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
Loans:
Individually evaluated for impairment:	$	121		$	5,176		$	1,118	$	3,824		$	4,429		$	573	$	14		$	15,255
Collectively evaluated for impairment:		6,632			106,154			17,149		97,688			12,111			18,841		3,654			262,229
Balances at end of period	$	6,753		$	111,330		$	18,267	$	101,512		$	16,540		$	19,414	$	3,668		$	277,484

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	Residential
	Construction			1-4 Family			Multi-Family			Nonresidential			Land			Commercial			Consumer			Total
	(Unaudited; In Thousands)
Three Months Ended September 30, 2011 Balances at beginning of period:	$	32		$	1,088		$	108		$	1,226		$	959		$	113		$	63		$	3,589
Provision for losses		(11	)		675			23			69			690			(27	)		30			1,449
Loans charged off		-			(116	)		-			(381	)		(736	)		-			(34	)		(1,267	)
Recoveries on loans		-			-			-			-			-			-			9			9
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
Nine Months Ended September 30, 2011 Balances at beginning of period:	$	35		$	746		$	138		$	1,632		$	976		$	157		$	122		$	3,806
Provision for losses		(14	)		1,354			(7	)		290			755			(71	)		(10	)		2,297
Loans charged off		-			(453	)		-			(1,008	)		(818	)		-			(77	)		(2,356	)
Recoveries on loans		-			-			-			-			-			-			33			33
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780

	Residential
	Construction		1-4 Family		Multi-Family		Nonresidential		Land		Commercial		Consumer		Total
	(In Thousands)
As of December 31, 2011
Allowance for losses:
Individually evaluated for impairment:	$	-	$	913	$	-	$	-	$	519	$	-	$	-	$	1,432
Collectively evaluated for impairment:		23		1,073		65		822		474		70		44		2,571
Balances at end of period	$	23	$	1,986	$	65	$	822	$	993	$	70	$	44	$	4,003
Loans:
Individually evaluated for impairment:	$	-	$	6,331	$	1,966	$	3,705	$	4,972	$	271	$	17	$	17,262
Collectively evaluated for impairment:		8,308		104,867		16,616		79,579		14,109		17,078		3,823		244,380
Balances at end of period	$	8,308	$	111,198	$	18,582	$	83,284	$	19,081	$	17,349	$	3,840	$	261,642

24

The following tables present the credit risk profile of the Corporation’s loan portfolio based on rating category as of September 30, 2012 and December 31, 2011:

September 30, 2012	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(Unaudited; In Thousands)
Construction	$	6,753	$	6,632	$	-	$	121	$	-
1-4 family residential		111,330		101,551		3,684		6,095		-
Multi-family residential		18,267		17,150		-		1,117		-
Nonresidential		101,512		94,057		3,606		3,849		-
Land		16,540		11,818		258		4,464		-
Commercial		19,414		18,790		3		621		-
Consumer		3,668		3,654		-		14		-
Total Loans	$	277,484	$	253,652	$	7,551	$	16,281	$	-

December 31, 2011	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	8,308	$	8,308	$	-	$	-	$	-
1-4 family residential		111,198		100,827		2,891		7,429		51
Multi-family residential		18,582		16,616		-		1,966		-
Nonresidential		83,284		75,966		3,441		3,877		-
Land		19,081		13,457		505		5,119		-
Commercial		17,349		16,685		329		335		-
Consumer		3,840		3,796		22		22		-
Total Loans	$	261,642	$	235,655	$	7,188	$	18,748	$	51

Credit Quality Indicators

The Corporation categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually on an ongoing basis by classifying the loans as to credit risk, assigning grade classifications. Loan grade classifications of special mention, substandard, doubtful, or loss are reported to the Corporation’s board of directors monthly. The Corporation uses the following definitions for credit risk grade classifications:

Pass: Loans not meeting the criteria below are considered to be pass rated loans.

Special Mention: These assets are currently protected, but potentially weak. They have credit deficiencies deserving a higher degree of attention by management. These assets do not presently exhibit a sufficient degree of risk to warrant adverse classification. Concerns may lie with cash flow, liquidity, leverage, collateral, or industry conditions. These are graded special mention so that the appropriate level of attention is administered to prevent a move to a “substandard” rating.

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Substandard: By regulatory definition, “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. These types of loans have well defined weaknesses that jeopardize the liquidation of the debt. A distinct possibility exists that the institution will sustain some loss if the deficiencies are not corrected. These loans are considered workout credits. They exhibit at least one of the following characteristics.

·   An expected loan payment is in excess of 90 days past due (non-performing), or non-earning.

·   The financial condition of the borrower has deteriorated to such a point that close monitoring is necessary. Payments do not necessarily have to be past due.

·   Repayment from the primary source of repayment is gone or impaired.

·   The borrower has filed for bankruptcy protection.

·   The loans are inadequately protected by the net worth and cash flow of the borrower.

·   The guarantors have been called upon to make payments.

·   The borrower has exhibited a continued inability to reduce principal (although interest payment may be current).

·   The Corporation is considering a legal action against the borrower.

·   The collateral position has deteriorated to a point where there is a possibility the Corporation may sustain some loss. This may be due to the financial condition, improper documentation, or to a reduction in the value of the collateral.

·   Although loss may not seem likely, the Corporationhas gone to extraordinary lengths (restructuring with extraordinary lengths) to protect its position in order to maintain a high probability of repayment.

· Flaws in documentation leave the Corporationin a subordinated or unsecured position.

Doubtful: These loans exhibit the same characteristics as those rated “substandard,” plus weaknesses that make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. This would include inadequately secured loans that are being liquidated, and inadequately protected loans for which the likelihood of liquidation is high. This classification is temporary. Pending events are expected to materially reduce the amount of the loss. This means that the “doubtful” classification will result in either a partial or complete loss on the loan (write-down or specific reserve), with reclassification of the asset as “substandard,” or removal of the asset from the classified list, as in foreclosure or full loss.

