loss rates. In 2008, we dramatically reduced new indirect automobile loan purchases based on the risk concentration in our portfolio, liquidity requirements, and current economic conditions. The Company resumed purchases in April 2011.

Under the loan purchase arrangement, on a monthly basis the seller aggregates indirect automobile loans into separate loan pools. The pools are then segregated into risk categories with each category having predefined limits as to the maximum amounts allowed. Generally, the pools are sold without recourse. The Company receives a listing of the individual loans in the pool, including loan and borrower information prior to funding the purchase but the Company is not generally permitted to substitute loans in a pool or purchase part of a pool.

The seller is responsible for dealer relationships and the monitoring of their performance. The seller performs all servicing functions including the collection of principal, interest, and fees as well as repossessions and recoveries. Thus, the Company is not involved in the sale of repossessed vehicles.

The Company performs semi-annual reviews of newly purchased loan files and review operational procedures as part of our internal audit function.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances as well as the economy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three months ended March 31, 2012 and 2011, and the year ended December 31, 2011:

	Three Months Ended March 31, 2012 Mortgage Loans on Real Estate
	1-4 Family			HELOC and 2nd  Mortgage			Multi-Family Residential		Commercial		Farmland			Construction and Land Development
Allowance for loan losses:
Balance, beginning of period	$	549		$	248		$	287	$	533	$	143		$	374
Provision charged to expense		63			(53	)		24		70		(2	)		(15	)
Losses charged off		(10	)		(2	)		—		—		—			(55	)
Recoveries		—			—			—		—		—			—
Balance, end of period	$	602		$	193		$	311	$	603	$	141		$	304
Ending balance: individually evaluated for impairment	$	261		$	70		$	253	$	67	$	—		$	266
Ending balance: collectively evaluated for impairment	$	341		$	123		$	58	$	536	$	141		$	38
Loans:
Ending balance	$	44,045		$	9,797		$	2,074	$	24,571	$	9,419		$	2,245
Ending balance: individually evaluated for impairment	$	3,591		$	187		$	911	$	1,390	$	—		$	972
Ending balance: collectively evaluated for impairment	$	40,454		$	9,610		$	1,163	$	23,181	$	9,419		$	1,273

	Three Months Ended March 31, 2012 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net			Other Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	125	$	215	$	95		$	6		$	—	$	2,575
Provision charged to expense		2		55		34			(5	)		—		173
Losses charged off		—		—		(7	)		—			—		(74	)
Recoveries		—		—		1			—			—		1
Balance, end of period	$	127	$	270	$	123		$	1		$	—	$	2,675
Ending balance: individually evaluated for impairment	$	20	$	—	$	4		$	—		$	—	$	941
Ending balance: collectively evaluated for impairment	$	107	$	270	$	119		$	1		$	—	$	1,734
Loans:
Ending balance	$	4,576	$	17,990	$	7,911		$	142		$	—	$	122,770
Ending balance: individually evaluated for impairment	$	90	$	—	$	11		$	—		$	—	$	7,152
Ending balance: collectively evaluated for impairment	$	4,486	$	17,990	$	7,900		$	142		$	—	$	115,618

	Three Months Ended March 31, 2011 Mortgage Loans on Real Estate
	1-4 Family			HELOC and 2nd  Mortgage			Multi-Family Residential		Commercial			Farmland		Construction and Land Development
Allowance for loan losses:
Balance, beginning of period	$	352		$	150		$	34	$	629		$	5	$	291
Provision charged to expense		177			2			1		(12	)		—		2
Losses charged off		(87	)		(5	)		—		(10	)		—		—
Recoveries		2			—			—		—			—		—
Balance, end of period	$	444		$	147		$	35	$	607		$	5	$	293
Ending balance: individually evaluated for impairment	$	104		$	16		$	—	$	155		$	—	$	265
Ending balance: collectively evaluated for impairment	$	340		$	131		$	35	$	452		$	5	$	28
Loans:
Ending balance	$	44,739		$	11,148		$	1,586	$	25,869		$	3,835	$	2,428
Ending balance: individually evaluated for impairment	$	1,869		$	150		$	—	$	686		$	—	$	665
Ending balance: collectively evaluated for impairment	$	42,870		$	10,998		$	1,586	$	25,183		$	3,835	$	1,763

