UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2012
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number: 0-21765

RIVER VALLEY BANCORP

(Exact name of registrant as specified in its charter)

Indiana	35-1984567
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
430 Clifty Drive Madison, Indiana	47250
(Address of principal executive offices)	(Zip Code)

(812) 273-4949

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 electronically and posted on its corporate Web site, 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 that the registrant was required to submit and post such files).

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. (Check One):

Large Accelerated Filer¨	Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)	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

The number of shares of the Registrant’s common stock, without par value, outstanding as of November 13, 2012, was 1,524,872.

RIVER VALLEY BANCORP

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Operations	4
	Consolidated Condensed Statements of Comprehensive Income	5
	Consolidated Condensed Statements of Cash Flows	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	45
Item 4.	Controls and Procedures	46
PART II. OTHER INFORMATION		46
Item 1.	Legal Proceedings	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
SIGNATURES		48
EXHIBIT INDEX		49

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RIVER VALLEY BANCORP

Consolidated Condensed Balance Sheets

	September 30, 2012			December 31, 2011
	(Unaudited)
	(In Thousands, Except Share Amounts)
Assets
Cash and due from banks	$	1,940		$	1,881
Interest-bearing demand deposits		4,545			14,928
Federal funds sold		1,907			1,905
Cash and cash equivalents		8,392			18,714
Investment securities available for sale		112,201			104,689
Loans held for sale		1,358			87
Loans		257,622			257,099
Allowance for loan losses		(3,642	)		(4,003	)
Net loans		253,980			253,096
Premises and equipment, net		7,759			8,091
Real estate, held for sale		1,221			2,487
Federal Home Loan Bank stock		4,226			4,226
Interest receivable		2,160			1,996
Cash value of life insurance		10,086			9,855
Goodwill		79			79
Other assets		2,972			3,323
Total assets	$	404,434		$	406,643
Liabilities
Deposits
Noninterest-bearing	$	31,807		$	24,468
Interest-bearing		271,353			280,758
Total deposits		303,160			305,226
Borrowings		62,217			65,217
Interest payable		321			401
Other liabilities		4,065			2,842
Total liabilities		369,763			373,686
Commitments and Contingencies
Stockholders’ Equity
Preferred stock – liquidation preference $1,000 per share – no par value
Authorized – 2,000,000 shares
Issued and outstanding – 5,000 shares		5,000			5,000
Common stock, no par value
Authorized – 5,000,000 shares
Issued and outstanding – 1,524,872 and 1,514,472 shares		7,691			7,523
Retained earnings		19,518			18,617
Accumulated other comprehensive income		2,462			1,817
Total stockholders’ equity		34,671			32,957
Total liabilities and stockholders’ equity	$	404,434		$	406,643

See Notes to Consolidated Condensed Financial Statements.

3

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Operations

(Unaudited)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2012			2011			2012			2011
	(In Thousands, Except Share Amounts)
Interest Income
Loans receivable	$	10,714		$	11,215		$	3,596		$	3,732
Investment securities		2,105			2,037			687			711
Interest-earning deposits and other		120			107			40			36
Total interest income		12,939			13,359			4,323			4,479
Interest Expense
Deposits		2,039			2,633			638			864
Borrowings		1,766			1,775			592			600
Total interest expense		3,805			4,408			1,230			1,464
Net Interest Income		9,134			8,951			3,093			3,015
Provision for loan losses		1,064			2,297			268			1,449
Net Interest Income After Provision for Loan Losses		8,070			6,654			2,825			1,566
Other Income
Service fees and charges		1,554			1,431			557			516
Net realized gains on sale of available-for-sale securities		450			270			119			105
Net gains on loan sales		844			367			335			138
Interchange fee income		327			303			107			103
Increase in cash value of life insurance		231			242			77			81
Loss on premises, equipment and real estate held for sale		(566	)		(683	)		(172	)		(533	)
Other income		245			54			81			(15	)
Total other income		3,085			1,984			1,104			395
Other Expenses
Salaries and employee benefits		4,295			3,945			1,395			1,329
Net occupancy and equipment expenses		1,069			1,069			359			363
Data processing fees		333			312			118			101
Advertising		294			318			93			128
Mortgage servicing rights		199			87			82			45
Office supplies		98			92			31			30
Professional fees		289			291			97			111
Federal Deposit Insurance Corporation assessment		257			290			90			47
Loan-related expenses		441			152			118			73
Acquisition expense		235			33			111			33
Other expenses		944			812			311			290
Total other expenses		8,454			7,401			2,805			2,550
Income (Loss) Before Income Tax		2,701			1,237			1,124			(589	)
Income tax expense (benefit)		572			21			278			(382	)
Net Income (Loss)		2,129			1,216			846			(207	)
Preferred stock dividends		(272	)		(272	)		(91	)		(91	)
Net Income (Loss) Available to Common Stockholders	$	1,857		$	944		$	755		$	(298	)
Basic earnings per common share	$	1.23		$	.62		$	.50		$	(.20	)
Diluted earnings per common share		1.22			.62			.50			(.20	)
Dividends per share		.63			.63			.21			.21

