rivr-20121231.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
		of 1934 for the Fiscal Year Ended December 31, 2012
		Or
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities
		Exchange Act of 1934 for the Transition Period from _______ to ______

000-21765
Commission File Number

RIVER VALLEY BANCORP
(Exact name of registrant as specified in its charter)

INDIANA		35-1984567
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

430 Clifty Drive, P.O. Box 1590, Madison, Indiana		47250-0590
(Address of principal executive offices)		(Zip Code)

(812) 273-4949
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Name of each exchange on which registered
Common Stock	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.		Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.		Yes o No ý

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 ý No o

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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.		ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer¨	Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).		Yes o No ý

As of June 30, 2012, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was $11,172,356 based on the closing sale price as reported on the NASDAQ Capital Market.

As of February 22, 2013, there were issued and outstanding 1,524,872 shares of the issuer’s Common Stock.

Documents Incorporated by Reference

Portions of the Proxy Statement for the 2013 Annual Meeting of Shareholders to be held on April 17, 2013 are incorporated in Part III.

RIVER VALLEY BANCORP

FORM 10-K

INDEX

FORWARD-LOOKING STATEMENTS		3

PART I		3
Item 1.	Business.	3
Item 1A.	Risk Factors.	25
Item 1B.	Unresolved Staff Comments.	26
Item 2.	Properties.	27
Item 3.	Legal Proceedings.	27
Item 4.	Mine Safety Disclosures
Item 4.5.	Executive Officers of the Registrant.

PART II		28
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	28
Item 6.	Selected Financial Data.	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	46
Item 8.	Financial Statements and Supplementary Data.	47
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	97
Item 9A.	Controls and Procedures.	97
Item 9B.	Other Information.	97

PART III		97
Item 10.	Directors, Executive Officers and Corporate Governance.	97
Item 11.	Executive Compensation.	98
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	98
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	98
Item 14.	Principal Accountant Fees and Services.	98

PART IV		99
Item 15.	Exhibits and Financial Statement Schedules.	99

SIGNATURES		100

EXHIBIT INDEX		101

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Form 10-K”) 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-K and include statements regarding the intent, belief, outlook, estimates or expectations of River Valley Bancorp, its directors, or its officers primarily with respect to future events and the future financial performance of the Company. Readers of this Form 10-K 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-K identifies important factors that could cause such differences. These factors include, but are not limited to, changes in interest rates; 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.

PART I

ITEM 1. BUSINESS.

BUSINESS

GENERAL

River Valley Bancorp (the “Holding Company” or “River Valley” and together with the “Bank,” the “Company”), an Indiana corporation, was formed in 1996 for the primary purpose of purchasing all of the issued and outstanding common stock of River Valley Financial Bank (formerly Madison First Federal Savings and Loan Association; hereinafter “River Valley Financial” or the “Bank”) in its conversion from mutual to stock form. The conversion offering was completed on December 20, 1996. On December 23, 1996, the Company utilized approximately $3.0 million of the net conversion proceeds to purchase 95.6% of the outstanding common shares of Citizens National Bank of Madison (“Citizens”), and River Valley Financial and Citizens merged on November 20, 1997.

The activities of the Holding Company have been limited primarily to holding the stock of River Valley Financial, which was organized in 1875 under the laws of the United States of America and which continues today under charter from the State of Indiana. River Valley Financial, which provides banking services in a single significant business segment, conducts operations from its 12 full-service office locations in Clark, Floyd, Jackson, Jennings and Jefferson Counties, Indiana, and Carroll County, Kentucky, and offers a variety of deposit and lending services to consumer and commercial customers.

The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction, or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank’s loan origination activities, representing 43.7% of the Bank’s total loan portfolio at December 31, 2012. The Bank identified loans totaling $394,000 as held for sale at December 31, 2012. The Bank also offers multi-family mortgage loans, nonresidential real estate loans, land loans, construction loans, non-mortgage commercial loans and consumer loans. The Bank’s primary market areas have been Jefferson, Floyd and Clark Counties in southeastern Indiana and adjacent Carroll and Trimble Counties in Kentucky.

In November 2012, the Company completed its acquisition of Dupont State Bank, an Indiana commercial bank wholly owned by Citizens Union Bancorp of Shelbyville, Inc. In conjunction with the acquisition, River Valley Financial merged with and into Dupont State Bank, which changed its name to River Valley Financial Bank, effecting the conversion of the Bank from a federally chartered thrift to a state chartered commercial bank. This acquisition has expanded the Bank’s branch network to North Vernon, Seymour and Dupont, Indiana, adding a presence in Jackson and Jennings Counties, Indiana, resulting in a total of 12 branches across southeast Indiana and northern Kentucky that will offer a wide range of consumer and commercial community banking services.

Until July 2011, the Holding Company and River Valley Financial were subject to regulation, supervision and examination by the Office of Thrift Supervision (“OTS”), but the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated the regulatory authority of the OTS and reallocated its functions. Thereafter, the Holding Company was subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve (“Federal Reserve”), and River Valley Financial was subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).

As a result of the November 2012 conversion of the Bank to a state chartered bank, the Bank will be subject to regulation, supervision and examination by the Indiana Department of Financial Institutions (“DFI”), instead of the OCC. The Bank will continue to be regulated by the FDIC, and the Holding Company will continue to be regulated by the Federal Reserve.

For ease of reference throughout this Annual Report on Form 10-K, references to the DFI are intended to include a reference to the OTS and/or the OCC, as the predecessors in thrift regulation and supervision, as the context and the time period requires.

Deposits in River Valley Financial are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Bank is also a member of the Federal Home Loan Bank (“FHLB”) system, and in particular the Federal Home Loan Bank of Indianapolis, which is one of twelve regional banks comprising the system.

The Company’s internet address is www.rvfbank.com. The Company makes available all filings with the Securities and Exchange Commission via its internet website.

LOAN PORTFOLIO DATA

The following table sets forth the composition of the Bank’s loan portfolio as of December 31, 2012, 2011, 2010, 2009 and 2008 by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses, deferred loan origination costs and loans in process. Historical data in this table and others reporting loan portfolio data has been restated in some cases to conform to certain loan recategorizations employed as of December 31, 2012.

	At December 31,
	2012					2011					2010					2009					2008
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
	(Dollars in thousands)
TYPE OF LOAN
Residential real estate:
One-to-four-family	$	137,402		43.65	%	$	111,198		42.50	%	$	117,616		43.38	%	$	127,397		45.41	%	$	140,433		48.50	%
Multi-family		19,988		6.35			18,582		7.10			14,997		5.53			12,910		4.60			9,924		3.43
Construction		10,784		3.43			8,308		3.18			6,975		2.57			7,867		2.80			10,999		3.80
Nonresidential real estate		106,433		33.81			83,284		31.83			89,607		33.05			87,483		31.18			83,400		28.80
Land loans		15,722		4.99			19,081		7.29			21,016		7.75			23,065		8.22			22,429		7.75
Commercial loans		19,549		6.21			17,349		6.63			16,413		6.05			17,129		6.10			17,306		5.98
Consumer loans		4,906		1.56			3,840		1.47			4,533		1.67			4,711		1.68			5,058		1.75
Gross loans receivable		314,784		100.00	%		261,642		100.00	%		271,157		100.00	%		280,562		100.00	%		289,549		100.00	%

Add/(Deduct):
Deferred loan origination costs		484		0.15			481		0.18			485		.2			464		.2			503		.2
Undisbursed portions of loans in process		(6,186	)	(1.97	)		(5,024	)	(1.92	)		(2,388	)	(.9	)		(1,824	)	(.7	)		(2,384	)	(.8	)
Allowance for loan losses		(3,564	)	(1.13	)		(4,003	)	(1.53	)		(3,806	)	(1.4	)		(2,611	)	(.9	)		(2,364	)	(.8	)
Net loans receivable	$	305,518		97.05	%	$	253,096		96.73	%	$	265,448		97.9	%	$	276,591		98.6	%	$	285,304		98.6	%

The following table sets forth certain information at December 31, 2012, regarding the dollar amount of loans maturing in the Bank’s loan portfolio based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.

	Balance Outstanding at		Due During Years Ending December 31
	December 31, 2012		2013		2014		2015 to 2016		2017 to 2021		2022 to 2026		2027 and following
	(In thousands)
Residential real estate loans:
One-to-four-family	$	137,402	$	6,417	$	461	$	1,268	$	7,326	$	14,901	$	107,029
Multi-family		19,988		-		872		27		3,519		726		14,844
Construction		10,784		8,984		1,773		-		24		-		3
Nonresidential real estate loans		106,433		9,321		2,112		454		4,807		16,923		72,816
Land loans		15,722		9,619		-		105		299		968		4,731
Commercial loans		19,549		10,733		1,208		2,635		4,305		563		105
Consumer loans		4,906		1,584		769		1,712		841		-		-
Total	$	314,784	$	46,658	$	7,195	$	6,201	$	21,121	$	34,081	$	199,528

The following table sets forth, as of December 31, 2012, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates.