26

The following tables present the Corporation’s loan portfolio aging analysis as of September 30, 2012 and December 31, 2011:

September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(Unaudited; In Thousands)
Construction	$	-	$	-	$	-	$	-	$	6,753	$	6,753	$	-
1-4 family residential		631		118		659		1,408		109,922		111,330		-
Multi-family residential		-		-		-		-		18,267		18,267		-
Nonresidential		149		-		1,300		1,449		100,063		101,512		-
Land		-		-		2,511		2,511		14,029		16,540		-
Commercial		68		500		308		876		18,538		19,414		-
Consumer		9		6		2		17		3,651		3,668		-
	$	857	$	624	$	4,780	$	6,261	$	271,223	$	277,484	$	-

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands)
Construction	$	335	$	-	$	-	$	335	$	7,973	$	8,308	$	-
1-4 family residential		1,172		26		2,946		4,144		107,054		111,198		-
Multi-family residential		-		-		-		-		18,582		18,582		-
Nonresidential		949		105		1,831		2,885		80,399		83,284		-
Land		8		-		3,080		3,088		15,993		19,081		-
Commercial		41		-		297		338		17,011		17,349		-
Consumer		44		-		3		47		3,793		3,840		-
	$	2,549	$	131	$	8,157	$	10,837	$	250,805	$	261,642	$	-

The following table presents the Corporation’s nonaccrual loans as of September 30, 2012 and December 31, 2011, which includes both non-performing troubled debt restructured and loans delinquent 90 days or more.

	September 30, 2012		December 31, 2011
	(Unaudited)
	(In Thousands)
Residential real estate
Construction	$	121	$	-
One-to-four family residential		2,781		4,304
Multi-family residential		1,117		-
Nonresidential real estate and agricultural land		2,214		2,161
Land (not used for agricultural purposes)		4,429		3,080
Commercial		508		297
Consumer and other		-		21
Total nonaccrual loans	$	11,170	$	9,863

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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 Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present information pertaining to the principal balances and specific valuation allocations for impaired loans, as of September 30, 2012 (unaudited; in thousands):

Impaired loans without a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction	$	121	$	212	$	-
1-4 family residential		4,234		4,544		-
Multi-family residential		55		55		-
Nonresidential		3,738		4,867		-
Land		2,543		2,963		-
Commercial		573		651		-
Consumer		14		14		-
	$	11,278	$	13,306	$	-

Impaired loans with a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction	$	-	$	-	$	-
1-4 family residential		942		942		184
Multi-family residential		1,063		1,063		195
Nonresidential		86		231		45
Land		1,886		1,886		196
Commercial		-		-		-
Consumer		-		-		-
	$	3,977	$	4,122	$	620

Total impaired loans:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction	$	121	$	212	$	-
1-4 family residential		5,176		5,486		184
Multi-family residential		1,118		1,118		195
Nonresidential		3,824		5,098		45
Land		4,429		4,849		196
Commercial		573		651		-
Consumer		14		14		-
	$	15,255	$	17,428	$	620

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The following tables present information pertaining to the principal balances and specific valuation allocations for impaired loans as of December 31, 2011 (in thousands):

Impaired loans without a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction	$	-	$	-	$	-
1-4 family residential		3,064		3,249		-
Multi-family residential		1,966		1,966		-
Nonresidential		3,705		4,469		-
Land		2,329		2,329		-
Commercial		271		300		-
Consumer		17		17		-
	$	11,352	$	12,330	$	-

Impaired loans with a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction	$	-	$	-	$	-
1-4 family residential		3,267		3,267		913
Multi-family residential		-		-		-
Nonresidential		-		-		-
Land		2,643		2,643		519
Commercial		-		-		-
Consumer		-		-		-
	$	5,910	$	5,910	$	1,432

Total impaired loans:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction	$	-	$	-	$	-
1-4 family residential		6,331		6,516		913
Multi-family residential		1,966		1,966		-
Nonresidential		3,705		4,469		-
Land		4,972		4,972		519
Commercial		271		300		-
Consumer		17		17		-
	$	17,262	$	18,240	$	1,432

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The following is a summary by class of information related to the average recorded investment and interest income recognized on impaired loans for the three months and nine months ended September 30, 2012 and 2011.

	Nine Months Ended September 30, 2012				Nine Months Ended September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
	(Unaudited; In Thousands)
Construction	$	77	$	1	$	180	$	1
1-4 family residential		6,231		134		5,904		206
Multi-family residential		759		6		1,978		54
Nonresidential		3,831		55		4,708		120
Land		4,539		-		6,442		86
Commercial		476		16		542		10
Consumer		15		1		7		-
	$	15,928	$	213	$	19,761	$	477

	Three Months Ended September 30, 2012				Three Months Ended September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
	(Unaudited; In Thousands)
Construction	$	185	$	1	$	169	$	-
1-4 family residential		5,142		37		6,376		91
Multi-family residential		1,117		1		2,317		32
Nonresidential		4,083		21		4,758		49
Land		4,456		-		6,821		11
Commercial		517		1		342		2
Consumer		14		1		19		1
	$	15,514	$	62	$	20,802	$	186

For the three months and nine months ended September 30, 2012 and 2011, interest income recognized on a cash basis included above was immaterial.

Troubled Debt Restructurings

In the course of working with borrowers, the Corporation may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Corporation attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Corporation to identify if a troubled debt restructuring (“TDR”) has occurred. A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Corporation grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Corporation do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Corporation may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

As a result of adopting the amendments in Accounting Standards Update No. 2011-02, the Corporation reassessed all restructurings that occurred on or after the beginning of its prior fiscal year (January 1, 2011) for identification as troubled debt restructurings. As a result of this reassessment, the Corporation did not identify as troubled debt restructurings any additional receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology.

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Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported in this report as non-performing loans. For all loan classes, it is the Corporation’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Corporation believes that receipt of principal and interest is questionable under the terms of the loan agreement. Most generally, this is at 90 or more days past due.

The balance of nonaccrual restructured loans, which is included in total nonaccrual loans, was $6.0 million at September 30, 2012. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status.

With regard to determination of the amount of the allowance for credit losses, all accruing restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above.

The following tables present information regarding troubled debt restructurings by class for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011.

	At September 30, 2012				For the Three-Month Period Ended  September 30, 2012								For the Nine-Month Period Ended  September 30, 2012
	# of Loans		Total Troubled Debt Restructured		# of Loans		Current Balance		Pre-Modification Recorded Balance		Post-Modification Recorded Balance		# of Loans		Current Balance		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
	(Unaudited; Dollars In Thousands)
Residential Real Estate
Construction		1	$	121		1	$	121	$	76	$	100		1	$	121	$	76	$	100
One-to-four family residential		11		4,113		-		-		-		-		5		1,047		1,204		1,249
Multi-family residential		1		1,063		-		-		-		-		1		1,063		1,068		1,082
Nonresidential real estate and agricultural land		5		2,323		-		-		-		-		-		-		-		-
Land not agricultural		1		1,886		-		-		-		-		-		-		-		-
Commercial		6		226		3		41		33		41		5		205		202		211
Consumer		1		14		-		-		-		-		-		-		-		-
		26	$	9,746		4	$	162	$	109	$	141		12	$	2,436	$	2,550	$	2,642