	Three Months Ended March 31, 2011 (Continued)
	Commercial and Industrial			Agricultural		Purchased Indirect Automobile, Net			Other Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	97		$	206	$	105		$	4		$	—	$	1,873
Provision charged to expense		(1	)		6		(4	)		(2	)		—		169
Losses charged off		—			—		(31	)		—			—		(133	)
Recoveries		—			—		2			—			—		4
Balance, end of period	$	96		$	212	$	72		$	2		$	—	$	1,913
Ending balance: individually evaluated for impairment	$	20		$	—	$	13		$	—		$	—	$	573
Ending balance: collectively evaluated for impairment	$	76		$	212	$	59		$	2		$	—	$	1,340
Loans:
Ending balance	$	4,640		$	14,131	$	4,688		$	267		$	—	$	113,331
Ending balance: individually evaluated for impairment	$	103		$	—	$	50		$	1		$	—	$	3,524
Ending balance: collectively evaluated for impairment	$	4,537		$	14,131	$	4,638		$	266		$	—	$	109,807

	Year Ended December 31, 2011 Mortgage Loans on Real Estate
	1-4 Family			HELOC and 2nd  Mortgage			Multi-Family Residential			Commercial			Farmland		Construction and Land Development
Allowance for loan losses:
Balance, beginning of year	$	352		$	150		$	34		$	629		$	5	$	291
Provision charged to expense		453			103			313			28			138		121
Losses charged off		(302	)		(5	)		(60	)		(162	)		—		(50	)
Recoveries		46			—			—			38			—		12
Balance, end of year	$	549		$	248		$	287		$	533		$	143	$	374
Ending balance: individually evaluated for impairment	$	239		$	120		$	259		$	—		$	—	$	329
Ending balance: collectively evaluated for impairment	$	310		$	128		$	28		$	533		$	143	$	45
Loans:
Ending balance	$	44,339		$	10,284		$	1,480		$	25,192		$	9,531	$	2,522
Ending balance: individually evaluated for impairment	$	3,775		$	268		$	917		$	1,390		$	—	$	1,027
Ending balance: collectively evaluated for impairment	$	40,564		$	10,016		$	563		$	23,802		$	9,531	$	1,495

	Year Ended December 31, 2011 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net			Other Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of year	$	97	$	206	$	105		$	4		$	—	$	1,873
Provision charged to expense		28		9		122			4			—		1,319
Losses charged off		—		—		(139	)		(2	)		—		(720	)
Recoveries		—		—		7			—			—		103
Balance, end of year	$	125	$	215	$	95		$	6		$	—	$	2,575
Ending balance: individually evaluated for impairment	$	21	$	—	$	2		$	5		$	—	$	975
Ending balance: collectively evaluated for impairment	$	104	$	215	$	93		$	1		$	—	$	1,600
Loans:
Ending balance	$	4,241	$	14,313	$	6,223		$	152		$	—	$	118,277
Ending balance: individually evaluated for impairment	$	50	$	—	$	9		$	5		$	—	$	7,441
Ending balance: collectively evaluated for impairment	$	4,191	$	14,313	$	6,214		$	147		$	—	$	110,836

Management's opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

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. The Company also analyzes 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.

Although the Company's policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size for impairment as part of the review for establishing specific allowances. The Company's policy also allows for general valuation allowance on certain smaller-balance homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified loans.

There have been no changes to the Company's accounting policies or methodology from the prior periods.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All commercial, agricultural and land development loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company's risk rating system, the Company classifies problem and potential problem loans as "Watch," "Substandard," "Doubtful," and "Loss." The Company uses the following definitions for risk ratings:

Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Watch – Loans classified as watch represent loans with the minimum level of acceptable credit risk and servicing requirements and the borrower has the capacity to perform according to the terms and repayment is expected. However, one or more elements of uncertainty exist.

Special Mention – Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged-off.

The following tables present the credit risk profile of the Company's loan portfolio based on rating category and payment activity as of March 31, 2012 and December 31, 2011, respectively:

	March 31, 2012 Mortgage Loans on Real Estate
	1-4 Family		HELOC and 2nd Mortgage		Multi-Family Residential		Commercial		Farmland		Construction and Land Development
Pass	$	38,469	$	9,417	$	1,163	$	20,533	$	9,419	$	1,273
Watch		1,698		157		—		2,330		—		—
Special Mention		287		36		—		318		—		—
Substandard		3,591		187		911		1,390		—		972
Total	$	44,045	$	9,797	$	2,074	$	24,571	$	9,419	$	2,245