	Due After December 31, 2013
	Fixed Rates		Variable Rates		Total
	(In thousands)
Residential real estate loans:
Construction	$	728	$	1,072	$	1,800
One-to-four-family		11,268		119,717		130,985
Multi-family		5,011		14,977		19,988
Nonresidential real estate loans		6,311		90,801		97,112
Land loans		163		5,940		6,103
Commercial loans		7,545		1,271		8,816
Consumer loans		3,308		14		3,322

Total	$	34,334	$	233,792	$	268,126

Residential Loans. Residential loans consist primarily of one- to four-family residential loans. Approximately $137.4 million, or 43.7% of the Bank’s portfolio of loans, at December 31, 2012, consisted of one- to four-family residential loans, of which approximately 88.4% had adjustable rates.

The Bank currently offers adjustable rate one- to four-family residential mortgage loans (“ARMs”) which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity. Some of the Bank’s residential ARMs are originated at a discount or “teaser” rate which is generally 150 to 175 basis points below the “fully indexed” rate. These ARMs then adjust annually to maintain a margin above the applicable index, subject to maximum rate adjustments discussed below. The Bank’s ARMs have a current margin above such index of 3-3.5% for owner-occupied properties and 3.5-5% for non-owner-occupied properties. A substantial portion of the ARMs in the Bank’s portfolio at December 31, 2012 provide for maximum rate adjustments per year and over the life of the loan of 2% and 6%, respectively, although the Bank has originated residential ARMs which provide for maximum rate adjustments per year and over the life of the loan of 1% and 4%, respectively. The Bank’s ARMs generally provide for interest rate minimums equal to, or up to 1% below the origination rate. The Bank’s residential ARMs are amortized for terms up to 30 years.

Adjustable rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates.

The Bank currently offers fixed rate one- to four-family residential mortgage loans which provide for the payment of principal and interest over periods of 10 to 30 years. At December 31, 2012, approximately 11.6% of the Bank’s one- to four-family residential mortgage loans had fixed rates. The Bank currently underwrites a portion of its fixed rate residential mortgage loans for potential sale to the Federal Home Loan Mortgage Corporation (the “FHLMC”). The Bank retains all servicing rights on the residential mortgage loans sold to the FHLMC. At December 31, 2012, the Bank had approximately $96.0 million of fixed rate residential mortgage loans which were sold to the FHLMC and for which the Bank provides servicing. In conjunction with the acquisition of Dupont State Bank, the Bank also holds servicing rights for a portfolio of $17.6 million in FNMA loans.

The Bank generally does not originate one-tofour-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (the “Loan-to-Value Ratio”) exceeds 95% and generally does not originate one- to four-family residential ARMs if the Loan-to-Value Ratio exceeds 90%. The Bank generally requires private mortgage insurance on all fixed rate conventional one- to four-family residential real estate mortgage loans with Loan-to-Value Ratios in excess of 80%. The cost of such insurance is factored into the annual percentage yield on such loans, and is not automatically eliminated when the principal balance is reduced over the term of the loan. During 2012 the Bank originated and retained $3.6 million of fixed rate one- to four-family residential mortgage loans. Typically, these loans would be sold into the secondary market, however, the majority of these loans were originated to existing customers and were retained, rather than sold, due to tightened lending standards in the secondary market.

Substantially all of the one- to four-family residential mortgage loans that the Bank originates include “due-on-sale” clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.

At December 31, 2012, the Bank had outstanding approximately $15.2 million of home equity loans, with unused lines of credit totaling approximately $22.3 million. As of December 31, 2012 all home equity loans were performing loans. The Bank’s home equity lines of credit are adjustable rate lines of credit tied to the prime rate and are amortized based on a 10- to 20-year maturity. The Bank generally allows a maximum 85% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Payments on such home equity loans are equal to 1.5% of the outstanding principal balance per month, or on newer home equity loans, to the interest accrued at the end of the period.

The Bank also offers standard second mortgage loans, which are adjustable rate loans tied to the U.S. Treasury securities yields adjusted to a constant maturity with a current margin above such index of 3.5-4%. The Bank’s second mortgage loans have maximum rate adjustments per year and over the terms of the loans equal to 2% and 6%, respectively. The Bank’s second mortgage loans have terms of up to 30 years.

At December 31, 2012, $2.7 million of one- to four-family residential mortgage loans, or .9% of total loans, were included in the Bank’s non-performing assets.

Multi-family Loans. At December 31, 2012, approximately $20 million, or 6.4% of the Bank’s total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). The Bank writes multi-family loans on terms and conditions similar to its nonresidential real estate loans. The largest multi-family loan in the Bank’s portfolio as of December 31, 2012 was $3.1 million and was secured by an apartment building in Jeffersonville, Indiana. At December 31, 2012, $1.1 million of multi-family loans, or 0.4% of total loans, were included in the Bank’s non-performing assets.

Multi-family loans, like nonresidential real estate loans, involve a greater risk than residential loans. See “Nonresidential Real Estate Loans” below. Also, the loan-to-one borrower limitations restrict the ability of the Bank to make loans to developers of apartment complexes and other multi-family units.

Construction Loans. The Bank offers construction loans with respect to residential and nonresidential real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer).

Generally, construction loans are written as twelve-month loans, either fixed or adjustable, with interest calculated on the amount disbursed under the loan and payable on a semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value Ratio for its construction loans, although the Bank may permit an 85% Loan-to-Value Ratio for one- to four-family residential construction loans. Inspections are generally made prior to any disbursement under a construction loan, and the Bank does not typically charge commitment fees for its construction loans.

At December 31, 2012, $10.8 million, or 3.4% of the Bank’s total loan portfolio, consisted of construction loans. The largest construction loan at December 31, 2012 totaled $2.3 million. . At December 31, 2012, $413,000 of construction loans, or 0.1% of total loans, were included in the Bank’s non-performing assets. While providing the Bank with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be saleable, resulting in the borrower defaulting and the Bank taking title to the project.

Nonresidential Real Estate Loans. At December 31, 2012, $106.4 million, or 33.8% of the Bank’s total loan portfolio, consisted of nonresidential real estate loans and land used for agricultural production. Nonresidential real estate loans are primarily secured by real estate such as churches, farms and small business properties. The Bank generally originates nonresidential real estate as adjustable rate loans of varying rates with lock-in terms of up to 10 years indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, written for maximum terms of 30 years. The Bank’s adjustable rate nonresidential real estate loans have maximum adjustments per year and over the life of the loan of 2% and 6%, respectively, and interest rate minimums of 1% below the origination rate. The Bank generally requires a Loan-to-Value Ratio of up to 80%, depending on the nature of the real estate collateral.

The Bank underwrites its nonresidential real estate loans on a case-by-case basis and, in addition to its normal underwriting criteria, evaluates the borrower’s ability to service the debt from the net operating income of the property. As of December 31, 2012, the Bank’s largest nonresidential real estate loan, for a church in Jeffersonville, Indiana, was $4.4 million. Nonresidential real estate loans in the amount of $1.7 million, or 0.5% of total loans, were included in non-performing assets at December 31, 2012.

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

Land Loans. At December 31, 2012, approximately $15.7 million, or 5.0% of the Bank’s total loan portfolio, consisted of mortgage loans secured by developed and undeveloped real estate. The Bank’s land loans are generally written on terms and conditions similar to its nonresidential real estate loans. Some of the Bank’s land loans are land development loans, i.e., the proceeds of the loans are used for improvements to the real estate such as streets and sewers. At December 31, 2012, the Bank’s largest land loan, a development loan secured by residential building lots in Clark and Floyd Counties Indiana, totaled $2.1 million. Non-performing land loans in the amount of $4.4 million were included in total non-performing assets as of December 31, 2012, representing 1.4% of total loans. Land loans are more risky than conventional loans since land development borrowers who are over budget may divert the loan funds to cover cost over-runs rather than direct them toward the purpose for which such loans were made. In addition, those loans are more difficult to monitor than conventional mortgage loans. As such, a defaulting borrower could cause the Bank to take title to partially improved land that is unmarketable without further capital investment.