	At September 30, 2011				For the Three-Month Period Ended September 30, 2011								For the Nine-Month Period Ended September 30, 2011
	# of Loans		Total Troubled Debt Restructured		# of Loans		Current Balance		Pre-Modification Recorded Balance		Post-Modification Recorded Balance		# of Loans		Current Balance		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
	(Unaudited; Dollars In Thousands)
Residential Real Estate
Construction		-	$	-		-	$	-	$	-	$	-		-	$	-	$	-	$	-
One-to-four family residential		8		3,197		2		1,003		1,005		1,003		2		1,003		1,005		1,003
Multi-family residential		1		1,974		-		-		-		-		1		1,974		1,735		1,987
Nonresidential real estate and agricultural land		4		2,076		-		-		-		-		1		956		1,118		956
Land not agricultural		1		2,137		-		-		-		-		-		-		-		-
Commercial		2		71		-		-		-		-		1		23		46		46
Consumer		1		19		-		-		-		-		1		19		19		19
		17	$	9,474		2	$	1,003	$	1,005	$	1,003		6	$	3,975	$	3,923	$	4,011

31

Of the loans restructured during the nine months ended September 30, 2012, twelve loans, totaling $2,436,000, were refinanced primarily to allow the borrowers to overcome current cash flow issues. Of these loans:

·   Three, totaling $1,589,000, were placed on 30-year amortizing schedules.

·   Another, of $38,000, was refinanced with additional collateral and provisioned with a specific valuation allowance for the entirety of the loan.

·   Eight were placed on short term, low-rate notes to allow the borrowers to remain current while attempting to liquidate portions of the collateral, or recover. The sum of these eight loans was $809,000.

For the three months ended September 30, 2012, four loans, totaling $162,000, were refinanced primarily to allow the borrowers to overcome current cash flow issues. Of these loans:

·   Four were placed on short term, low-rate notes to allow the borrowers to remain current while attempting to liquidate portions of the collateral, or recover. The sum of these four was $162,000.

Financial impact of these restructurings was immaterial to the financials of the Corporation at September 30, 2012.

One loan classified as troubled debt restructuring within the last twelve months defaulted during the nine months ended September 30, 2012. This loan, for a single family residence, was foreclosed upon and was included in real estate owned as of June 30, 2012. That property was subsequently sold with a book loss of $1,000. The restructured amount of the loan was $345,000 and the final sale price in July, 2012, was $304,000. The remainder was recorded through the allowance for loan losses as a charge off in June. The Corporation defines default in this instance as being either past due 90 days or more at the end of the quarter or in the legal process of foreclosure.

At September 30, 2012, eight restructured loans, with a total principal balance of $1.8 million, which were originally placed on a nonaccrual status due to performance prior to restructuring, were returned to accrual status.

Of the loans restructured during the nine months ended September 30, 2011, three loans, totaling $260,000, were refinanced after bankruptcy or foreclosure based on reaffirmation of the note or a deficiency note.  All three were made at market rate or above and are listed as troubled debt due to borrower’s inability to cash flow. Two loans were refinanced at slightly below market rates, with taxes and insurance escrowed, one of which consolidated 28 individual loans and provided superior collateral coverage to the Corporation. These two loans totaled $2.9 million. Finally, one loan for an investment property was refinanced at a below market rate on an interest-only basis, for 12 months to provide an opportunity for the borrower to sell the property or recover. The total of this loan was $786,000.

Financial impact of these restructurings was immaterial to the financials of the Corporation at September 30, 2011.

No loans identified and reported as TDR during the nine and three months ended September 30, 2011 defaulted during either of those periods. The Corporation defines default in this instance as being either past due 90 days or more at the end of the quarter or in the legal process of foreclosure.

NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update No. 2011-11—Balance Sheet (Topic 210). In December 2011, FASB issued ASU 2011-11. The objective of this Update is to provide enhanced disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.

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An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Corporation will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

NOTE 8:  BUSINESS ACQUISITION

In the fourth quarter of 2011, the Corporation announced that it had entered into an agreement to merge the Bank with Dupont State Bank (“Dupont”), an Indiana commercial bank and wholly owned subsidiary of Citizens Union Bancorp of Shelbyville, Inc. (“Citizens”). At the effective time of the merger, the Corporation will pay Citizens $5,700,000 (the “Merger Consideration”) for its shares of Dupont. The transaction was anticipated to close in the third quarter of 2012, but the remaining regulatory approvals from the FDIC and the Board of Governors of the Federal Reserve System were still pending at September 30, 2012. Since then, the transaction has received the approvals, and the transaction is anticipated to close by November 9, 2012. The closing is subject to customary closing conditions.

After the combination, the surviving entity will be called “River Valley Financial Bank” and will operate as an Indiana-chartered commercial bank.

NOTE 9:  RECLASSIFICATIONS

Certain reclassifications have been made to the 2011 consolidated condensed financial statements to conform to the September 30, 2012 presentation.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief, outlook, estimate or expectations of the Corporation (as defined in the notes to the consolidated condensed financial statements), its directors or its officers primarily with respect to future events and the future financial performance of the Corporation. Readers of this Form 10-Q are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-Q identifies important factors that could cause or contribute to such differences. Some of these factors are discussed herein, but also include, but are not limited to, changes in the economy and interest rates in the nation and the Bank’s general market area; loss of deposits and loan demand to other financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or turmoil and governmental intervention in the financial services industry. The forward-looking statements contained herein include those with respect to the effect future changes in interest rates may have on financial condition and results of operations, and management’s opinion as to the effect on the Corporation’s consolidated financial position and results of operations of recent accounting pronouncements not yet in effect.

Effect of Current Events

The level of turmoil in the financial services industry continues to present unusual risks and challenges for the Corporation, as described below:

The Current Economic Environment. We are operating in a challenging and uncertain economic environment, including generally uncertain national conditions and local conditions in our markets. The capital and credit markets have been experiencing volatility and disruption for a prolonged period. The risks associated with our business become more acute in periods of a slowing economy or slow growth. Financial institutions continue to be affected by sharp declines in the real estate market and constrained financial markets. While we are taking steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

33

Our loan portfolio includes commercial real estate loans, residential mortgage loans, and construction and land development loans. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations. In addition, deterioration in local economic conditions in our markets could drive losses beyond that which is provided for in our allowance for loan losses and result in the following other consequences: increases in loan delinquencies, problem assets and foreclosures may increase; demand for our products and services may decline; deposits may decrease, which would adversely impact our liquidity position; and collateral for our loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

Impact of Recent and Future Legislation. Over the last four years, Congress and the Treasury Department have adopted legislation and taken actions to address the disruptions in the financial system, declines in the housing market and the overall regulation of financial institutions and the financial system.