See Notes to Consolidated Condensed Financial Statements.

4

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

	Nine Months Ended September 30,				Three Months Ended September 30,
	2012		2011		2012		2011
	(In Thousands)
Net income (loss)	$	2,129	$	1,216	$	846	$	(207	)
Other comprehensive income, net of tax
Unrealized gains on securities available for sale
Unrealized holding gains arising during the period, net of tax expense of $503, $990, $275 and $424		933		1,805		511		770
Less: Reclassification adjustment for gains included in net income, net of tax expense of $162, $94, $45 and $38		288		176		74		67
		645		1,629		437		703
Comprehensive income	$	2,774	$	2,845	$	1,283	$	496

See Notes to Consolidated Condensed Financial Statements.

5

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
	(In Thousands)
Operating Activities
Net income	$	2,129		$	1,216
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		1,064			2,297
Depreciation and amortization		504			441
Investment securities gains		(450	)		(270	)
Loans originated for sale in the secondary market		(25,685	)		(12,932	)
Proceeds from sale of loans in the secondary market		25,017			13,020
Gain on sale of loans		(844	)		(367	)
Amortization of net loan origination cost		107			103
Loss on premises, equipment and real estate held for sale		566			683
Employee Stock Ownership Plan compensation		23			26
Net change in
Interest receivable		(164	)		(9	)
Interest payable		(80	)		(87	)
Prepaid Federal Deposit Insurance Corporation assessment		242			268
Other adjustments		1,036			(292	)
Net cash provided by operating activities		3,465			4,097
Investing Activities
Proceeds from sale of FHLB Stock		-			270
Purchases of securities available for sale		(31,071	)		(31,803	)
Proceeds from maturities of securities available for sale		18,270			7,057
Proceeds from sales of securities available for sale		6,561			7,585
Net change in loans		(3,699	)		3,602
Purchases of premises and equipment		(172	)		(585	)
Proceeds from sale of real estate acquired through foreclosure		2,373			893
Other investing activity		(62	)		(182	)
Net cash used in investing activities		(7,800	)		(13,163	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		2,134			6,046
Certificates of deposit		(4,200	)		6,753
Proceeds from borrowings		-			15,000
Repayment of borrowings		(3,000	)		(15,000	)
Cash dividends		(1,226	)		(1,226	)
Proceeds from exercise of stock options		140			-
Acquisition of stock for stock benefit plans		-			(16	)
Advances by borrowers for taxes and insurance		165			126
Net cash provided by (used in) financing activities		(5,987	)		11,683
Net Change in Cash and Cash Equivalents		(10,322	)		2,617
Cash and Cash Equivalents, Beginning of Period		18,714			16,788
Cash and Cash Equivalents, End of Period	$	8,392		$	19,405
Additional Cash Flows and Supplementary Information
Interest paid	$	3,885		$	4,495
Income tax paid, net of refunds		309			388
Transfers to real estate held for sale		1,643			4,311

See Notes to Consolidated Condensed Financial Statements.

6

RIVER VALLEY BANCORP

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

River Valley Bancorp (the “Corporation” or the “Company”) is a unitary savings and loan holding company whose activities are primarily limited to holding the stock of River Valley Financial Bank (“River Valley” or the “Bank”). The Bank conducts a general banking business in southeastern Indiana and Carroll County, Kentucky which consists of attracting deposits from the general public and applying those funds to the origination of loans for consumer, residential and commercial purposes. River Valley’s profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of competitive factors, such as governmental monetary policy, that are outside of management’s control.

NOTE 1: BASIS OF PRESENTATION

The accompanying consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation included in the Annual Report on Form 10-K for the year ended December 31, 2011. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and nine-month periods ended September 30, 2012, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Corporation as of December 31, 2011 has been derived from the audited consolidated balance sheet of the Corporation as of that date.