Commercial Loans. At December 31, 2012, $19.5 million, or 6.2% of the Bank’s total loan portfolio, consisted of non-mortgage commercial loans. The Bank’s commercial loans are written on either a fixed rate or an adjustable rate basis with terms that vary depending on the type of security, if any. At December 31, 2012, approximately $19.0 million, or 97.4%, of the Bank’s commercial loans were secured by collateral, generally in the form of equipment, inventory, crops or, in some cases as an abundance of caution, real estate. The Bank’s adjustable rate commercial loans are generally indexed to the prime rate with varying margins and terms depending on the type of collateral securing the loans and the credit quality of the borrowers. At December 31, 2012, the largest commercial loan was $1.9 million, representing a large agricultural operation. As of the same date, commercial loans totaling $567,000, or 0.2% of total loans, were included in non-performing assets.

Commercial loans tend to bear somewhat greater risk than residential mortgage loans, depending on the ability of the underlying enterprise to repay the loan. Further, they are frequently larger in amount than the Bank’s average residential mortgage loans.

Consumer Loans. The Bank’s consumer loans, consisting primarily of auto loans, home improvement loans, unsecured installment loans, loans secured by deposits and mobile home loans, aggregated approximately $4.9 million at December 31, 2012, or 1.6% of the Bank’s total loan portfolio. The Bank originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals, although demand for these types of loans has steadily decreased over the past few years. All of the Bank’s consumer loans, except loans secured by deposits, are fixed rate loans with terms that vary from six months (for unsecured installment loans) to 66 months (for home improvement loans and loans secured by new automobiles). At December 31, 2012, $4.0 million of the Bank’s $4.9 million consumer loans were secured by collateral.

The Bank’s loans secured by deposits are made in amounts up to 90% of the current account balance and accrue at a rate of 2% over the underlying passbook or certificate of deposit rate.

The Bank offers only direct automobile loans that provide the loan directly to a consumer.

Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections depend upon the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2012, consumer loans amounting to $16,000 were included in non-performing assets.

Origination, Purchase and Sale of Loans.

The Bank underwrites fixed rate residential mortgage loans for potential sale to the FHLMC on a servicing-retained basis. Loans originated for sale to the FHLMC in the secondary market are originated in accordance with the guidelines established by the FHLMC and are sold promptly after they are originated. The Bank receives a servicing fee of one-fourth of 1% of the principal balance of all loans serviced. At December 31, 2012, the Bank serviced $96.0 million in loans sold to the FHLMC. In conjunction with the acquisition of Dupont State Bank, the Bank acquired servicing rights for $17.6 million of Federal National Mortgage Association loans (FNMA).

The Bank focuses its loan origination activities primarily on Jefferson, Clark and Floyd Counties in Indiana and Trimble, Carroll, and Jefferson Counties in Kentucky, with some activity in the areas adjacent to these counties. With the acquisition of Dupont State Bank, the Bank will engage in loan origination activities in Jackson and Jennings Counties in Indiana as well. At December 31, 2012, the Bank held loans totaling approximately $73.2 million that were secured by property located outside of Indiana. The Bank’s loan originations are generated from referrals from existing customers, real estate brokers and newspaper and periodical advertising. Loan applications are taken at any of the Bank’s 12 full-service offices.

The Bank’s loan approval processes are intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower’s ability to repay, the Bank evaluates the employment and credit history and information on the historical and projected income and expenses of its borrowers.

Under the Bank’s lending policy, a loan officer may approve mortgage loans up to $150,000, a Senior Loan Officer may approve mortgage loans up to $417,000 and the President may approve mortgage loans up to $500,000. All other mortgage loans must be approved by at least four members of the Bank’s Board of Directors. The lending policy further provides that loans secured by readily marketable collateral, such as stock, bonds and certificates of deposit may be approved by a Loan Officer for up to $150,000, by a Senior Loan Officer for up to $300,000 and by the President up to $400,000. Loans secured by other non-real estate collateral may be approved by a Loan Officer for up to $50,000, by a Senior Loan Officer up to $100,000 and by the President up to $200,000. Finally, the lending policy provides that unsecured loans may be approved by a Loan Officer up to $15,000 or up to $25,000 by a Senior Loan Officer or up to $50,000 by the President. All other unsecured loans or loans secured by non-real estate collateral must be approved by at least four members of the Bank’s Board of Directors.

The Bank generally requires appraisals on all real property securing its loans and requires an attorney’s opinion or title insurance and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing the loan if the property is in a flood plain. The Bank also generally requires private mortgage insurance only on fixed rate residential mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does not typically require escrow accounts for insurance premiums or taxes, however, in 2010, due to changes in Regulation Z relative to “high priced mortgages,” the Bank began requiring that certain borrowers escrow for both property taxes and hazard insurance. Under Regulation Z, a “high priced mortgage” is any first mortgage that is 1.5% over the index rate or any second mortgage that is 3.5% over the index rate.

The Bank’s underwriting standards for consumer and commercial loans are intended to protect against some of the risks inherent in making such loans. Borrower character, paying habits and financial strengths are important considerations.

The Bank occasionally purchases and sells participations in commercial loans, nonresidential real estate and multi-family loans to or from other financial institutions. At December 31, 2012, the Bank held $3.0 million in participation loans in its loan portfolio, all a result of the acquisition of Dupont State Bank.

The following table shows loan disbursement and repayment activity for the Bank during the periods indicated.

	Year Ended December 31
	2012		2011			2010
	(In thousands)
Loans Disbursed:
Construction loans	$	10,028	$	8,034		$	5,474
Residential real estate loans		57,741		44,982			50,772
Multi-family loans		4,017		6,391			5,891
Nonresidential real estate loans		29,747		15,009			10,165
Land loans		823		11,959			14,123
Commercial loans		18,037		15,230			14,274
Consumer and other loans		3,265		3,205			3,443
Total loans disbursed		123,658		104,810			104,142
Reductions:
Sales		32,526		23,971			25,185
Principal loan repayments and other (1)		90,835		93,191			90,100
Total reductions		123,361		117,162			115,285
Fair value of loans acquired		52,125		-			-
Net increase (decrease)	$	52,422	$	(12,352	)	$	(11,143	)

(1)

Other items consist of amortization of deferred loan origination costs, the provision for losses on loans, net charges to the allowance for loan losses, and restructured debt.

Origination and Other Fees. The Bank realizes income from loan origination fees, loan servicing fees, late charges, checking account service charges and fees for other miscellaneous services. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents.

NON-PERFORMING AND PROBLEM ASSETS

Mortgage loans are reviewed by the Bank on a regular basis and are placed on a nonaccrual status when management determines that the collectibility of the interest is less than probable or collection of any amount of principal is in doubt. Generally, when loans are placed on nonaccrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. The Bank delivers delinquency notices with respect to all mortgage loans contractually past due 10 days. When loans are 16 days in default, personal contact is made with the borrower to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so.

Commercial and consumer loans are treated similarly. Interest income on consumer, commercial and other non-mortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case accrual of interest is discontinued and the loan is written-off, or written down to the fair value of the collateral securing the loan. It is the Bank’s policy to recognize losses on these loans as soon as they become apparent.

Non-performing Assets. At December 31, 2012, $10.9 million, or 2.3% of consolidated total assets, were non-performing loans compared to $9.9 million, or 2.4% of consolidated total assets, at December 31, 2011. The balance of non-performing assets was real estate owned (REO), comprised of real estate taken during forclosure proceedings, held at December 31, 2012, in the amount of $1.6 million, as compared to $2.5 million at December 31, 2011. Troubled debt restructured that is non-performing at the time of restructuring is required to be inclued as a non-performing asset until certain requirements for payment and borrower viability are met. Non-performing assets are also discussed in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following table sets forth the amounts and categories of the Bank’s non-performing assets (non-performing loans, non-performing troubled debt restructured, and foreclosed real estate) and troubled debt restructurings for the last three years. It is the policy of the Bank that all earned but uncollected interest on all past due loans is reviewed monthly to determine what portion of it should be classified as uncollectible for loans past due in excess of 90 days. Uncollectible interest is written off monthly.

	At December 31
	2012			2011			2010
	(In thousands)
Non-performing assets:
Non-performing loans	$	10,850		$	9,863		$	10,381
Troubled debt restructured		3,860			6,939			6,747
Total non-performing loans and troubled debt restructured		14,710			16,802			17,128
Foreclosed real estate		1,610			2,487			400
Total non-performing assets	$	16,320		$	19,289		$	17,528
Total non-performing loans to net loans		3.55	%		3.90	%		3.91	%
Total non-performing loans, including troubled debt restructured, to net loans		4.82	%		6.64	%		6.45	%
Total non-performing assets to total assets		3.45	%		4.74	%		4.53	%

At December 31, 2012, the Bank held loans delinquent from 30 to 89 days totaling $2.6 million. As of that date, management was not aware of any other assets that would need to be disclosed as non-performing assets.

