10-K 1 rivr-20131231.htm FYE DECEMBER 31, 2013 rivr-20131231.htm

THE UNITED STATES
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, 2013
   
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.
o
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, 2013, 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 $16,218,695 based on the closing sale price as reported on the NASDAQ Capital Market.
 
As of February 21, 2014, there were issued and outstanding 1,532,306 shares of the issuer’s Common Stock.
 
Documents Incorporated by Reference
 
Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders to be held on April 16, 2014 are incorporated in Part III.
 

 
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RIVER VALLEY BANCORP
 
FORM 10-K
 
INDEX
 
FORWARD-LOOKING STATEMENTS
3
     
PART I
 
3
Item 1.
Business
3
Item 1A.
Risk Factors
26
Item 1B.
Unresolved Staff Comments
26
Item 2.
Properties
27
Item 3.
Legal Proceedings
28
Item 4.
Mine Safety Disclosures
28
Item 4.5.
Executive Officers of the Registrant
28
     
PART II
 
29
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
29
Item 6.
Selected Financial Data
31
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
32
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
47
Item 8.
Financial Statements and Supplementary Data
48
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



 
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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 on November 20, 1997, Citizens merged out of existence into River Valley Financial.
 
The activities of the Holding Company have been limited primarily to owning 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 13 full-service office locations in southeastern Indiana and northern Kentucky. During the second quarter of 2014, the Company will open an additional full service branch in Jeffersonville, Indiana.
 
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 42.1% of the Bank’s total loan portfolio at December 31, 2013. The Bank identified loans totaling $341,000 as held for sale at December 31, 2013. 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 traditionally 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 expanded the Bank’s branch network to North Vernon, Seymour and Dupont, Indiana, adding a presence in Jackson and Jennings Counties, Indiana. After completing a branch acquisition in November 2013, the Bank opened another full service branch in Osgood, Indiana, in Ripley County. That branch was previously owned by Old National Bank of Evansville, Indiana.
 
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”).
 

 
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As a result of the November 2012 conversion of the Bank to a state chartered bank, the Bank is subject to regulation, supervision and examination by the Indiana Department of Financial Institutions (“DFI”), instead of the OCC, and continues to be regulated by the FDIC. The Holding Company continues 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, 2013, 2012, 2011, 2010 and 2009 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, 2013.


   
At December 31,
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
   
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
                                                           
Construction/Land
  $ 24,307       7.46 %   $ 26,506       8.42 %   $ 27,389       10.47 %   $ 27,991       10.32 %   $ 30,932       11.03 %
One-to-four family residential
    137,298       42.11       137,402       43.65       111,198       42.50       117,616       43.38       127,397       45.41  
Multi-family residential
    16,408       5.03       19,988       6.35       18,582       7.10       14,997       5.53       12,910       4.60  
Nonresidential
    118,946       36.48       106,433       33.81       83,284       31.83       89,607       33.05       87,483       31.18  
Commercial
    24,741       7.59       19,549       6.21       17,349       6.63       16,413       6.05       17,129       6.10  
Consumer
    4,326       1.33       4,906       1.56       3,840       1.47       4,533       1.67       4,711       1.68  
Gross loans receivable
    326,026       100.00 %     314,784       100.00 %     261,642       100.00 %     271,157       100.00 %     280,562       100.00 %
                                                                                 
Add/(Deduct):
                                                                               
Deferred loan origination costs
    487       0.15       484       0.15       481       0.18       485       .2       464       .2  
Undisbursed portions of loans in process
    (5,775 )     (1.77 )     (6,186 )     (1.97 )     (5,024 )     (1.92 )     (2,388 )     (.9 )     (1,824 )     (.7 )
Allowance for loan losses
    (4,510 )     (1.38 )     (3,564 )     (1.13 )     (4,003 )     (1.53 )     (3,806 )     (1.4 )     (2,611 )     (.9 )
Net loans receivable
  $ 316,228       97.00 %   $ 305,518       97.05 %   $ 253,096       96.73 %   $ 265,448       97.9 %   $ 276,591       98.6 %