NOTE 2: PRINCIPLES OF CONSOLIDATION

The consolidated condensed financial statements include the accounts of the Corporation and its subsidiary, the Bank. The Bank currently owns four subsidiaries. Madison 1st Service Corporation, which was incorporated under the laws of the State of Indiana on July 3, 1973, currently holds land and cash but does not otherwise engage in significant business activities. RVFB Investments, Inc., RVFB Holdings, Inc., and RVFB Portfolio, LLC were established in Nevada the latter part of 2005. They hold and manage a significant portion of the Bank’s investment portfolio. All significant inter-company balances and transactions have been eliminated in the accompanying consolidated condensed financial statements.

7

NOTE 3: EARNINGS PER SHARE

Earnings per share have been computed based upon the weighted average common shares outstanding.

	Nine Months Ended						Nine Months Ended
	September 30, 2012						September 30, 2011
	Income		Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(Unaudited; In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	1,857		1,515,587	$	1.23	$	944		1,514,472	$	.62
Effect of dilutive RRP awards and stock options				2,021						2,034
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	1,857		1,517,608	$	1.22	$	944		1,516,506	$	.62

	Three Months Ended						Three Months Ended
	September 30, 2012						September 30, 2011
	Income		Weighted Average Shares		Per Share Amount		Income			Weighted Average Shares		Per Share Amount
	(Unaudited; In Thousands, Except Share Amounts)
Basic earnings per share
Income (Loss) available to common stockholders	$	755		1,517,793	$	.50	$	(298	)		1,514,472	$	(.20	)
Effect of dilutive RRP awards and stock options				2,378							-
Diluted earnings per share
Income (Loss) available to common stockholders and assumed conversions	$	755		1,520,171	$	.50	$	(298	)		1,514,472	$	(.20	)

Net income for the nine-month period ending September 30, 2012, of $2,129,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $1,857,000. For the nine-month period ending September 30, 2011, net income of $1,216,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $944,000.

Net income for the three-month period ending September 30, 2012, of $846,000 was reduced by $91,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $755,000. For the three-month period ending September 30, 2011, net loss of $207,000 was increased by $91,000 for dividends on preferred stock in the same period, to arrive at a loss of $298,000.

Certain groups of options were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares. For the three-month and nine-month periods ended September 30, 2012 and September 30, 2011, options to purchase 5,000 shares at an exercise price of $22.25 per share were outstanding and were not included in the computation of diluted earnings for those periods.  In addition, for the three months ended September 30, 2011, options to purchase 8,400 shares and 19,000 shares at exercise prices of $13.25 and $14.56 per share were also outstanding and were not included in the computation of diluted earnings per share due to the net loss reported for that period.

8

NOTE 4: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Corporation recognizes fair values in accordance with Financial Accounting Standards Codification (ASC) Topic 820. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

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

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Corporation does not currently hold any Level 1 securities. If quoted market prices are not available, then fair values are estimated by using pricing models which utilize certain market information or quoted prices of securities with similar characteristics (Level 2). For securities where quoted prices, market prices of similar securities or pricing models which utilize observable inputs are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. Rating agency industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into calculations. Level 2 securities include residential mortgage-backed agency securities, federal agency securities, municipal securities and corporate bonds. Securities classified within Level 3 of the hierarchy include pooled trust preferred securities which are less liquid securities.

Fair value determinations for Level 3 measurements of securities are the responsibility of the VP of Finance. The VP of Finance contracts with a third party pricing specialist who generates fair value estimates on a quarterly basis. The VP of Finance’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

9

The following tables present 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 ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011, respectively.

			September 30, 2012
			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)
	(Unaudited; In Thousands)
Available-for-sale securities
Federal agencies	$	37,990	$	-	$	37,990	$	-
State and municipal		32,132		-		32,132		-
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		38,461		-		38,461		-
Corporate		3,618		-		2,436		1,182
Total	$	112,201	$	-	$	111,019	$	1,182

			December 31, 2011
			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)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	37,917	$	-	$	37,917	$	-
State and municipal		28,715		-		28,715		-
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		34,697		-		34,697		-
Corporate		3,360		-		2,270		1,090
Total	$	104,689	$	-	$	103,599	$	1,090

10

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011:

	Available-For-Sale Securities
	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	(Unaudited; In Thousands)
Beginning balance	$	1,090		$	936
Total realized and unrealized gains and losses
Amortization included in net income		6			6
Unrealized gains included in other comprehensive income		105			231
Purchases		-			-
Pay downs		(19	)		(10	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,182		$	1,163
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	$	-		$	-

	Available-For-Sale Securities
	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011
	(Unaudited; In Thousands)
Beginning balance	$	1,146		$	1,169
Total realized and unrealized gains and losses
Amortization included in net income		2			3
Unrealized gains (losses) included in other comprehensive income		46			(6	)
Purchases		-			-
Pay downs		(12	)		(3	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,182		$	1,163
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	$	-		$	-

There were no realized or unrealized gains or losses of Level 3 securities included in net income for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011.

11

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011.

				September 30, 2012
				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)
		(Unaudited; In Thousands)
Impaired loans		$	4,643		$	-		$	-		$	4,643
Real estate held for sale			936			-			-			936
				December 31, 2011
				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)
		(In Thousands)
Impaired loans		$	5,611		$	-		$	-		$	5,611
Real estate held for sale			752			-			-			752

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

Impaired Loans (Collateral Dependent)

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

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

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

The Corporation 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 policy. Appraisals are reviewed for accuracy and consistency by loan review personnel and reported to management. 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 loan review personnel by comparison to historical results.

12

Real Estate Held for Sale

Real estate held for sale is carried at the fair value less cost to sell and is periodically evaluated for impairment. Real estate held for sale recorded during the current accounting period is recorded at fair value less cost to sell and is disclosed as a nonrecurring measurement. Appraisals of real estate held for sale are obtained when the real estate is acquired and subsequently as deemed necessary by policy. Appraisals are reviewed for accuracy and consistency by loan review personnel and reported to management. Appraisers are selected from the list of approved appraisers maintained by management. Real estate held for sale is classified within Level 3 of the fair value hierarchy.

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring and nonrecurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Unobservable (Level 3) Inputs

The following table represents quantitative information about Level 3 fair value measurements:

	Fair Value at September 30, 2012	Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Unaudited; In Thousands)
Impaired loans	$4,643	Comparative sales based on independent appraisal	Marketability Discount	10%-20	%
Real estate held for sale	$   936	Comparative sales based on independent appraisal	Marketability Discount	10%-20	%
Securities available for sale
Pooled Trust Preferred	$1,182	Discounted cash flows	*Default probability	2.81%-4.93	%
			*Loss, given default	100	%
			*Asset correlation	30%-50	%
			*Recovery rate	0	%
			*Prepayment rate	0	%

Sensitivity of Significant Unobservable Inputs

Securities Available for Sale - Pooled Trust Preferred Securities

Pooled trust preferred securities are collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full discounted cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third party specialist with direct industry experience in pooled trust preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled trust preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security, and terms of the security’s structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current/near term operating conditions, prepayment projections, credit loss assumptions, and the impact of macroeconomic and regulatory changes. Where available, actual trades of securities with similar characteristics are used to further support the value. The cumulative probability of default ranges from a low of 2.81% to 4.93%, and the estimates used for loss given default are 100%.

The significant unobservable inputs used in the fair value measurement of the Corporation’s pooled trust preferred securities are probability of default, estimated loss given default, asset correlation for issuers in the same industry (50%) and different industries (30%), and recovery and prepayment rates. Significant increases (decreases) in any of those inputs in isolation could result in a significant change in the fair value measurement.

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The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value.

Loans Held for Sale - Fair values are based on quoted market prices.

Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.

Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.

Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.

Borrowings - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt or as applicable, based on quoted market prices for the identical liability when traded as an asset.

Off-balance sheet Commitments - Commitments include commitments to originate mortgage and consumer loans and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amounts of these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments.

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The following tables present estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 and the fair values of the Corporation’s financial instruments at December 31, 2011.