Delinquent Loans. The following table sets forth certain information at December 31, 2012, 2011, and 2010 relating to delinquencies in the Bank’s portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets. For the period ending December 31, 2012, delinquent purchased credit impaired loans with a fair value of $2.5 million were excluded from the table below.

	At December 31, 2012							At December 31, 2011							At December 31, 2010
	30-89 Days			90 Days or More				30-89 Days			90 Days or More				30-89 Days			90 Days or More
	Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans
	(Dollars in thousands)

Construction loans	1	$	63	1	$	225		1	$	335	-	$	-		-	$	-	1	$	165
Residential real estate loans	35		2,115	10		1,408		20		1,198	36		2,946		14		971	27		2,304
Multi-family loans	-		-	-		-		-		-	-		-		-		-	2		910
Nonresidential real estate loans	6		276	5		753		4		1,054	6		1,831		-		-	10		4,673
Land loans	-		-	1		331		1		8	4		3,080		2		372	3		1,749
Commercial loans	1		100	3		251		2		41	3		297		3		542	2		265
Consumer loans	9		36	1		2		7		44	1		3		6		37	5		315
Total	52	$	2,590	21	$	2,970		35	$	2,680	50	$	8,157		25	$	1,922	50	$	10,381

Delinquent loans to net loans						1.82	%						4.28	%						4.63	%

Classified Assets. The Bank’s Asset Classification Policy provides for the classification of loans and other assets such as debt and equity securities of lesser quality as “special mention,” “substandard,” “doubtful,” or “loss” assets. An asset is treated as a “special mention” when the assets are currently protected but have credit weaknesses that warrant a higher degree of attention from management. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

The Bank regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulation. Not all of the Bank’s classified assets constitute non-performing assets, although the balances of non-performing loans as a percent of total classified is higher than in prior years. Historically, management has been conservative in its listing of assets as classified, especially in comparison to peer classification of similar assets and to actual delinquency status. Whereas classified loans for the Bank historically have been a conservative list of loans warranting scrutiny, in 2011 and 2012 the classified list has become weighted heavily by loans and relationships in the lengthy process of foreclosure. The mating of the conservative approach in monitoring problem loans and loans lingering due to foreclosure has created a larger than historical balance of classified assets. As a result, the Bank remains somewhat higher than peer on balances of loans classified.

The classification of assets listing is evaluated monthly by a committee comprised of lending personnel, the Bank Chief Executive Officer, the Chief Financial Officer, Loan Review personnel, the Collection Officer, and the Bank’s Internal Auditor. The list encompasses entire relationships, rather than single problem loans, and removal of loans from the list is only approved by the committee upon demonstrated performance by the borrower.

At December 31, 2012, the Bank’s classified assets, were as follows:

	At December 31, 2012
	(In thousands)

Substandard assets	$	16,286
Doubtful assets		3,199
Loss assets		-
Total classified assets	$	19,485

Regulatory definition requires that total classified assets include classified loans, which at December 31, 2012 included $16.3 million as substandard and $3.2 million as doubtful, other real estate owned as a result of foreclosure or other legal proceedings of $1.6 million, also considered substandard, and two below-investment grade corporate securities, considered substandard, totaling $1.2 million. Detail of classified loans by loan segment is provided in Footnote 6 to the Consolidated Financial Statements presented later in this Report on Form 10-K.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management’s review and evaluation of current economic conditions (including those of the Bank’s lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs and other pertinent information derived from a review of the loan portfolio. In management’s opinion, the Bank’s allowance for loan losses is adequate to absorb probable incurred losses from loans at December 31, 2012. However, there can be no assurance that regulators, when reviewing the Bank’s loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank’s loan portfolio.

Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the five years ended December 31, 2012. Additional detail about loan loss experience is presented in Footnote 6 to the Consolidated Financial Statements presented in this Report on Form 10-K.

	Year Ended December 31,
	2012			2011			2010			2009			2008
	(Dollars in thousands)

Balance at beginning of period	$	4,003		$	3,806		$	2,611		$	2,364		$	2,208
Charge-offs:
Real estate loans		(1,843	)		(2,520	)		(1,690	)		(2,453	)		(782	)
Consumer		(89	)		(102	)		(130	)		(169	)		(183	)
Commercial loans		-			-			(405	)		(141	)		(83	)
Total charge-offs		(1,932	)		(2,622	)		(2,225	)		(2,763	)		(1,048	)
Recoveries		111			48			775			127			124
Net charge-offs		(1,821	)		(2,574	)		(1,450	)		(2,636	)		(924	)
Provision for losses on loans		1,382			2,771			2,645			2,883			1,080
Balance end of period	$	3,564		$	4,003		$	3,806		$	2,611		$	2,364
Allowance for loan losses as a percent of total loans outstanding		1.15	%		1.56	%		1.41	%		.94	%		.82	%
Ratio of net charge-offs to average loans outstanding before net items		.69	%		.98	%		.53	%		.94	%		.32	%

Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Bank’s allowance for loan losses at the dates indicated. Decreases seen in the “unallocated” category reflect more precise allocation of loan types and concentrations within the revised methodology.

	At December 31,
	2012				2011				2010				2009				2008
	Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans
	(Dollars in thousands)

Balance at end of period applicable to:
Residential real estate	$	1,711	53.4	%	$	2,074	52.8	%	$	919	51.5	%	$	898	52.8	%	$	602	55.7	%
Nonresidential real estate and land		1,719	38.8			1,815	39.1			2,608	40.8			1,570	39.4			967	36.6
Commercial loans		133	6.2			70	6.6			157	6.1			46	6.1			158	6.0
Consumer loans		1	1.6			44	1.5			122	1.6			31	1.7			77	1.7
Unallocated		-	-			-	-			-	-			66	-			560	-
Total	$	3,564	100.0	%	$	4,003	100.0	%	$	3,806	100.0	%	$	2,611	100.0	%	$	2,364	100.0	%

INVESTMENTS AND MORTGAGE-BACKED SECURITIES

Investments. The Bank’s investment portfolio (excluding mortgage-backed securities) consists of U.S. government and agency obligations, corporate bonds, municipal securities and Federal Home Loan Bank (“FHLB”) stock. At December 31, 2012, total investments in the portfolio, as defined above and including mortgage-backed securities, had a combined carrying value of approximately $118.4 million, or 25.0%, of the consolidated total assets.

Investments reported in the financial statements of the Company are held both at the Bank level and at the Bank’s Nevada subsidiaries. All Company investments are available for sale, but the intent of the Company is to hold investments to maturity. Liquidity is met through a combination of deposit growth, borrowing from the Federal Home Loan Bank of Indianapolis, and if needed, sale of investments held at the Bank level. Securities held through the Nevada subsidiaries are held primarily for investment purposes. Securities held at the Bank level are held primarily for liquidity purposes. In 2011, liquidity needs were met primarily through deposit growth and the same held true for 2012. Sales of investments over the last 18 months have been made primarily to take advantage of gain positions on short-term investments, especially those expected to be called in the near future, while funds from maturing investments were reinvested primarily into high quality mortage-backed securities and long term municipals.

The portfolio increased by $9.1 million from December 31, 2011 to the same date in 2012, as $5.0 million of U.S. government and agency securities, most at yields of less than 2%, were purchased at the Nevada subsidiary level. Also,at the Nevada subsidiary level, $18.5 million in purchases of high quality mortgage and asset-backed securities were offset by reductions for a slight overall increase of $1.3 million. Offsetting the purchase were decreases, primarily $10.9 of periodic paydown on these investments while the remainder represented sales and maturities, as the Company took advantage of high gains on sale to offset extraordinary expenses associated with the acquisition of Dupont State Bank. The acquisition of Dupont State Bank included $12.1 million in available-for-sale securities, primarily U.S. government and agency securities and asset-backed securities. During the fourth quarter $5.2 million of these securities were sold to repay Federal Home Loan Bank of Indianapolis advances, and improve the net margin of the Company. Municipal securities, managed at the Nevada subsidiary level, increased slightly for the year. The carrying value of the two trust preferred investments held by the Company, considered to be of higher risk than most investments, improved from $1.1 million as of December 31, 2011 to $1.2 million as of December 31, 2012. The net unrealized gain on the portfolio was $2.9 million at December 31, 2012 and $2.8 million at December 31, 2011.

The following table sets forth the amortized cost and the market value of the Bank’s investment portfolio, excluding mortgage-backed investments, at the dates indicated.