	March 31, 2012 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net		Other Consumer		Total
Pass	$	3,234	$	17,990	$	7,900	$	142	$	109,540
Watch		1,083		—		—		—		5,268
Special Mention		169		—		—		—		810
Substandard		90		—		11		—		7,152
Total	$	4,576	$	17,990	$	7,911	$	142	$	122,770

	December 31, 2011 Mortgage Loans on Real Estate
	1-4 Family		HELOC and 2nd Mortgage		Multi-Family Residential		Commercial		Farmland		Construction and Land Development
Pass	$	38,473	$	9,841	$	563	$	21,905	$	9,531	$	1,495
Watch		1,801		138		—		1,557		—		—
Special Mention		290		37		—		340		—		—
Substandard		3,775		268		917		1,390		—		1,027
Total	$	44,339	$	10,284	$	1,480	$	25,192	$	9,531	$	2,522

	December 31, 2011 (Continued)
	Commercial and Industrial		Agricultural		Purchased Indirect Automobile, Net		Other Consumer		Total
Pass	$	2,967	$	14,313	$	6,214	$	147	$	105,449
Watch		1,051		—		—		—		4,547
Special Mention		173		—		—		—		840
Substandard		50		—		9		5		7,441
Total	$	4,241	$	14,313	$	6,223	$	152	$	118,277

The accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at the earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged-off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present the Company's loan portfolio aging analysis as of March 31, 2012 and December 31, 2011, respectively:

	March 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total  Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Real estate loans:
One-to-four family	$	2,210	$	675	$	1,460	$	4,345	$	39,700	$	44,045	$	—
Home equity lines of credit and other 2nd mortgages		169		—		172		341		9,456		9,797		—
Multi-family		—		—		—		—		2,074		2,074		—
Commercial		—		74		—		74		24,497		24,571		—
Farmland		222		—		—		222		9,197		9,419		—
Construction and land development		—		—		—		—		2,245		2,245		—
Total real estate loans		2,601		749		1,632		4,982		87,169		92,151		—
Commercial and industrial		90		68		—		158		4,418		4,576		—
Agriculture		—		—		—		—		17,990		17,990		—
Consumer loans:
Purchased indirect automobile		10		1		—		11		7,900		7,911		—
Other		4		—		—		4		138		142		—
Total consumer loans		14		1		—		15		8,038		8,053		—
Total	$	2,705	$	818	$	1,632	$	5,155	$	117,615	$	122,770	$	—

	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total  Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Real estate loans:
One-to-four family	$	2,321	$	1,366	$	1,590	$	5,277	$	39,062	$	44,339	$	—
Home equity lines of credit and other 2nd mortgages		88		—		239		327		9,957		10,284		—
Multi-family		—		—		—		—		1,480		1,480		—
Commercial		—		74		—		74		25,118		25,192		—
Farmland		—		—		—		—		9,531		9,531		—
Construction and land development		—		—		—		—		2,522		2,522		—
Total real estate loans		2,409		1,440		1,829		5,678		87,670		93,348		—
Commercial and industrial		—		—		—		—		4,241		4,241		—
Agriculture		—		—		—		—		14,313		14,313		—
Consumer loans:
Purchased indirect automobile		9		—		—		9		6,214		6,223		—
Other		—		—		5		5		147		152		—
Total consumer loans		9		—		5		14		6,361		6,375		—
Total	$	2,418	$	1,440	$	1,834	$	5,692	$	112,585	$	118,277	$	—

At March 31, 2012 and December 31, 2011, the Company held $17,990 and $14,313 in agricultural production loans and $9,419 and $9,531, respectively in farmland loans in the Company's geographic lending area. Generally, those loans are collateralized by assets of the borrower. The loans are expected to be repaid from cash flows or from proceeds of sale of related assets of the borrower. Declines in prices for corn, beans, livestock and farmland could significantly affect the repayment ability for many agricultural loan customers.

At March 31, 2012 and December 31, 2011, the Company held $24,571 and $25,192 in commercial real estate loans and $2,245 and $2,522 in loans collateralized by construction and development real estate primarily in the Company's geographic lending area. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed.

Loans contractually delinquent 30 days or more decreased $537,000 from December 31, 2011 to $5.2 million at March 31, 2012 primarily as a result of a decrease in delinquent one-to-four family real estate loans of $932,000.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Factors considered by management 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. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans 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 by either the present value of the expected future cash flows, the loan's observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.