 
The following table sets forth certain information at December 31, 2013, 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
   
Maturing
 
     
Outstanding at December 31, 2013
   
Within One Year
   
After One but Within Five Years
   
After Five Years
 
     
(In thousands)
 
 
Construction/Land
  $ 24,307     $ 18,582     $ 1,201     $ 4,524  
 
One-to-four family residential
    137,298       4,998       4,534       127,766  
 
Multi-family residential
    16,408       1,022       802       14,584  
 
Nonresidential
    118,946       11,791       4,164       102,991  
 
Commercial
    24,741       12,837       6,318       5,586  
 
Consumer
    4,326       1,361       2,935       30  
 
Total
  $ 326,026     $ 50,591     $ 19,954     $ 255,481  

 

 
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The following table sets forth, as of December 31, 2013, 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, 2014
 
     
Fixed Rates
   
Variable Rates
   
Total
 
     
(In thousands)
 
 
Construction/Land
  $ 1,075     $ 4,650     $ 5,725  
 
One-to-four family residential
    11,833       120,467       132,300  
 
Multi-family residential
    1,128       14,258       15,386  
 
Nonresidential
    11,291       95,864       107,155  
 
Commercial
    11,193       711       11,904  
 
Consumer
    2,954       10       2,964  
 
Total
  $ 39,474     $ 235,960     $ 275,434  

 
Construction/Land Loans. The Bank offers mortgage loans for construction, land development and undeveloped land with respect to residential and nonresidential real estate and, in certain cases, to builders or developers 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 the ratio of the loan amount to the lesser of the current cost or appraised value of the property (the “Loan-to-Value Ratio”) to be 80% 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. The largest single construction loan at December 31, 2013 totaled $2.3 million.
 
Land loans are generally written on terms and conditions similar to nonresidential real estate loans. Some of the Bank’s land loans are land development loans, meaning the proceeds of the loans are used for infrastructure improvements to the real estate such as streets and sewers. At December 31, 2013, the Bank’s largest single land loan, a development loan secured by residential building lots in Clark and Floyd Counties, Indiana, totaled $2.1 million.
 
At December 31, 2013, $24.3 million, or 7.5% of the Bank’s total loan portfolio, consisted of construction, land or land development loans. Of these loans, $3.9 million, or 1.2% 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 and land loans involve a higher level of risk. Borrowers who are over budget may divert the loan funds to cover cost overruns rather than direct them toward the purpose for which such loans were made. In addition, these 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.
 
One-to-four Family Residential Loans. Residential loans consist primarily of one-to-four family residential loans. Approximately $137.3 million, or 42.1% of the Bank’s portfolio of loans, at December 31, 2013, consisted of one-to-four family residential loans, of which approximately 89.6% 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 3.0-3.5% for owner-occupied properties and 3.5-5.0% for non-owner-occupied properties. A substantial portion of the ARMs in the Bank’s portfolio at December 31, 2013 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.
 

 
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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, 2013, approximately 10.4% 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, 2013, the Bank had approximately $99.1 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 $15.0 million in FNMA loans.
 
The Bank generally does not originate one-to-four family residential mortgage loans if 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 2013, the Bank originated and retained $2.6 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, 2013, the Bank had outstanding approximately $16.1 million of home equity loans, with unused lines of credit totaling approximately $24.3 million. The Bank’s home equity lines of credit are adjustable rate lines of credit tied to the prime rate and are 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 3.5-4.0%. 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, 2013, $3.8 million of one-to-four family residential mortgage loans, or 1.2% of total loans, were included in the Bank’s non-performing assets.
 
Multi-family Residential Loans. At December 31, 2013, approximately $16.4 million, or 5.0% 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 residential loans on terms and conditions similar to its nonresidential real estate loans. The largest single multi-family residential loan in the Bank’s portfolio as of December 31, 2013 was $1.0 million. At December 31, 2013, $1.1 million of multi-family residential loans, or 0.3% of total loans, were included in the Bank’s non-performing assets.
 
Multi-family residential 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.
 