In this regard, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has made sweeping changes to the United States financial system. The Dodd-Frank Act eliminated the Office of Thrift Supervision (the “OTS”) as of July 21, 2011. The Dodd-Frank Act transferred to the Office of the Comptroller of the Currency (the “OCC”) all functions and all rulemaking authority of the OTS relating to federal savings associations. The Dodd-Frank Act also transferred to the Board of Governors of the Federal Reserve System (the “Federal Reserve”) all functions of the OTS relating to savings and loan holding companies and their non-depository institution subsidiaries. Thus, the Holding Company and all of its subsidiaries other than the Bank are now being supervised by the Federal Reserve. The Federal Reserve is also to regulate loans to insiders, transactions with affiliates, and tying arrangements. The OCC and the Federal Reserve have already published some regulations that will apply to the entities that they are to regulate for the first time, but otherwise, OTS guidance, orders, interpretations, and policies to which federal savings associations like the Bank and savings and loan holding companies like the Holding Company are subject are to remain in effect until they are suspended.

The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the “CFPB”) within the Federal Reserve, which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks. Many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies are now performed by the CFPB. The CFPB has a large budget and staff, and has broad rulemaking authority over providers of credit, savings, and payment services and products. In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions. State officials also will be authorized to enforce consumer protection rules issued by the CFPB. This bureau also is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB also is directed to prevent “unfair, deceptive or abusive practices” and ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent, and competitive.

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB has published proposed regulations on several of these topics, including minimum mortgage underwriting standards. In addition, the Federal Reserve and other federal bank regulatory agencies have issued a proposed rule under the Dodd-Frank Act that would exempt “qualified residential mortgages” from the securitization risk retention requirements of the Dodd-Frank Act. The final definition of what constitutes a “qualified residential mortgage” may impact the pricing and depth of the secondary market into which we may sell mortgages we originate. At this time, we cannot predict the content of final CFPB and other federal agency regulations or the impact they might have on the Corporation’s financial results. The CFPB’s authority over mortgage lending, and its authority to change regulations adopted in the past by other regulators (i.e., regulations issued under the Truth in Lending Act, for example), or to rescind or ignore past regulatory guidance, could increase the Corporation’s compliance costs and litigation exposure.

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In addition to the CFPB’s authority over mortgage lending, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. Moreover, the Dodd-Frank Act requires public companies like the Bancorp to hold shareholder advisory “say-on-pay” votes on executive compensation at least once every three years and submit related proposals to a vote of shareholders. However, the SEC has provided a temporary exemption for smaller reporting companies, such as the Corporation, from the requirement to hold “say-on-pay” votes until the first annual or other shareholder meeting occurring on or after January 21, 2013. The Dodd-Frank Act also provided for unlimited deposit insurance coverage for noninterest-bearing transaction accounts, but this provision is scheduled to expire on December 31, 2012, and so far has not been renewed. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of the Corporation in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is expected to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The Corporation’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of the Corporation. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Corporation in particular, continues to be uncertain.

New Proposed Capital Rules. On June 7, 2012, the Federal Reserve approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The FDIC and the OCC subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements. The proposed rules are subject to a comment period running through October 22, 2012.

The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Corporation and the Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the proposed rules permit the countercyclical buffer to be applied only to “advanced approach banks” ( i.e. , banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Corporation and the Bank. The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which would be phased out over time.

The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

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The proposed rules set forth certain changes for the calculation of risk-weighted assets, which we would be required to utilize beginning January 1, 2015. The standardized approach proposed rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) a proposed alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

Based on our current capital composition and levels, we believe that we would be in compliance with the requirements as set forth in the proposed rules if they were presently in effect.

Additional Increases in Insurance Premiums. The FDIC insures the Bank’s deposits up to certain limits. Current economic conditions have increased expectations for bank failures. The FDIC takes control of failed banks and ensures payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC charges us premiums to maintain the Deposit Insurance Fund. The FDIC has set the Deposit Insurance Fund long-term target reserve ratio at 2% of insured deposits. Due to recent bank failures, the FDIC insurance fund reserve ratio has fallen below the statutory minimum. The FDIC has implemented a restoration plan beginning January 1, 2009, that is intended to return the reserve ratio to an acceptable level. Further increases in premium assessments are also possible and would increase the Company’s expenses. Effective with the June 2011 reporting period, the FDIC changed the assessment from a deposit-based assessment to an asset-based assessment, and reevaluated the base rate assessed to financial institutions. As a result of these changes, the Corporation experienced a decrease in premiums. However, increased assessment rates and special assessments could have a material impact on the Corporation’s results of operations.

The Soundness of Other Financial Institutions Could Adversely Affect Us. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.

Future Reduction in Liquidity in the Banking System. The Federal Reserve Bank has been providing vast amounts of liquidity in to the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve’s activities or capacity could reduce liquidity in the markets, thereby increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations.

Difficult Market Conditions Continue toAffect Our Industry. We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past several years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and securities and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets could adversely affect our business, financial condition and results of operations. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the financial institutions industry. In particular, we may face the following risks in connection with these events:

·   We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

·   Our ability to assess the creditworthiness of our customers may be impaired if the models and approach we use to select, manage and underwrite our customers become less predictive of future behaviors.

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·   The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process.

·   Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.

·   Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

·   We may be required to pay significantly higher deposit insurance premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

Concentrations of Real Estate Loans Could Subject the Corporation to Increased Risks in the Event of a Real Estate Recession or Natural Disaster. A significant portion of the Corporation’s loan portfolio is secured by real estate. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in our primary market area could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Historically, Indiana and Kentucky have experienced, on occasion, significant natural disasters, including tornadoes and floods. The availability of insurance for losses for such catastrophes is limited. Our operations could also be interrupted by such natural disasters. Acts of nature, including tornadoes and floods, which may cause uninsured damage and other loss of value to real estate that secures our loans or interruption in our business operations, may also negatively impact our operating results or financial condition.

We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks. Our business employs systems and a website that allow for the secure storage and transmission of customers’ proprietary information. Security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

Critical Accounting Policies

Note 1 to the consolidated financial statements presented on pages 57 through 61 of the Annual Report on Form 10-K for the year ended December 31, 2011 contains a summary of the Corporation’s significant accounting policies. Certain of these policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, analysis of other-than-temporary impairment on available-for-sale investments, and the valuation of mortgage servicing rights.

Allowance for Loan Losses

The allowance for loan losses is a significant estimate that can and does change based on management’s assumptions about specific borrowers and current economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current economic condition, the amount of loans outstanding, identified problem loans, and the probability of collecting all amounts due.