	At December 31,
	2012				2011				2010
	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value
	(In thousands)
Available for sale:
U.S. Government and agency obligations	$	42,581	$	43,409	$	37,107	$	37,917	$	22,139	$	22,528
Municipal securities		29,331		31,162		27,076		28,715		22,516		22,855
Corporate		3,652		3,177		4,115		3,360		1,768		936
Total available for sale		75,564		77,748		68,298		69,992		46,423		46,319
FHLB stock		4,595		4,595		4,226		4,226		4,496		4,496
Total investments	$	80,159	$	82,343	$	72,524	$	74,218	$	50,919	$	50,815

The following table sets forth the amount of investment securities (excluding FHLB stock and mortgage-backed investments) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2012.

	Amount at December 31, 2012 which matures in
	Less Than One Year					One Year to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Average Yield			Amortized Cost		Average Yield			Amortized Cost		Average Yield			Amortized Cost		Average Yield
	(Dollars in thousands)
U.S. Government and agency obligations	$	6,003		2.24	%	$	16,057		1.84	%	$	20,521		1.61	%	$	-		0.00	%
Municipal securities		202		6.16			2,207		4.96			10,406		5.53			16,516		5.65
Corporate		-		-			1,934		1.90			-		-			1,718		1.16

Mortgage-Backed Securities. The Bank maintains a portfolio of mortgage-backed pass-through securities in the form of FHLMC, FNMA and Government National Mortgage Association (“GNMA”) participation certificates. Mortgage-backed pass-through securities generally entitle the Bank to receive a portion of the cash flows from an identified pool of mortgages and gives the Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by its respective agencies as to principal and interest.

Although mortgage-backed securities generally yield less than individual loans originated by the Bank, they present less credit risk. Because mortgage-backed securities have a lower yield relative to current market rates, retention of such investments could adversely affect the Bank’s earnings, particularly in a rising interest rate environment. The mortgage-backed securities portfolio is generally considered to have very low credit risk because the securities are guaranteed as to principal repayment by the issuing agency.

In addition, the Bank has purchased adjustable rate mortgage-backed securities as part of its effort to reduce its interest rate risk. In a period of declining interest rates, the Bank is subject to prepayment risk on such adjustable rate mortgage-backed securities. The Bank attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par. If interest rates rise in general, the interest rates on the loans backing the mortgage-backed securities will also adjust upward, subject to the interest rate caps in the underlying mortgage loans. However, the Bank is still subject to interest rate risk on such securities if interest rates rise faster than 1% to 2% maximum annual interest rate adjustments on the underlying loans.

At December 31, 2012, the Bank had mortgage-backed securities with a carrying value of approximately $36.0 million, all of which were classified as available for sale. These mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity.

The following table sets forth the amortized cost and market value of the Bank’s mortgage-backed securities at the dates indicated.

	At December 31,
	2012				2011				2010
	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value
	(In thousands)
Available for sale:
Government-sponsored enterprise (GSE) residential mortgage-backed securities	$	13,595	$	13,851	$	17,952	$	18,529	$	13,266	$	13,674
Collateralized mortgage obligations		21,663		22,171		15,613		16,168		14,847		15,238
Total mortgage-backed securities	$	35,258	$	36,022	$	33,565	$	34,697	$	28,113	$	28,912

The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2012.

	Amount at December 31, 2012 which matures in
	Less Than One Year				One Year to Five Years				Five to Ten Years				After Ten Years
	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
	(Dollars in thousands)
Government-sponsored enterprise (GSE) residential mortgage-backed securities	$	-	0.00	%	$	2,711	4.41	%	$	7,552	2.12	%	$	3,332	1.59	%
Collateralized mortgage obligations		252	2.73			19,414	2.65			992	1.81			1,005	0.94

The following table sets forth the changes in the Bank’s mortgage-backed securities portfolio at amortized cost for the years ended December 31, 2012, 2011, and 2010.

	For the Year Ended December 31,
	2012			2011			2010
	(In thousands)

Beginning balance	$	33,565		$	28,113		$	26,682
Purchases		26,223			17,550			9,220
Sales proceeds		(13,706	)		(5,947	)		(1,702	)
Repayments		(11,197	)		(6,138	)		(6,072	)
Gain on sales		497			148			92
Premium and discount amortization, net		(124	)		(161	)		(107	)
Ending balance	$	35,258		$	33,565		$	28,113

SOURCES OF FUNDS

General. Deposits have traditionally been the Bank’s primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets, and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions, and levels of competition. Borrowings from the FHLB of Indianapolis and other sources of wholesale funding may be used in the short term to compensate for reductions in deposits or deposit inflows at less than projected levels.

Deposits. Deposits are attracted through the offering of a broad selection of deposit instruments including fixed rate certificates of deposit, NOW, MMDAs and other transaction accounts, individual retirement accounts and savings accounts. The Bank actively solicits and advertises for deposits in Jefferson, Clark, Floyd, Jackson and Jennings Counties in Indiana and in Trimble and Carroll County, Kentucky. Deposits will come from all of our market areas. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by

competitors, growth goals and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Historically, NOW and MMDAs have been relatively stable sources of deposits. During 2012, the single largest item impacting deposit levels was the acquisition of Dupont State Bank and the $78.3 million in deposits acquired. That deposit base was comprise of maturity deposits totaling $39.1 million, interest bearing transactional deposits totaling $28.3 million and noninterest-bearing deposits totaling $10.9 million. Other than the impact of the acquisition, the Company saw little change overall in the amount of deposits year to year. There was, however, a change in the mix of pre-merger deposits as approximately $10.0 million in maturity deposits shifted to transactional deposit accounts, some into noninterest bearing accounts. Taking into consideration the impact of the acquisition on deposits in total, transactional deposits, primarily NOW and MMDA accounts, increased significantly from $185.1 million at December 31, 2011 to $234.8 million at December 31, 2012, an increase of $49.7 million, or 26.9%.

The ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. Due primarily to the acquisition, and despite the shift from maturity deposits to transactional deposits, certificate of deposit balances increased $29.3 million, or 24.4%, from the balance of $120.1 million as of December 31, 2011 to $149.4 million at December 31, 2012. As certificates of deposit repriced and new certificates were added, the lower interest rates for these items caused a significant decline in the cost of deposits. As a result, cost of deposits for the year ended December 31, 2012 was 0.94% as compared to 1.28% for the year ended December 31, 2011, a drop of 34 basis points, period to period. This change resulted in a weighted average rate for deposits of 0.72% at December 31, 2012, a decline of 33 basis points from the 1.05% at December 31, 2011.

An analysis of the Company’s deposit accounts by type, maturity and rate at December 31, 2012 is as follows:

Type of Account	Minimum Opening Balance	Balance at December 31, 2012	% of Deposits			Weighted Average Rate
	(Dollars in thousands)
Withdrawable:
Noninterest bearing accounts	$ 100	$ 40,516		10.54	%		0.00	%
Savings accounts	50	50,900		13.25			0.18
MMDA	2,500	41,982		10.93			0.34
NOW accounts	1,000	101,438		26.40			0.46
Total withdrawable		234,836		61.12			0.30
Certificates (original terms):
I.R.A.	2,500	12,606		3.28			1.73
3 months	2,500	61		0.01			0.15
6 months	2,500	569		0.15			0.18
9 months	2,500	-		0.00			0.00
12 months	2,500	1,640		0.43			0.65
15 months	2,500	30,116		7.84			0.73
18 months	2,500	2,587		0.67			0.70
24 months	2,500	6,098		1.59			1.13
30 months	2,500	1,162		0.30			1.63
36 months	2,500	5,542		1.44			1.72
41 months	2,500	-		0.00			0.00
48 months	2,500	5,664		1.47			2.66
60 months	2,500	12,919		3.36			2.47
Jumbo certificates	2,500	70,455		18.34			1.34
Total certificates		149,419		38.88			1.38
Total deposits		$ 384,255		100.00	%		0.72	%

The following table sets forth, by various interest rate categories, the composition of time deposits of the Bank at the dates indicated:

	At December 31,
	2012		2011		2010
	(In thousands)

0.00 to 1.00%	$	82,418	$	17,348	$	5,263
1.01 to 2.00%		30,166		59,773		65,565
2.01 to 3.00%		32,044		30,160		24,049
3.01 to 4.00%		3,646		3,752		6,361
4.01 to 5.00%		1,094		8,161		13,389
5.01 to 6.00%		51		903		1,461
Total	$	149,419	$	120,097	$	116,088

The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 2012. Matured certificates, which have not been renewed as of December 31, 2012, have been allocated based upon certain rollover assumptions.