The Company will restructure loans when the borrower demonstrates the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are initially classified as impaired.

The following tables present impaired loans at March 31, 2012, March 31, 2011 and December 31, 2011, respectively:

	March 31, 2012
	(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific allowance
Real estate loans:
One-to-four family	$	991	$	1,081	$	—	$	1,050	$	8	$	8
Home equity lines of credit and other 2nd mortgages		108		110		—		109		1		1
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		695		6		6
Farmland		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Total real estate loans		1,099		1,191		—		1,854		15		15
Commercial and industrial		40		40		—		20		—		—
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total consumer loans		—		—		—		—		—		—
Total loans	$	1,139	$	1,231	$	—	$	1,874	$	15	$	15
Loans with a specific allowance
Real estate loans:
One-to-four family	$	2,600	$	2,670	$	261	$	2,633	$	21	$	21
Home equity lines of credit and other 2nd mortgages		79		79		70		118		1		1
Multi-family		911		971		253		914		7		7
Commercial		1,390		1,390		67		695		6		6
Farmland		—		—		—		—		—		—
Construction and land development		972		1,107		266		999		8		8
Total real estate loans		5,952		6,217		917		5,359		43		43
Commercial and industrial		50		50		20		50		—		—
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		11		11		4		10		—		—
Other		—		—		—		3		—		—
Total consumer loans		11		11		4		13		—		—
Total loans		6,013		6,278		941		5,422		43		43
Total	$	7,152	$	7,509	$	941	$	7,296	$	58	$	58

	March 31, 2011
	(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific allowance
Real estate loans:
One-to-four family	$	1,228	$	1,248	$	—	$	1,048	$	13
Home equity lines of credit and other 2nd mortgages		117		127		—		88		1
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Farmland		—		—		—		—		—
Construction and land development		—		—		—		—		—
Total real estate loans		1,345		1,375		—		1,136		14
Commercial and industrial		5		5		—		2		—
Agriculture		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		—		—		—		—		—
Other		1		1		—		1		—
Total consumer loans		1		1		—		1		—
Total loans	$	1,351	$	1,381	$	—	$	1,139	$	14
Loans with a specific allowance
Real estate loans:
One-to-four family	$	641	$	654	$	104	$	490	$	6
Home equity lines of credit and other 2nd mortgages		33		33		16		34		—
Multi-family		—		—		—		—		—
Commercial		686		786		155		884		—
Farmland		—		—		—		—		—
Construction and land development		665		707		265		665		—
Total real estate loans		2,025		2,180		540		2,073		6
Commercial and industrial		98		98		20		99		1
Agriculture		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		50		50		13		88		1
Other		—		—		—		—		—
Total consumer loans		50		50		13		88		1
Total loans		2,173		2,328		573		2,260		7
Total	$	3,524	$	3,709	$	573	$	3,399	$	21

	December 31, 2011
	(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific allowance
Real estate loans:
One-to-four family	$	1,109	$	1,245	$	—	$	988	$	47	$	47
Home equity lines of credit and other 2nd mortgages		111		111		—		85		4		4
Multi-family		1,390		1,390		—		695		33		33
Commercial		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Total real estate loans		2,610		2,746		—		1,768		84		84
Commercial and industrial		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		—		—		—		—		—		—
Other		—		—		—		1		—		—
Total consumer loans		—		—		—		1		—		—
Total	$	2,610	$	2,746	$	—	$	1,769	$	84	$	84
Loans with a specific allowance
Real estate loans:
One-to-four family	$	2,666	$	2,716	$	239	$	1,503	$	72	$	72
Home equity lines of credit and other 2nd mortgages		157		157		120		95		5		5
Multi-family		917		977		259		459		22		22
Commercial		—		—		—		541		26		26
Farmland		—		—		—		—		—		—
Construction and land development		1,027		1,107		329		846		41		41
Total real estate loans		4,767		4,957		947		3,444		166		166
Commercial and industrial		50		50		21		75		4		4
Agriculture		—		—		—		—		—		—
Consumer loans:
Purchased indirect automobile		9		9		2		67		3		3
Other		5		5		5		3		—		—
Total consumer loans		14		14		7		70		3		3
Total loans		4,831		5,021		28		3,589		173		173
Total	$	7,441	$	7,767	$	975	$	5,358	$	257	$	257

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.