The allowance for loan losses represents management’s estimate of probable losses inherent in the Corporation’s loan portfolios. In determining the appropriate amount of the allowance for loan losses, management makes numerous assumptions, estimates and assessments.

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The Corporation’s strategy for credit risk management includes conservative, centralized credit policies, and uniform underwriting criteria for all loans as well as an overall credit limit for each customer significantly below legal lending limits. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit quality reviews and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.

The Corporation’s allowance consists of three components: probable losses estimated from individual reviews of specific loans, probable losses estimated from historical loss rates, and probable losses resulting from economic or other deterioration above and beyond what is reflected in the first two components of the allowance.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation. Included in the review of individual loans are those that are considered impaired. 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. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral. The Corporation evaluates the collectibility of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

Homogenous loans, such as consumer installment and residential mortgage loans are not individually risk graded. Rather, standard credit scoring systems are used to assess credit risks. Reserves are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category.

Historical loss rates for loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in the internal lending policies and credit standards, collection practices and examination results from bank regulatory agencies and the Corporation’s internal loan review. The portion of the allowance that is related to certain qualitative factors not specifically related to any one loan type is considered the unallocated portion of the reserve.

Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

The Corporation’s primary market area for lending is comprised of Clark, Floyd and Jefferson Counties in southeastern Indiana and portions of northeastern Kentucky adjacent to that market. When evaluating the adequacy of allowance, consideration is given to this regional geographic concentration and the closely associated effect changing economic conditions have on the Corporation’s customers.

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Other-Than-Temporary Impairment

The Corporation evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies or government-sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of review of the issuer’s financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. The Corporation ‘s consolidated statement of income would reflect the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For securities that management has no intent to sell, and it is not more likely than not that the Corporation will be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the noncredit loss would be recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. The Corporation did not record any other-than-temporary impairment during the three-month or nine-month periods ended September 30, 2012.

Valuation of Mortgage Servicing Rights

The Corporation recognizes the rights to service mortgage loans as separate assets in the consolidated balance sheet. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Corporation are initially measured at fair value at the date of transfer. Mortgage servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Factors included in the calculation of fair value of the mortgage servicing rights include, estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic factors will change over the life of the mortgage servicing rights, resulting in different valuations of the mortgage servicing rights. The differing valuations will affect the carrying value of the mortgage servicing rights on the consolidated balance sheet as well as the income recorded from loan servicing in the consolidated income statement. As of September 30, 2012 and December 31, 2011, mortgage servicing rights had carrying values of $683,000 and $641,000 respectively. The December 31, 2011 amount included a $26,000 valuation allowance for impairment on certain pools of servicing rights as of that date. The September 30, 2012 amount included no valuation for impairment.

Financial Condition

At September 30, 2012, the Corporation’s consolidated assets totaled $404.4 million, a slight decrease of $2.2 million, or 0.5%, from the December 31, 2011 total. The change was the result of a $10.3 million decrease in cash and cash equivalents, $8.4 million as of September 30, 2012, as compared to $18.7 million as of December 31, 2011 and decreased levels of real estate held as a result of foreclosure (REO), $1.2 million at September 30, 2012 as compared to $2.5 million at December 31, 2011. These decreases were partially offset by a $7.5 million increase in available-for-sale investment securities, increased balances in loans held for sale, and decreased balances held in the allowance for loan losses. Investment securities available for sale by the Corporation increased $7.5 million, period to period, an overall increase of 7.2% from $104.7 million at December 31, 2011 to $112.2 million as of September 30, 2012. A portion of this increase in investments was attributable to mark-to-market changes on the securities, with the unrealized gain on the Corporation’s portfolio increasing from $2.8 million at December 31, 2011 to $3.8 million at September 30 2012. Loans held for sale increased from $87,000 as of December 31, 2011 to $1.4 million as of September 30, 2012. Lastly, the balance held in the allowance for loan losses, $4.0 million as of December 31, 2011, decreased to $3.6 million as of September 30, 2012, primarily as a result of the first quarter 2012 charge off of previously expensed specific valuation allowances.

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A portion of the decrease in cash and cash equivalents, period to period, was due to the repayment of borrowings by the Corporation, with a slight decrease period to period from $65.2 million as of December 31, 2011 to $62.2 million at September 30, 2012. Advances from the Federal Home Loan Bank comprised the largest portion of those balances at $55.0 million for the period ended September 30, 2012 compared to $58.0 million at December 31, 2011, with a slight increase in the average cost at 3.69% compared to 3.55% period to period. The Federal Home Loan Bank (FHLB) is the Corporation’s primary source of wholesale funding.

The difficult lending environment continued to challenge loan production for the Corporation. Total loans, net of the allowance for loan losses, increased $884,000, or 0.3%, from $253.1 million at December 31, 2011 to $254.0 million at September 30, 2012. Over the nine-month period, $1.6 million in non-performing loans moved from the portfolio into real estate held for sale, while sales of conventional mortgages into the secondary market remained strong. Sales to the Federal Home Loan Mortgage Corporation (Freddie Mac) for the nine months ended September 30, 2012 were $24.4 million. These sales compare to $12.8 million in sales for the nine months ended September 30, 2011. Sales into the secondary market, primarily to Freddie Mac, are a significant source of noninterest income for the Corporation.

The Corporation’s consolidated allowance for loan losses totaled $3.6 million at September 30, 2012, a decrease of $361,000 from the $4.0 million total at December 31, 2011. This decrease was primarily the result of a decrease in specific valuation allowances (SVAs) as $855,000 of SVAs held at December 31, 2011 were permanently charged off during the first quarter of 2012. For the nine-month period ended September 30, 2012, $1.1 million was expensed and placed in the provision for loan losses and $1.5 million in non-performing loans were charged off, approximately half of which were provisioned for loss in prior periods by the previously mentioned SVAs. The total allowance represented 1.41% of total loans as of September 30, 2012, as compared to 1.56% as of December 31, 2011, with the decrease primarily attributable to the aforementioned reduction in SVAs. The portion of the allowance targeted for “general” losses (i.e., excluding SVAs), was $3.0 million at September 30, 2012 as compared to $2.6 million at December 31, 2011. This general portion of the allowance, as a percentage of total loans, increased period to period, 1.16% at September 30, 2012, as compared to 1.00% at December 31, 2011.

Loans past due 30 days or more as of September 30, 2012 were $6.3 million, or 2.26% of total loan receivables, as compared to $10.8 million, or 4.14%, at December 31, 2011. The same delinquency, as a percent of gross loans (i.e. non-inclusive of loans in process or deferred loan fees/costs) would be 2.43% and 4.22%, respectively. The September 30, 2012 decrease was due primarily to culmination of long running loan foreclosures that resulted in the real estate held for sale and to continuing improvement in the overall delinquency of the Corporation’s loan portfolio.