	Amounts at December 31, 2012 Maturing In
	One Year or Less		Two Years		Three Years		Greater Than Three Years
	(In thousands)

0.00 to 1.00%	$	67,918	$	12,692	$	1,653	$	89
1.01 to 2.00%		11,043		4,208		1,004		13,955
2.01 to 3.00%		5,875		9,060		5,016		12,115
3.01 to 4.00%		709		2,258		650		29
4.01 to 5.00%		1,089		-		-		5
5.01 to 6.00%		-		-		-		51
Total	$	86,634	$	28,218	$	8,323	$	26,244

The following table indicates the amount of the Bank’s jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2012.

	At December 31, 2012
Maturity Period	(In thousands)

Three months or less	$	13,529
Greater than 3 months through 6 months		9,104
Greater than 6 months through 12 months		20,445
Over 12 months		27,377
Total	$	70,455

The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.

	Deposit Activity

	Balance at December 31, 2012		% of Deposits		Increase (Decrease) from 2011		Balance at December 31, 2011	% of Deposits		Increase (Decrease) from 2010		Balance at December 31, 2010	% of Deposits
	(Dollars in thousands)
Withdrawable:
Noninterest-bearing accounts	$	40,516	10.54	%	16,048		24,468	8.02	%	988		23,480	8.20	%
Savings accounts		50,900	13.25		5,897		45,003	14.74		(7,202	)	52,205	18.23
MMDA		41,982	10.93		10,938		31,044	10.17		(9,631	)	40,675	14.21
NOW accounts		101,438	26.40		16,824		84,614	27.72		30,725		53,889	18.82
Total withdrawable		234,836	61.12		49,707		185,129	60.65		14,882		170,249	59.46
Certificates (original terms):
I.R.A.		12,606	3.28		2,431		10,175	3.33		1,297		8,878	3.10
3 months		61	0.01		39		22	0.01		(20	)	42	0.01
6 months		569	0.15		58		511	0.17		(208	)	719	0.25
9 months		-	0.00		(89	)	89	0.03		-		89	0.03
12 months		1,640	0.43		(5,549	)	7,189	2.36		50		7,139	2.49
15 months		30,116	7.84		5,507		24,609	8.06		2,280		22,329	7.80
18 months		2,587	0.67		908		1,679	0.55		141		1,538	0.54
24 months		6,098	1.59		926		5,172	1.69		263		4,909	1.71
30 months		1,162	0.30		633		529	0.17		(37	)	566	0.20
36 months		5,542	1.44		561		4,981	1.63		(1,507	)	6,488	2.27
41 months		-	0.00		(1,475	)	1,475	0.48		(1,149	)	2,624	0.92
48 months		5,664	1.47		(344	)	6,008	1.97		225		5,783	2.02
60 months		12,919	3.36		4,077		8,842	2.90		3,981		4,861	1.70
Jumbo certificates		70,455	18.34		21,639		48,816	15.99		(1,307	)	50,123	17.50
Total certificates		149,419	38.88		29,322		120,097	39.35		4,009		116,088	40.54
Total deposits	$	384,255	100.00	%	79,029		305,226	100.00	%	18,889		286,337	100.00	%

Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments, or borrowings. The Bank had $42.5 million in FHLB advances at December 31, 2012, as compared to $58.0 million held at the same point in 2011. The average rates paid on those borrowings, however, increased 28 basis points across the period, from 3.55% as of December 31, 2011 to 3.83% as of December 31, 2012, as the Company prepaid $12.5 million in advances. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. During the fiscal year the Bank prepaid $12.5 million in FHLB advances with a prepayment penalty of $392,000. With the acquisition of Dupont State Bank and availability of additional cash and investments, the Bank chose to restructure a portion of its liabilities by selling $5.2 million in available-for-sale securities at a gain of $385,000. The net effect allowed for an improvement of the overall net interest margin as the Bank prepaid higher costing borrowings by selling lower yielding investments at a profit.

The following table presents certain information relating to the Company’s borrowings at or for the years ended December 31, 2012, 2011 and 2010.

	At or for the Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
FHLB Advances and Other Borrowed Money:
Outstanding at end of period	$	49,717		$	65,217		$	65,217
Average balance outstanding for period		63,175			64,884			71,717
Maximum amount outstanding at any month-end during the period		65,217			65,217			81,217
Weighted average interest rate during the period		3.67	%		3.64	%		4.40	%
Weighted average interest rate at end of period		3.78	%		3.57	%		3.80	%

SUBSIDIARIES

The Bank’s wholly-owned subsidiary, Madison 1st Service Corporation, which was incorporated under the laws of the State of Indiana on July 3, 1973, currently holds land but does not otherwise engage in significant business activities. During 2005, the Bank established in Nevada three new subsidiaries, including RVFB Investments, Inc., RVFB Holdings, Inc. and RVFB Portfolio, LLC, to hold and manage a significant portion of the Bank’s investment portfolio. Income from the Nevada investment subsidiaries increased from $1.9 million for the year ended December 31, 2011 to $2.2 million for the same period in 2012, an increase of 15.8%.

FINANCING SUBSIDIARY

In 2003, the Company formed the “RIVR Statutory Trust I,” a statutory trust formed under Connecticut law, and filed a Certificate of Trust with the Secretary of the State of Connecticut. The sole purpose of the Trust is to issue and sell certain securities representing undivided beneficial interests in the assets of the Trust and to invest the proceeds thereof in certain debentures of the Company.

EMPLOYEES

As of December 31, 2012, the Bank employed 116 persons on a full-time basis and 9 persons on a part-time basis. None of the employees is represented by a collective bargaining group. Management considers its employee relations to be good.

COMPETITION

The Bank originates most of its loans to and accepts most of its deposits from residents of Jefferson, Jackson, Jennings, Floyd and Clark Counties, Indiana and Carroll County, KY. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions and certain non-banking consumer lenders that provide similar services in these counties. Some of these institutions have significantly larger resources available to them than does the Bank. In total, there are 23 banks and approximately 8 credit unions located in the six county market area, including the Bank.The Bank also competes with money market funds and brokerage accounts with respect to deposit accounts and with insurance companies with respect to individual retirement accounts.

The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable.

REGULATION AND SUPERVISION

GENERAL

The Bank is subject to examination, supervision and regulation by the Indiana Department of Financial Institutions (“DFI”), and the Federal Deposit Insurance Corporation (the “FDIC”). The Holding Company is a bank holding company, subject to oversight by the Board of Governors of the Federal Reserve System (“Federal Reserve”).

This discussion will summarize the effect of existing and probable governmental regulations on the operations of the Holding Company and the Bank as a bank holding company and a state commercial bank, respectively.

BANK HOLDING COMPANY REGULATION

As a registered bank holding company for the Bank, the Holding Company is subject to the regulation and supervision of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve.

Under the BHCA, without the prior approval of the Federal Reserve, the Holding Company may not acquire direct or indirect control of more than 5% of the voting stock or substantially all of the assets of any company, including a bank, and may not merge or consolidate with another bank holding company. In addition, the Holding Company is generally prohibited by the BHCA from engaging in any nonbanking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such

activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Under the Dodd-Frank Act, a bank holding company is expected to serve as a source of financial and managerial strength to its subsidiary banks. Pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. This support may be required by the Federal Reserve at times when the Holding Company may not have the resources to provide it or, for other reasons, would not be inclined to provide it. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a bank holding company is required to provide limited guarantee of the compliance by any insured depository institution subsidiary that may become “undercapitalized” (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency.

GRAMM-LEACH-BLILEY ACT

Under the Gramm-Leach-Bliley Act (“Gramm-Leach”), bank holding companies are permitted to offer their customers virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. In order to engage in these new financial activities, a bank holding company must qualify and register with the Federal Reserve as a “financial holding company” by demonstrating that each of its bank subsidiaries is well capitalized, well managed and has at least a satisfactory rating under the Community Reinvestment Act. Gramm-Leach established a system of functional regulation, under which the federal banking agencies regulate the banking activities of financial holding companies, the U.S. Securities and Exchange Commission regulates their securities activities and state insurance regulators regulate their insurance activities. The Holding Company has no current intention to elect to become a financial holding company under Gramm-Leach.

Under Gramm-Leach, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of Gramm-Leach affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors. The Holding Company does not disclose any nonpublic information about any current or former customers to anyone except as permitted by law and subject to contractual confidentiality provisions which restrict the release and use of such information.

STATE COMMERCIAL BANK REGULATION

As an Indiana commercial bank, the Bank is subject to federal regulation and supervision by the FDIC and to state regulation and supervision by the DFI. The Bank’s deposit accounts are insured by the Deposit Insurance Fund (“DIF”), which is administered by the FDIC.