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Unaudited; In Thousands)
September 30, 2012:
Assets
Cash and cash equivalents	$	8,392	$	8,392	$	-	$	-
Investment securities available for sale		112,201		-		111,019		1,182
Loans, held for sale		1,358		-		1,358		-
Loans, net of allowance for losses		253,980		-		-		274,438
Stock in Federal Home Loan Bank		4,226		-		4,226		-
Interest receivable		2,160		-		2,160
Liabilities
Deposits		303,160		-		305,120		-
Borrowings		62,217		-		58,982		6,651
Interest payable		321		-		321		-

	Carrying Amount		Fair Value
	(In Thousands)
December 31, 2011:
Assets
Cash and cash equivalents	$	18,714	$	18,714
Investment securities available for sale		104,689		104,689
Loans, held for sale		87		87
Loans, net of allowance for losses		253,096		260,907
Stock in Federal Home Loan Bank		4,226		4,226
Interest receivable		1,996		1,996
Liabilities
Deposits		305,226		309,156
Borrowings		65,217		68,546
Interest payable		401		401

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NOTE 5:  INVESTMENT SECURITIES

The amortized cost and approximate fair values of securities as of September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Unaudited; In Thousands)
Available-for-sale Securities
Federal agencies	$	37,099	$	891	$	-		$	37,990
State and municipal		30,022		2,114		(4	)		32,132
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		37,142		1,325		(6	)		38,461
Corporate		4,127		57		(566	)		3,618
Total investment securities	$	108,390	$	4,387	$	(576	)	$	112,201
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	37,107	$	844	$	(34	)	$	37,917
State and municipal		27,076		1,663		(24	)		28,715
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		33,565		1,138		(6	)		34,697
Corporate		4,115		-		(755	)		3,360
Total investment securities	$	101,863	$	3,645	$	(819	)	$	104,689

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The amortized cost and fair value of available-for-sale securities at September 30, 2012, by contractual maturity, are shown below. 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
	Amortized Cost		Fair Value
	(Unaudited; In Thousands)
Within one year	$	5,358	$	5,415
One to five years		21,945		22,670
Five to ten years		25,736		26,671
After ten years		18,209		18,984
		71,248		73,740
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		37,142		38,461
Totals	$	108,390	$	112,201

No securities were pledged at September 30, 2012 or at December 31, 2011 to secure FHLB advances. Securities with a carrying value of $47,628,000 and $14,562,000 were pledged at September 30, 2012 and December 31, 2011 to secure public deposits and for other purposes as permitted or required by law.

Beginning July 30, 2012 the Indiana Board for Depositories required the Corporation to pledge securities equal to 50% of the average daily balance of public funds as reported each quarter. Of the total pledged at September 30, 2012, $33,979,000 was for this purpose. The requirement was removed effective October 2012.

Proceeds from sales of securities available for sale during the nine-month periods ended September 30, 2012 and September 30, 2011 were $6,561,000 and $7,585,000. Gross gains of $450,000 and $270,000 resulting from sales and calls of available-for-sale securities were realized for the nine-month periods ended September 30, 2012 and September 30, 2011, respectively. No losses were recorded for the nine-month periods ended September 30, 2012 or September 30, 2011. Proceeds from sales of securities available for sale during the three-month periods ended September 30, 2012 and September 30, 2011 were $1,740,000 and $4,251,000. Gross gains of $119,000 and $105,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended September 30, 2012 and September 30, 2011, respectively. No losses were recorded for the three-month periods ended September 30, 2012 or September 30, 2011.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2012 was $3,123,000, which is approximately 2.78% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2011 was $10,869,000, which represented 10.4% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting credit portion of the loss recognized in net income and the noncredit portion of the loss would be recognized in accumulated other comprehensive income in the period the other-than-temporary impairment is identified.

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The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011:

	September 30, 2012
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Unaudited; In Thousands)
State and municipal	$	645	$	(4	)	$	-	$	-		$	645	$	(4	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		1,296		(6	)		-		-			1,296		(6	)
Corporate		-		-			1,182		(566	)		1,182		(566	)
Total temporarily impaired securities	$	1,941	$	(10	)	$	1,182	$	(566	)	$	3,123	$	(576	)
	December 31, 2011
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Federal agencies	$	4,991	$	(34	)	$	-	$	-		$	4,991	$	(34	)
State and municipal		733		(20	)		773		(4	)		1,506		(24	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		1,012		(6	)		-		-			1,012		(6	)
Corporate		2,270		(84	)		1,090		(671	)		3,360		(755	)
Total temporarily impaired securities	$	9,006	$	(144	)	$	1,863	$	(675	)	$	10,869	$	(819	)

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State and Municipal

The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were primarily caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2012.