Non-performing loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) as of September 30, 2012 were $11.2 million, as compared to $9.9 million at December 31, 2011. The increase, period to period, was primarily the result of loans reported as “troubled debt restructured” (TDR) which were performing as agreed at the report dates, but are included because of other inherent weaknesses. TDR loans included in total non-performing loans that were less than 90 days past due were $6.0 million as of September 30, 2012, as compared to $1.7 million as of December 31, 2011. Non-performing loans, which include troubled debt restructured loans on nonaccrual status, as a percent of gross loans were 4.34% and 3.84%, respectively, for those periods.

Although management believes that its allowance for loan losses at September 30, 2012 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation’s results of operations. Management is diligent in monitoring delinquent loans and in the analysis of the factors affecting the allowance.

Deposits totaled $303.1 million at September 30, 2012, a decrease of $2.1 million, or 0.7%, from total deposits of $305.2 million at December 31, 2011. During the nine-month period, noninterest bearing deposit accounts increased by 30%, or $7.3 million, while interest-bearing deposits decreased 3.3%, or $9.4 million. The change in deposits reflects movement from low yielding interest-bearing and maturity deposits to more fluid transactional deposits. The increases were distributed across all deposit types, with the greatest increase being the increase in noninterest bearing checking accounts, of $7.3 million. The largest decrease, period to period, was in certificate of deposit accounts, which decreased $4.2 million over the period. In the current rate environment, borrowers appeared to be trading minimal differences in interest rates for accessibility to their funds in selecting the transactional accounts over the non-transactional.

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Borrowings by the Corporation decreased slightly period to period from $65.2 million as of December 31, 2011 to $62.2 million at September 30, 2012, as discussed earlier.

Other liabilities totaled $4.1 million at September 30, 2012, an increase of $1.3 million from the December 31, 2011 balance of $2.8 million, primarily due to changes in escrowed balances, accrued expenses, and increased tax liabilities.

Stockholders’ equity totaled $34.7 million at September 30, 2012, an increase of $1.7 million, or 5.2%, from the $33.0 million at December 31, 2011. The increase was primarily due to net income of $2.1 million offset by dividends paid to common and preferred shareholders of $1.2 million and a $645,000 increase in the unrealized gains on available-for-sale securities. Dividends to common shareholders for the nine-month period were $.63 per share.

The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2012, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

General

The Corporation’s net income for the nine months ended September 30, 2012 totaled $2.1 million, an increase of $913,000, or 75.1%, from net income reported for the nine-month period ended September 30, 2011. The change in income period to period was representative of the variety of changes that occurred over the period. Total interest income decreased $420,000, or 3.1%, from $13.4 million for the nine months ended September 30, 2011 to $12.9 million for the same period in 2012, as yields on the investment portfolio decreased and both yields and average balances in the loan portfolio decreased. Offsetting the decrease in interest income was a more dramatic decrease in interest expense, with interest expense for the nine months ended September 30, 2012 of $3.8 million as compared to $4.4 million for the same period in 2011, a decrease of $603,000, or 13.7%, period to period, as deposit and borrowing costs of funds dropped from 1.52% at September 30, 2011 to 1.24% at September 30, 2012. Meanwhile, provision expense for the nine-month period ended September 30, 2012 was $1.1 million as compared to $2.3 million for the same period in 2011, a decrease of $1.2 million, reflecting improving trends in delinquency and declining charge-off activity. Noninterest income, which includes income from the sale of loans into the secondary markets, net gains/losses on the sale of investments, net gains/losses on the disposal of other assets, and fee income from charges associated with overdrawn/non-sufficient fund deposit accounts (NSF fees), increased $1.1 million, period to period, while noninterest expense increased $1.1 million. Overall, the two combined for a net increase in noninterest income of $49,000.

Net Interest Income

Total interest income for the nine months ended September 30, 2012 decreased $420,000, or 3.1%, from $13.4 million at September 30, 2011 to $12.9 million at September 30, 2012. The reduction was due primarily to a combination of decreased average balances in the loan portfolio, with slightly lower yields period to period, and higher average balances in the investment portfolio, at lower yields. The average yield on loans as of September 30, 2012 was 5.53% as compared to 5.82% a year earlier. Book yields on available-for-sale securities experienced more dramatic change, period to period, with the book yield as of September 30, 2012 at 2.71% as compared to 3.18% at the same point in 2011. This decrease in book yield was exacerbated by additional decreases due to accelerated amortization on asset-backed securities. These securities, affected by faster than anticipated prepayment speeds on the underlying mortgages, effectively yielded 2.52%, rather than the book of 2.71%. Similar yields for the nine months ended September 30, 2011 were 3.07% and 3.17%, respectively. The effect of the decline in investment yields was mitigated by the increase in the volume of investments held, $112.2 million as of September 30, 2012 as compared to $95.1 million as of September 30, 2011.

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Total interest expense for the same period decreased more significantly, $603,000, or 13.7%, from the $4.4 million reported at September 30, 2011 to $3.8 million at September 30, 2012. For the nine months ended September 30, 2012, interest expense from deposits totaled $2.0 million while interest expense from borrowings totaled $1.8 million, as compared to $2.6 million and $1.8 million for the same period in 2011. Of the overall decrease in interest expense, $594,000 was attributable to interest expense on deposits, primarily due to the repricing of fixed-maturity deposits at constantly lowering rates, and to a lesser degree due to the changes in the deposit mix. The decrease in interest-bearing maturity deposits, such as certificates of deposit, and related increase in transactional deposits, many of which are noninterest bearing, benefited the Corporation through reduced interest expense. Net interest income was $9.1 million for the nine months ended September 30, 2012 and $8.9 million for the same period in 2011, with an increase period to period of $183,000, or 2%. The spread between interest-earning assets and interest-bearing liabilities, 3.36% as of September 30, 2012 as compared to 3.34% at the same point in 2011, demonstrates the combined effect of changes in the mix of the underlying assets and liabilities.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectability of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $1.1 million provision for losses on loans for the nine months ended September 30, 2012, as compared to $2.3 million for the same period in 2011. Details regarding charge-off activity for the nine-month period ended September 30, 2012, are provided in the Financial Condition section. In summary, charge offs for the nine-month period ended September 30, 2012, after reduction for previously provisioned reserves (SVAs), total $531,000, as compared to $2.1 million for the same period in 2011. Delinquencies in total have declined as foreclosures pending during the last 12 to 18 months have been resolved, and new delinquencies remain controlled.