Both federal and Indiana law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations.

STATE BANK ACTIVITIES

Under federal law, as implemented by regulations adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and could continue to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC. It is not expected that these restrictions will have a material impact on the operations of the Bank.

FEDERAL HOME LOAN BANK SYSTEM

The Bank is a member of the FHLB system, which consists of 12 regional banks. The Federal Housing Finance Board (“FHFB”), an independent agency, controls the FHLB system, including the FHLB of Indianapolis. The FHLB system provides a central credit facility primarily for member financial institutions. At December 31, 2012, the

Bank’s investment in stock of the FHLB of Indianapolis was $4.6 million. For the fiscal year ended December 31, 2012, the FHLB of Indianapolis paid approximately $132,000 in cash dividends to the Bank. Annualized, this income would have a rate of 3.08%. The rate paid during the period ended December 31, 2012 was higher than the 2.56% paid for the period ended December 31, 2011, primarily due to improvement in the financial condition of the FHLB of Indianapolis in the last few years. All 12 FHLBs are required to provide funds to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. A reduction in the value of such stock may result in a corresponding reduction in the Bank’s capital.

The FHLB of Indianapolis serves as a reserve or central bank for its member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.

All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans not more than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, cash or FHLB deposits, certain small business and agricultural loans of smaller institutions and real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as additional security or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing, and the FHLB has established standards of community service that members must meet to maintain access to long-term advances.

At December 31, 2012 the Bank had $42.5 million in such borrowings, with an additional $59.5 million available, previously approved by the Board of Directors.

FEDERAL RESERVE SYSTEM

The Federal Reserve requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The effect of these reserve requirements is to increase the Bank’s cost of funds. At December 31, 2012, the Bank was in compliance with its reserve requirements.

INSURANCE OF DEPOSITS

Deposits in the Bank are insured by the Deposit Insurance Fund of the FDIC up to a maximum amount, which is generally $250,000 per depositor, subject to aggregation rules. The Dodd-Frank Act extended unlimited insurance on non-interest bearing accounts through December 31, 2012. Under this program, traditional non-interest demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held for a business, individual, or other type of depositor, were covered. Later, Congress added Lawyers’ Trust Accounts (IOLTA) to this unlimited insurance protection through December 31, 2012. Because this program expired on December 31, 2012, there is no longer unlimited insurance coverage for non-interest bearing transaction accounts. Deposits held in non-interest bearing transaction accounts are now aggregated with interest bearing deposits the owner may hold in the same ownership category, and the combined total is insured up to $250,000.

The Bank is subject to deposit insurance assessments by the FDIC pursuant to its regulations establishing a risk-related deposit insurance assessment system, based upon the institution’s capital levels and risk profile. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk-weighted categories based on supervisory evaluations, regulatory capital levels, and certain other factors, with less risky institutions paying lower assessments. An institution’s initial assessment rate depends upon the category to which it is assigned. There are also adjustments to a bank’s initial assessment rates based on levels of long-term unsecured debt, secured liabilities in excess of 25% of domestic deposits and, for certain institutions, brokered deposit levels. Under the rules in effect through March 31, 2011, initial assessments ranged from 12 to 45 basis points of assessable deposits, and the Bank paid assessments at the rate of 3.05 basis points for each $100 of insured deposits. However, pursuant to FDIC rules adopted under the Dodd-Frank Act, effective April 1, 2011, initial assessments ranged from 5 to 35 basis points of the institution’s total assets minus its tangible equity. The Bank paid deposit insurance assessments at the rate of 2.25 basis points for each $100 of insured deposits during the year ended December 31, 2012. No institution may pay a dividend if it is in default of the federal deposit insurance assessment.

The Bank is also subject to assessment for the Financing Corporation (FICO) to service the interest on its bond obligations. The amount assessed on individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. These assessments will continue

until the FICO bonds are repaid between 2017 and 2019. During 2012, the FICO assessment rate was 0.66 basis points for each $100 of the same assessment bases applicable to the FDIC assessment. For the first quarter of 2013, the FICO assessment rate is 0.64 basis points. The Bank expensed deposit insurance assessments (including the FICO assessments) of $362,000 during the year ended December 31, 2012. Future increases in deposit insurance premiums or changes in risk classification would increase the Bank’s deposit related costs.

On December 30, 2009, banks were required to pay the fourth quarter FDIC assessment and to prepay estimated insurance assessments for the years 2010 through 2012 on that date. The prepayment did not affect the Bank’s earnings on that date. The Bank paid an aggregate of $1.9 million in premiums on December 30, 2009, $1.6 million of which constituted prepaid premiums.

Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund at no less than 1.35%, and must achieve the 1.35% designated reserve ratio by September 30, 2020. The FDIC must offset the effect of the increase in the minimum designated reserve ratio from 1.15% to 1.35% on insured depository institutions of less than $10 billion, and may declare dividends to depository institutions when the reserve ratio at the end of a calendar quarter is at least 1.5%, although the FDIC has the authority to suspend or limit such permitted dividend declarations. In December, 2010, the FDIC adopted a final rule setting the designated reserve ratio for the deposit insurance fund at 2% of estimated insured deposits.

On October 19, 2010, the FDIC proposed a comprehensive long-range plan for deposit insurance fund management with the goals of maintaining a positive fund balance, even during periods of large fund losses, and maintaining steady, predictable assessment rates throughout economic and credit cycles. The FDIC determined not to increase assessments in 2011 by 3 basis points, as previously proposed, but to keep the current rate schedule in effect. In addition, the FDIC proposed adopting a lower assessment rate schedule when the designated reserve ratio reaches 1.15% so that the average rate over time should be about 8.5 basis points. In lieu of dividends, the FDIC proposed adopting lower rate schedules when the reserve ratio reaches 2% and 2.5%, so that the average rates will decline about 25 percent and 50 percent, respectively.

Under the Dodd-Frank Act, the assessment base for deposit insurance premiums was changed from adjusted domestic deposits to average consolidated total assets minus average tangible equity, affecting assessments for the last two quarters of 2011, as well as future assessments. Tangible equity for this purpose means Tier 1 capital. Since this is a larger base than adjusted domestic deposits, assessment rates are expected to be lower for the Bank as a result of these changes, which were first reflected in invoices due September 30, 2011. The new FDIC rule to implement the revised assessment requirements includes rate schedules scaled to the increase in the assessment base, including schedules that will go into effect when the reserve ratio reaches 1.15%, 2% and 2.5%. The FDIC staff has projected that the new rate schedules will be approximately revenue neutral.

The schedule would reduce the initial base assessment rate in each of the four risk-based pricing categories.

·	For small Risk Category I banks, the rates would range from 5-9 basis points.

·	The proposed rates for small institutions in Risk Categories II, III and IV would be 14, 23 and 35 basis points, respectively.

·	For large institutions and large, highly complex institutions, the proposed rate schedule ranges from 5 to 35 basis points.

There are also adjustments made to the initial assessment rates based on long-term unsecured debt, depository institution debt, and brokered deposits. The Bank’s assessment rate reflected in its invoices for the 2012 quarters was 2.25 basis points for each $100 of average consolidated assets less average tangible equity.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.

CAPITAL REQUIREMENTS

The Federal Reserve and the FDIC have issued substantially similar risk-based and leverage capital guidelines that are applicable to the Bank. These guidelines require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total

required capital must be “Tier 1 capital,” consisting principally of common stockholders’ equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the allowance for loan losses.

In addition to the risk-based capital guidelines, the Bank is subject to a Tier 1 (leverage) capital ratio which requires a minimum level of Tier 1 capital to adjusted average assets of 3% in the case of financial institutions that have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other institutions are expected to maintain a ratio of at least 1% to 2% above the stated minimum. Pursuant to the regulations, banks must maintain capital levels commensurate with the level of risk, including the volume and severity of problem loans, to which they are exposed.

The Dodd-Frank Act requires the Federal Reserve to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries; provided, however, that bank holding companies with less than $500 million in assets are exempt from these capital requirements. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and risks, including risks related to securitized products and derivatives.

See Footnote 16 to the Consolidated Financial Statements, which shows that, at December 31, 2012, the Bank’s capital exceeded all regulatory capital requirements. At December 31, 2012, the Bank was categorized as well capitalized.

Banking regulators may change these requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry. The Company is unable to predict whether and when higher capital requirements would be imposed and, if so, to what levels and on what schedule.

PROMPT CORRECTIVE REGULATORY ACTION

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2012, the Bank was categorized as “well capitalized,” meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure.