Government- Sponsored Enterprise (GSE) Residential Mortgage-Backed and Other Asset-Backed Agency Securities

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost bases over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2012.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at September 30, 2012 of $513,000 and $53,000, respectively. At December 31, 2011, the unrealized losses on these two investments were $412,000 and $259,000, respectively. These two securities are both “A” tranche investments (A2A and A-1 respectively) and have performed as agreed since purchase. The two are rated B2 and Baa3, respectively, by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent 1.6% of the book value of the Corporation’s investment portfolio and approximately 1.1% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and the Corporation expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at September 30, 2012.

NOTE 6:  LOANS AND ALLOWANCE

The Corporation’s loan and allowance policies are as follows:

Loans

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances, adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

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Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Corporation’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except one-to-four family residential properties and consumer, the Corporation promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Corporation charges off one-to-four family residential and consumer loans, or portions thereof, when the Corporation reasonably determines the amount of the loss. The Corporation adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Corporation can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

For all loan classes, when loans are placed on nonaccrual, or charged off, interest accrued but not collected is reversed against interest income. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. In general, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. However, for impaired loans and troubled debt restructured, which is included in impaired loans, the Corporation requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

When cash payments are received on impaired loans in each loan class, the Corporation records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

Allowance 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 management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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

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The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the prior three years. Management believes the three-year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Corporation utilizes the discounted cash flows to determine the level of impairment, the Corporation includes the entire change in the present value of cash flows as provision expense.

Segments of loans with similar risk 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, the Corporation does not separately identify individual consumer and residential loans for impairment measurements.

The following table presents the breakdown of loans as of September 30, 2012 and December 31, 2011.

	September 30, 2012			December 31, 2011
	(Unaudited)
	(In Thousands)
Residential real estate
Construction	$	6,753		$	8,308
One-to-four family residential		111,330			111,198
Multi-family residential		18,267			18,582
Nonresidential real estate and agricultural land		101,512			83,284
Land (not used for agricultural purposes)		16,540			19,081
Commercial		19,414			17,349
Consumer and other		3,668			3,840
		277,484			261,642
Unamortized deferred loan costs		490			481
Undisbursed loans in process		(20,352	)		(5,024	)
Allowance for loan losses		(3,642	)		(4,003	)
Total loans	$	253,980		$	253,096

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The risk characteristics of each loan portfolio segment are as follows:

Construction

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest-rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

One-to-Four Family Residential and Consumer

With respect to residential loans that are secured by one-to-four family residences and are generally owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. This segment also includes residential loans secured by non-owner occupied one-to-four family residences. Management tracks the level of owner-occupied residential loans versus non-owner occupied loans as a portion of our recent loss history relates to these loans. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Nonresidential (including agricultural land), Land, and Multi-family Residential Real Estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Nonresidential and multi-family residential real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Nonresidential and multi-family residential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s nonresidential and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates these loans based on collateral, geography and risk grade criteria. As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied real estate loans versus non-owner occupied loans.

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio segment and impairment method, as of September 30, 2012 and December 31, 2011.

	Residential
	Construction			1-4 Family			Multi-Family		Nonresidential			Land			Commercial		Consumer			Total
	(Unaudited; In Thousands)
Three Months Ended September 30, 2012 Balances at beginning of period:	$	4		$	1,390		$	283	$	1,091		$	730		$	8	$	15		$	3,521
Provision for losses		22			(13	)		5		301			(145	)		82		16			268
Loans charged off		-			(32	)		-		(102	)		-			-		(20	)		(154	)
Recoveries on loans		-			-			-		3			-			-		4			7
Balances at end of period	$	26		$	1,345		$	288	$	1,293		$	585		$	90	$	15		$	3,642
Nine Months Ended September 30, 2012 Balances at beginning of period:	$	23		$	1,986		$	65	$	822		$	993		$	70	$	44		$	4,003
Provision for losses		(1	)		273			223		599			(68	)		20		18			1,064
Loans charged off		-			(994	)		-		(131	)		(340	)		-		(65	)		(1,530	)
Recoveries on loans		4			80			-		3			-			-		18			105
Balances at end of period	$	26		$	1,345		$	288	$	1,293		$	585		$	90	$	15		$	3,642
As of September 30, 2012 Allowance for losses:
Individually evaluated for impairment:	$	-		$	184		$	195	$	45		$	196		$	-	$	-		$	620
Collectively evaluated for impairment:		26			1,161			93		1,248			389			90		15			3,022
Balances at end of period	$	26		$	1,345		$	288	$	1,293		$	585		$	90	$	15		$	3,642