Non-performing loans as of September 30, 2012 were $11.2 million, an increase of $1.2 million, from the $10.0 million at the same point in 2011. Of the total non-performing loans of $11.2 million at September 30, 2012, $6.4 million were less than 90 days past due, of which $6.0 million were performing troubled loans restructured, reported as non-performing due to other inherent weaknesses. The same data for the period ended December 31, 2011 included only $1.7 million in similar troubled debt restructured, and for September 30, 2011 the total was slightly less than $2.0. Loans of the Corporation past due more than 90 days average 382 days past due, emphasizing the fact that these are loans that have been moving slowly through the foreclosure process for the last few years. While management believes that the allowance for losses on loans is adequate at September 30, 2012, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future.

Other Income

Other income increased by $1.1 million, or 55.5%, during the nine months ended September 30, 2012 to $3.1 million, as compared to the $2.0 million reported for the same period in 2011. The increase was due primarily to net gains on loan sales as well as net gains on sales of available-for-sale securities. Gains on the sale of loans into the secondary market, primarily to Freddie Mac, $844,000 for the nine months ended September 30, 2012 as compared to $367,000 for the same nine months in 2011, reflected the impact of continued decreases in interest rates, as rates on Freddie Mac 15 year mortgage dropped to 3.25% for qualified borrowers. While sales into the secondary market for the first nine months of 2012 exceeded the same for 2011, this trend may not continue into 2013 as originations of loans for sale are expected to decline as underwriting continues to be tight and refinance demand is expected to decline. Gains on the sale of available-for-sale securities, $450,000 for the nine months ended September 30, 2012 as compared to $270,000 for the same period in 2011, reflected management’s decision to exchange rapidly amortizing asset-backed investments, and other investments with embedded option, for investments with a more predictable cash flow. The only other notable increase in other income for the nine-month period was in fees and charges relative to deposit accounts, primarily overdraft fees, which increased $123,000, period to period, with the total income from these fees $1.6 million for the nine-month period ended September 30, 2012 as compared to $1.4 million for the same period in 2011, primarily due to increased overdraft activity. Unlike interest income, “other income” is not always readily predictable and is subject to variations depending on outside influences, including regulatory changes.

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Other Expenses

Total other expenses experienced a notable change period to period, with a net increase of $1.1 million, or 14.2%, from September 30, 2011 to September 30, 2012. In general, increases were experienced in several financial statement lines. The most significant financial statement changes were:

·   Salaries and employee benefits, an 8.9% increase period to period, from $3.9 million for the nine months ended September 30, 2011 to $4.3 million for the same period in 2012. This reflects the addition of branch personnel and increases in benefits including health insurance increases.

·   Acquisition expense relative to the pending acquisition of Dupont State Bank accounted for 19.3% of the increase in other expenses for a total of $235,000 for the nine-month period ended September 30, 2012 compared to $33,000 for the same period in 2011.

·   Loan related expenses increased 190.0%, period to period, from $152,000 for the nine-month period ended September 30, 2011 to $441,000 for the same period ended September 30, 2012. This increase was due primarily to expenses paid on behalf of delinquent borrowers.

Income Taxes

Tax expense of $572,000 was recorded for the nine-month period ended September 30, 2012 as compared to $21,000 for the comparable period in 2011. For the 2012 period, the Corporation had pre-tax income of $2.7 million as compared to $1.2 million for the 2011 period. The effective tax rate was 21.2% for the nine-month period ended September 30, 2012 as compared to 1.7% for the same period in 2011. The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses, including most costs associated with the acquisition of Dupont State Bank.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

General

The Corporation’s net income for the three months ended September 30, 2012 totaled $846,000, an increase of $1.1 million, from the net loss of $207,000 reported for the period ended September 30, 2011. The increase in net income for the 2012 period as compared to 2011 was primarily attributable to lower provision for loan losses.

During 2011, the Corporation realized strong income from the widening of the margin between interest-earning assets and interest-bearing liabilities. This trend has somewhat stabilized, with net interest income nearly identical for the three-month periods ended September 30, 2012 and 2011. Total interest income for the three-month period ended September 30, 2012 was $4.3 million as compared to $4.5 million for the same period in 2011, a decrease of $156,000, or 3.5%. Conversely, total interest expense for the three-month period ended September 30, 2012 was $1.2 million as compared to $1.5 million for the same period in 2011, a decrease of $234,000, or 16.0%. Provision expense decreased $1.2 million or 81.5% from $1.4 million for the three months ended September 30, 2011 to $268,000 for the three months ended September 30, 2012. The 2011 provision expense was primarily due to large charge offs identified and expensed for additional deterioration of loans in the third quarter of 2011.

Net Interest Income

Total interest income for the three months ended September 30, 2012 decreased $156,000, or 3.5%, from $4.5 million at September 30, 2011 to $4.3 million at September 30, 2012. The reduction was due primarily to a combination of decreased average balances in the loan portfolio, with similar yields period to period, and moderately higher average balances in the investment portfolio, at lower yields.

Total interest expense for the same period decreased significantly by $234,000, or 16.0%, from the $1.5 million reported for the three months ended September 30, 2011 to $1.2 million for the three months ended September 30, 2012. For the three months ended September 30, 2012, interest expense from deposits totaled $638,000, as compared to $864,000 for the same period in 2011. The decrease was primarily attributable to interest expense on fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates, but also due somewhat to the changes in the composition of the deposit base mentioned above, as depositors moved from maturity and interest-bearing accounts to transactional and noninterest-bearing accounts. The cost of borrowing, period to period, decreased slightly as the increase in the average rate paid for borrowing from the Federal Home Loan Bank (FHLB), 3.55% as of September 30, 2011 compared to 3.69% at the same point in 2012, was offset by slightly lower average balances.

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Net interest income was $3.1 million for the three-month period ended September 30, 2012 compared to $3.0 million for the same period in 2011, as decreases in interest income were offset by greater decreases in interest expense.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectability of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $268,000 provision for losses on loans for the three months ended September 30, 2012, $1.2 million lower than the amount expensed for the same period in 2011.

Delinquencies in total have decreased as foreclosures pending during the last 12 to 18 months have been resolved, and new delinquencies remain controlled. Non-performing loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) as of September 30, 2012 were $11.2 million, an increase of $1.3 million, from the $9.9 million reported at December 31, 2011. Of the total non-performing loans of $11.2 million at September 30, 2012, $6.0 million are troubled loans restructured which have been performing according to the terms of the restructured agreement, but are reported as non-performing due to other inherent weaknesses. The same data for the period ended December 31, 2011 included only $1.7 million in similar troubled debt restructured, and for September 30, 2011 the total was slightly less than $2.0. While management believes that the allowance for losses on loans is adequate at September 30, 2012, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future.