Included in certain loan categories in the impaired loans are troubled debt restructurings ("TDR"), where economic concessions have been granted to borrowers who have experienced financial difficulties that were classified as impaired. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower's sustained repayment performance for a reasonable period of at least twelve months.

When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or based on the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.

During the quarter ended September 30, 2011, the Company adopted ASU 2011-02. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those receivables newly identified as impaired. As a result of adopting ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011, for identification as TDRs. The Company identified no loans as troubled debt restructurings for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology. Thereafter there was no additional impact to the allowance for loan losses as a result of the adoption.

Given the current adverse economic environment and negative outlook in the residential real estate market, the Company includes in its methodology for the valuation of loans in its real estate portfolio a methodology that applies downward "qualitative" adjustments to the real estate appraised values for residential loans that are deemed impaired. We believe that these qualitative appraisal adjustments more accurately reflect real estate values in light of the sales experience and economic conditions that we have recently observed. As a result of the increased TDR's in residential real estate, the specific and general allowance have been increased in this category since December 31, 2010.

The following table presents the recorded balance, at original cost, of troubled debt restructurings, all of which were performing according to the terms of the restructuring, as of March 31, 2012 and December 31, 2011:

(Dollars in thousands)	March 31, 2012		December 31, 2011
Real estate loans:
One-to-four family	$	1,678	$	1,890
Home equity lines of credit and other 2nd mortgages		—		—
Multi-family		911		917
Commercial		1,390		—
Farmland		—		—
Construction and land development		972		1,027
Total real estate loans		4,951		3,834
Commercial and industrial		—		—
Agriculture		—		—
Consumer loans:
Purchased indirect automobile		—		—
Other		—		—
Total consumer loans		—		—
Total	$	4,951	$	3,834

The following table represents loans modified as troubled debt restructures during the three month period ended March 31, 2012:

	Three Months Ended March 31, 2012
(Dollars in thousands)	Number of Modifications		Recorded Investment
Real estate loans:
One-to-four family		1	$	65
Home equity lines of credit and other 2nd mortgages		—		—
Multi-family		—		—
Commercial		1		1,390
Farmland		—		—
Construction and land development		—		—
Total real estate loans		2		1,455
Commercial and industrial		—		—
Agriculture		—		—
Consumer loans:
Purchased indirect automobile		—		—
Other		—		—
Total consumer loans		—		—
Total		2	$	1,455

During the three month period ended March 31, 2012, the Company modified one residential real estate loan, with a recorded investment of $65 prior to modification, which was deemed a TDR. The modification involved both an interest rate and maturity concession, which resulted in an impairment loss of $1 based upon the present value of expected future cash flows. During the three months ended March 31, 2012, the Company modified one commercial real estate loan totaling $1,390 involving a maturity concession only, which resulted in no impairment loss and specific allowances of $67 based upon the fair value of the collateral.

As of March 31, 2012 there were no loans in default that had been modified within the previous 12 months as a troubled debt restructuring.

The following table presents the Company's nonaccrual loans at March 31, 2012 and December 31, 2011. Nonaccrual loans include troubled debt restructurings of $4,792 and $3,834 at March 31, 2012 and December 31, 2011, respectively, all of which are performing according to the terms of the restructuring.

	March 31, 2012		December 31, 2011
Mortgages on real estate:
One-to-four family	$	3,591	$	3,775
Home equity lines of credit and other 2nd mortgages		180		268
Multi-family residential		911		917
Commercial		1,390		1,390
Construction and land development		972		1,027
Commercial and industrial		90		50
Purchased indirect automobile		—		—
Other consumer		—		5
Total	$	7,134	$	7,432

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Commitments

3 Months Ended

Mar. 31, 2012

Commitments [Abstract]

Commitments

Note 12:    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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Consolidated Statements Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements Of Comprehensive Income [Abstract]
Net Income	$ 151	$ 56
Other Comprehensive Income
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $4 and $(1), for 2012 and 2011, respectively	7	(4)
Less: reclassification adjustment for loss on other-than-temporary impairment of equity securities included in net income, net of taxes of $0 and $0, for 2012 and 2011, respectively	(1)
Comprehensive Income	$ 157	$ 52

XML

Basis Of Financial Statement Presentation

3 Months Ended

Mar. 31, 2012

Basis Of Financial Statement Presentation [Abstract]

Basis Of Financial Statement Presentation

Note 1:    Basis of Financial Statement Presentation

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

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 March 31, 2012 and December 31, 2011, and the results of its operations for the three month periods ended March 31, 2012 and 2011. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2011 included as part of Harvard Illinois Bancorp, Inc.'s Form 10-K (File No. 000-53935) (2011 Form 10-K) filed with the Securities and Exchange Commission on March 27, 2012.