The FDIC may order institutions which have insufficient capital to take corrective actions, including, among other things, submitting a capital restoration plan, limiting asset growth, placing restrictions on activities, requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired, restricting transactions with affiliates and prohibiting the payment of principal or interest on subordinated debt. Institutions deemed by the FDIC to be “critically undercapitalized” would be subject to the appointment of a receiver or conservator.

DIVIDEND LIMITATIONS

The Holding Company is a legal entity separate and distinct from the Bank. The primary source of the Holding Company’s cash flow, including cash flow to pay dividends on the Holding Company’s Common Stock, is the payment of dividends to the Holding Company by the Bank. Under Indiana law, the Bank may pay dividends of so much of its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the DFI for the payment of a dividend if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income” means net income as calculated for call report purposes, less all dividends declared for the applicable period.

The FDIC has the authority to prohibit the Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. In addition, under Federal Reserve supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, assets, quality, and overall financial condition. The Federal Reserve

issued a letter dated February 24, 2009, to bank holding companies providing that it expects banks holding companies to consult with it in advance of declaring dividends that could raise safety and soundness concerns (i.e., such as when the dividend is not supported by earnings or involves a material increase in the dividend rate) and in advance of repurchasing shares of common or preferred stock.

LOANS TO ONE BORROWER

Under Indiana law, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. At December 31, 2012, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits.

ACQUISITIONS OR DISPOSITIONS AND BRANCHING

Branching by the Bank requires the approval of the DFI. Under current law, Indiana chartered banks may establish branches throughout the state and in other states, subject to certain limitations. Congress authorized interstate branching, with certain limitations, beginning in 1997. Indiana law authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the acquisition of a branch. The Dodd-Frank Act permits the establishment of de novo branches in states where such branches could be opened by a state bank chartered by that state. The consent of the state is no longer required.

DODD-FRANK ACT

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and small bank and thrift holding companies, such as River Valley Bancorp, will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision (the “OTS”) and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, impose new capital requirements on bank and thrift holding companies, and impose limits on debit card interchange fees charged by large banks (commonly known as the Durbin Amendment).

The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach Bliley Act, and certain other statutes. In July 2011, many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies transferred to the CFBP. The CFBP has a large budget and staff, and has the authority to implement regulations under federal consumer protection laws and enforce those laws against financial institutions. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by the federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practice in connection with the offering of consumer financial products. Additionally, this bureau 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. Moreover, the Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.

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 recently published several final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, escrow accounts, and mortgage loan originator compensation. The ability-to-repay rule makes lenders liable if they fail to assess ability to repay under a prescribed test, but also creates a safe harbor for so called “qualified mortgages.” The “qualified mortgages” standards include a tiered cap structure that places limits on the total amount of certain fees that can be charged on a loan, a 43% cap on

debt-to-income (i.e., total monthly payments on debt to monthly gross income), exclusion of interest-only products, and other requirements. The 43% debt-to-income cap does not apply for the first seven years the rule is in effect for loans that are eligible for sale to Fannie Mae or Freddie Mac or eligible for government guarantee through the FHA or the Veterans Administration. Failure to comply with the ability-to-repay rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorneys fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. The Company’s management is currently assessing the impact of these requirements on its mortgage lending business.

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 Company’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 Company’s compliance costs and litigation exposure.

The January 25, 2013 decision of the D.C. Circuit Court of Appeals invalidating recess appointments to the National Labor Relations Board, calls into question the recess appointment of Richard Cordray as head of the CFPB. What impact this potentially invalid appointment will have on the CFPB regulations promulgated in January, 2013 or actions taken prior to that time is undetermined at this time. The decision may also play a part in determining whether new legislation will be passed respecting the structure and funding of the CFPB, and whether Director Cordray will be appointed when his current term expires. Though it is not possible to predict the outcome of the recess appointment controversy, the decision will have implications for the Company and the Bank with respect to regulations that apply to them and to competition from other entities that may or may not be subject to regulations promulgated by the CFPB

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 Company 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 nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’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 Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, remains uncertain.

INTERCHANGE FEES FOR DEBIT CARDS

Under the Dodd-Frank Act, interchange fees for debit card transactions must be reasonable and proportional to the issuer’s incremental cost incurred with respect to the transaction plus certain fraud related costs. Although institutions with total assets of less than $10 billion are exempt from this requirement, competitive pressures may require smaller depository institutions to reduce fees with respect to these debit card transactions.

TRANSACTIONS WITH AFFILIATES

Under Indiana law, the Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies, such as the Bancorp. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.

FEDERAL SECURITIES LAW

The shares of Common Stock of the Holding Company have been registered with the SEC under the Securities Exchange Act (the “1934 Act”). The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. If the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements.

Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding

Company who complies with the other conditions of Rule 144 (including those that require the affiliate’s sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks.

Under the Dodd-Frank Act, beginning in 2013, the Holding Company will be required to provide its shareholders an opportunity to vote on the executive compensation payable to its named executive officers and on golden parachute payments made in connection with mergers or acquisitions. These votes will be non-binding and advisory. Beginning in 2013, the Holding Company must also permit shareholders to determine on an advisory basis whether such votes should be held every one, two, or three years.

COMMUNITY REINVESTMENT ACT MATTERS

Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 (“CRA”) be disclosed. The disclosure includes both a four-unit descriptive rating (specifically, outstanding, satisfactory, needs to improve, and substantial noncompliance) and a written evaluation of an institution’s performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member’s performance under the CRA and its record of lending to first-time home buyers. As of the date of its most recent regulatory examination, the Bank was rated “satisfactory” with respect to its CRA compliance.

OTHER FUTURE LEGISLATION AND CHANGE IN REGULATIONS

Various other legislation, including proposals to expand or contract the powers of banking institutions and bank holding companies, is from time to time introduced. This legislation may change banking statutes and the operating environment of the Holding Company and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Holding Company cannot accurately predict whether any of this potential legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon the financial condition or results of operations of the Holding Company or the Bank.

TAXATION

FEDERAL TAXATION

For federal income tax purposes, the Company has been reporting its income and expenses on the accrual method of accounting. The Holding Company and the Bank file a consolidated federal income tax return for each fiscal year ending December 31. The Company’s federal income tax returns have not been audited in recent years.

STATE TAXATION

The Company is subject to Indiana’s Financial Institutions Tax (“IFIT”), which is imposed at a flat rate of 8.5% on apportioned “adjusted gross income.” “Adjusted gross income,” for purposes of IFIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Company’s state income tax returns have not been audited in recent years.

The Company is subject to Kentucky’s Bank Franchise Tax (“KBFT”), which is imposed at a flat rate of 1.1% on apportioned “net capital.” For purposes of the KBFT, “net capital” is determined by (1) adding together the Company’s paid-in capital stock, surplus, undivided profits, capital reserves, net unrealized gains or losses on certain securities, and cumulative foreign currency translation adjustments and (2) deducting from the total an amount equal to the same percentage of the total as the book value of U.S. obligations and Kentucky obligations bears to the book value of the total assets of the Company. “Kentucky obligations” are all obligations of the state, counties, municipalities, taxing districts, and school districts that are exempt from taxation under Kentucky law. Other applicable state taxes include generally applicable sales and use taxes as well as Kentucky bank deposit and local deposit taxes which are generally imposed on the Company with respect to the deposits of Kentucky resident individuals at rates of .001% and .025%, respectively.

ITEM 1A. RISK FACTORS.

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

The following table provides certain information with respect to the Bank’s offices as of December 31, 2012.

Description and Address	Owned or Leased	Year Opened	Total Deposits (in thousands)		Net Book Value of Property, Furniture & Fixtures (in thousands)		Approximate Square Footage
Locations in Madison, Indiana
Downtown Office:
233 East Main Street	Owned	1952	$	54,644	$	303	9,110
Drive-Through Branch:
401 East Main Street	Owned	1984		-		200	420
Hilltop Location:
430 Clifty Drive	Owned	1983		161,556		2,268	18,696
Wal-Mart Banking Center:
567 Ivy Tech Drive	Leased	1995		7,620		91	517

Location in Charlestown, Indiana
1025 Highway 62	Leased/Land	2002		7,590		482	1,500

Location in Dupont, Indiana
10525 N West Front Street	Owned	1910		11,720		164	2,332

Location in Floyds Knobs, Indiana
3660 Paoli Pike	Leased	2008		11,250		373	3,000

Location in Hanover, Indiana
10 Medical Plaza Drive	Owned	1995		13,717		378	1,344

Location in New Albany, Indiana
2675 Charlestown Road	Owned