Other Income

Other income increased by $709,000, or 179.5%, during the three months ended September 30, 2012 to $1.1 million, as compared to the $395,000 reported for the same period in 2011. The increase was due primarily to a decrease in losses on OREO sales and value write-downs with $172,000 in losses for the three-month period ended September 30, 2012 compared to $533,000 for the same period in 2011. Income from the sale of loans into the secondary market was another large contributing factor, period to period. Gains on sales to the Federal Home Loan Mortgage Corporation (Freddie Mac) for the three months ending September 30, 2012 totaled $335,000 an increase of $197,000 over the $138,000 recorded for the same period ended September 30, 2011. Sales to Freddie Mac for the three months ended September 30, 2012 were $9.6 million, a strong increase over the $5.0 million recorded for the three-month period ended September 30, 2011. Sales into the secondary market have been strong during the entirety of 2012 as consumers take advantage of record low interest rates. Other notable increases in other income, period to period, included service fees and charges, which includes income from ATM usage. Service fees and charges increased to $557,000 for the three-month period ended September 30, 2012 from $516,000 for the comparable period in 2011, an increase of $41,000. Unlike interest income, “other income” is not always readily predictable and is subject to variations depending on outside influences.

Other Expenses

Total other expenses increased period to period, with a net increase of $255,000, or 10.0%, from September 30, 2011 to September 30, 2012. The most significant financial statement changes were:

·   Expenses associated with the pending acquisition of Dupont State Bank totaled $111,000 for the three- month period ended September 30, 2012, an increase of $78,000 from the comparable period in 2011.

·   Increased expense relative to the amortization of mortgage servicing rights for loans sold into the secondary market amounted to $37,000. The Corporation retains servicing rights on loans sold to Freddie Mac. These rights are capitalized at the point of sale and amortized over the life of the loan. The increase, 2012 over 2011, is the result of the strong refinance activity during 2012, and amortization of existing servicing rights, at faster than anticipated speeds.

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·   Salaries and employee benefits, a 5.0% increase period to period, reflective of increased salary costs, including additional business development, lending, and investment advisory personnel, and increases in group insurance and retirement plan costs.

·   Loan related expenses increased due to an increase in expenses paid on behalf of delinquent borrowers, legal expenses related to problem loans and an increase in secondary market related expenses. Loan related expenses increased from $73,000 for the three-month period ended September 30, 2011 to $118,000 for the three-month period ended September 30, 2012.

·   Other expenses increased primarily due to increases in business services and postage expense.

Income Taxes

Tax expense of $278,000 was recorded for the three-month period ended September 30, 2012 as compared to a net tax benefit of $382,000 for the comparable period in 2011. For the 2012 period, the Corporation had pre-tax income of $1.1 million as compared to a net loss of $589,000 for the 2011 period. The effective tax rate was 24.7% for the three-month period ended September 30, 2012. This effective rate was slightly higher than in other periods due to the inclusion of non-tax deductible expenses relative to acquisition costs pertaining to the Dupont State Bank acquisition. The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses.

Other

The Securities and Exchange Commission maintains a Web site that contains reports, proxy information statements, and other information regarding registrants that file electronically with the Commission, including the Corporation. The address is http://www.sec.gov.

Liquidity Resources

Historically, the Corporation has maintained its liquid assets at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Cash for these purposes is generated through loan sales and repayments, increases in deposits, and through the sale or maturity of investment securities. Loan payments are a relatively stable source of funds, while deposit flows are influenced significantly by the level of interest rates and general money market conditions. Borrowings may be used to compensate for reductions in other sources of funds such as deposits. As a member of the Federal Home Loan Bank (FHLB) system, the Bank may borrow from the FHLB of Indianapolis. At September 30, 2012, the Bank had $55.0 million in such borrowings, with a $10 million overdraft line of credit immediately available. An additional $47 million in borrowing capacity, beyond the current fixed rate advances and line of credit was available, previously approved by the Bank’s board of directors. Based on collateral, an additional $27 million could be available, if the board of directors determines the need. The FHLB is the Bank’s primary source of wholesale funding. During the first half of 2011, the Bank entered into an agreement with Promontory Inter-financial Network to participate in the Certificate of Deposit Account Registry Service (CDARS) as a customer service product (reciprocal deposits) and as a supplemental source of wholesale liquidity using the CDARS one-way buy program. The Bank also has the ability to borrow from the Federal Reserve Bank Discount Window, an additional source of wholesale funding. At September 30, 2012, the Bank had commitments to fund loan originations of $20.4 million, unused home equity lines of credit of $20.6 million and unused commercial lines of credit of $9.9 million. Commitments to sell loans as of that date were $1.4 million. Generally, a significant portion of amounts available in lines of credit will not be drawn.

Beginning July 30, 2012, the Indiana Board for Depositories required the Corporation to pledge 50% of the average daily balance of public funds held during each quarter. This resulted in a pledge of securities in the amount of $33,979,000, but the requirement was removed effective October 2012.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for Smaller Reporting Companies.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. The Corporation’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the most recent fiscal quarter covered by this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Corporation’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Corporation in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in the Corporation’s internal control over financial reporting identified in connection with the Corporation’s evaluation of controls that occurred during the Corporation’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Neither the Corporation nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the business.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	XBRL Interactive Data Files, including the following materials from the Corporation’s Report on Form 10-Q for the quarter ended September 30, 2012: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, with detailed tagging of notes and financial statement schedules.*

* Users of the XBRL-related information in Exhibit 101 of this Quarterly Report on Form 10-Q are advised, in accordance with Regulation S-T Rule 406T, that this Interactive Data File is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is unaudited and unreviewed.

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SIGNATURES

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

	RIVER VALLEY BANCORP
Date: November 14, 2012	By:	/s/ Matthew P. Forrester
		Matthew P. Forrester
		President and Chief Executive Officer
Date: November 14, 2012	By:	/s/ Vickie L. Grimes
		Vickie L. Grimes
		Vice President of Finance

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EXHIBIT INDEX

No.	Description	Location
31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached
101	XBRL Interactive Data Files, including the following materials from the Corporation’s Report on Form 10-Q for the quarter ended September 30, 2012: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, with detailed tagging of notes and financial statement schedules.*	Attached

* Users of the XBRL-related information in Exhibit 101 of this Quarterly Report on Form 10-Q are advised, in accordance with Regulation S-T Rule 406T, that this Interactive Data File is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is unaudited and unreviewed.