The results of operations for the three month period ended March 31, 2012 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 2011 Form 10–K.

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Disclosures About Fair Value Of Assets And Liabilities

3 Months Ended

Mar. 31, 2012

Disclosures About Fair Value Of Assets And Liabilities [Abstract]

Disclosures About Fair Value Of Assets And Liabilities

Note 11:    Disclosures About Fair Value of Assets and Liabilities

Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of 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

Recurring Measurements

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 March 31, 2012 and December 31, 2011 (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)
March 31, 2012:
Available-for-sale securities:
US Government and federal agency	$	2,457	$	—	$	2,457	$	—
Mortgage-backed securities – GSE residential		878		—		878		—
Equity securities		472		11		461		—
Mortgage servicing rights		365		—		—		365

			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, 2011:
Available-for-sale securities:
US Government and federal agency	$	3,214	$	—	$	3,214	$	—
Mortgage-backed securities – GSE residential		906		—		906		—
Equity securities		461		11		450		—
Mortgage servicing rights		310		—		—		310

Following is a description of the valuation methodologies and inputs used for assets 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. There have been no significant changes in the valuation techniques during the period ended March 31, 2012. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. 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. As of March 31, 2012 and December 31, 2011, there were no securities classified as Level 3.

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.

Level 3 Reconciliation

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):

	Mortgage Servicing Rights
Balance, January 1, 2012	$	310
Total realized and unrealized gains and losses included in net income		50
Servicing rights that result from asset transfers		27
Loans refinanced		(22	)
Balance, March 31, 2012	$	365
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	$	—

Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as noninterest income.

Nonrecurring Measurements

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 March 31, 2012 and December 31, 2011 (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)
March 31, 2012:
Impaired loans (collateral dependent)	$	6,211	$	—	$	—	$	6,211
Foreclosed assets		525		—		—		525
December 31, 2011:
Impaired loans (collateral dependent)	$	3,706	$	—	$	—	$	3,706
Foreclosed assets		932		—		—		932

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. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Controller's office. Appraisals are reviewed for accuracy and consistency by the Controller's office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Controller's office by comparison to historical results.

Foreclosed Assets

Foreclosed assets consist primarily of real estate owned. Real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Controller's office. Appraisals are reviewed for accuracy and consistency by the Controller's office. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (dollars in thousands).

	Fair Value at March 31, 2012		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Foreclosed assets	$	6,211	Market comparable properties	Comparability adjustments (%)	Not available
Collateral-dependent impaired loans		525	Market comparable properties	Marketability discount	10% – 30% (22%)
Mortgage servicing rights		365	Discounted cash flow	Discount rate PSA standard prepayment model rate	9% – 11% (10%) 383 – 561 (476)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company's financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 (in thousands).

	Carrying Amount		Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2012:
Financial assets
Cash and cash equivalents	$	21,535	$	21,535	$	—	$	—
Interest-bearing deposits with other financial institutions		8,022		8,022		—		—
Held-to-maturity securities		1,537		—		1,648		—
Loans, net of allowance for loan losses		120,091		—		—		122,027
Federal Home Loan Bank stock		3,532		—		3,532		—
Accrued interest receivable		434		—		434		—
Financial liabilities
Deposits		136,508		—		—		138,481
Federal Home Loan Bank advances		11,330		—		11,787		—
Advances from borrowers for taxes and insurance		622		—		622		—
Accrued interest payable		38		—		38		—
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

	December 31, 2011
	Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	22,227	$	22,227
Interest-bearing deposits with other financial institutions		6,235		6,235
Available-for-sale securities		4,581		4,581
Held-to-maturity securities		1,702		1,837
Loans, net of allowance for loan losses		115,698		117,598
Federal Home Loan Bank stock		6,549		6,549
Mortgage servicing rights		310		310
Interest receivable		691		691
Financial liabilities
Deposits		135,069		135,870
Federal Home Loan Bank advances		12,402		12,885
Advances from borrowers for taxes and insurance		388		388
Interest payable		37		37
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—
Letters of credit		—		—
Lines of credit		—		—

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 with Other Institutions, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued 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 securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, defaults, cumulative loss projections and cash flows.

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.