Nonresidential Real Estate Loans. At December 31, 2013, $118.9 million, or 36.5% 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 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, 2013, the Bank’s largest nonresidential real estate loan, for two fire houses located in Charlestown and New Albany, Indiana, was $4.9 million. Nonresidential real estate loans in the amount of $2.4 million, or 0.7% of total loans, were included in non-performing assets at December 31, 2013.
 

 
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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 may make them more difficult for management to monitor and evaluate.
 
Commercial Loans. At December 31, 2013, $24.7 million, or 7.6% 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, 2013, approximately $22.5 million, or 91.1%, 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, 2013, the largest single commercial loan was $3.3 million, made to a plastic molding company located in Madison, Indiana. As of the same date, commercial loans totaling $362,000, or 0.1% 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 $4.3 million at December 31, 2013, or 1.3% 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, 2013, $2.9 million of the Bank’s $4.3 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, 2013, consumer loans amounting to $5,000 were included in non-performing assets.
 
Origination, Purchase and Sale of LoansThe 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, 2013, the Bank serviced $99.1 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”), $15.0 million of which were being serviced by the Bank as of December 31, 2013.
 
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 and the Osgood, Indiana branch, the Bank engages in loan origination activities in Jackson, Jennings and Ripley Counties in Indiana as well.  At December 31, 2013, the Bank held loans totaling approximately $75.9 million that were secured by property located outside of its home state of Indiana, primarily in the adjacent states of Kentucky and Ohio.  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 13 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.
 

 
7

 

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, 2013, the Bank held $3.9 million in participation loans in its loan portfolio. The majority of the participations held by the Bank were acquired from Dupont State Bank, and represent relationships with financial institutions and borrowers located in southern Indiana and northern Kentucky. The sole participation originated by the Bank, for a YMCA in Floyd County, Indiana, was a joint effort of several financial institutions in that area.
 
The following table shows loan disbursement and repayment activity for the Bank during the periods indicated.
 
     
Year Ended December 31,
 
     
2013
   
2012
   
2011
 
     
(In thousands)
 
 
Loans Disbursed:
                 
 
Construction/Land
  $ 11,878     $ 10,851     $ 19,993  
 
One-to-four family residential
    57,103       57,741       44,982  
 
Multi-family residential
    5,577       4,017       6,391  
 
Nonresidential
    36,691       29,747       15,009  
 
Commercial
    26,840       18,037       15,230  
 
Consumer and other
    4,008       3,265       3,205  
 
Total loans disbursed
    142,097       123,658       104,810  
 
Reductions:
                       
 
Sales
    22,490       32,526       23,971  
 
Principal loan repayments and other (1)
    108,897       90,835       93,191  
 
Total reductions
    131,387       123,361       117,162  
 
Fair value of loans acquired
    -       52,125       -  
 
Net increase (decrease)
  $ 10,710     $ 52,422     $ (12,352 )
  ______________________________                        
  (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.
 

 
8

 

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, 2013, $11.5 million, or 2.4% of consolidated total assets, were non-performing loans compared to $10.9 million, or 2.3% of consolidated total assets, at December 31, 2012. The balance of non-performing assets was real estate owned (“REO”), comprised of real estate taken during forclosure proceedings, held at December 31, 2013, in the amount of $155,000, as compared to $1.6 million at December 31, 2012. 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,
 
     
2013
 
2012
 
2011
 
2010
 
2009
 
     
(In thousands)
 
 
Non-performing assets:
                     
 
Nonaccrual loans
  $ 11,514   $ 10,850   $ 9,863   $ 10,381   $ 7,199  
 
Past due 90 days or more and accruing
    1     -     -     -     -  
 
Troubled debt restructured
    3,898     3,860     6,939     6,747     1,651  
 
Total non-performing loans and troubled debt restructured
    15,413     14,710     16,802     17,128     8,850  
 
Foreclosed real estate
    155     1,610     2,487     400     253  
 
Total non-performing assets
  $ 15,568   $ 16,320   $ 19,289   $ 17,528   $ 9,103  
                                   
 
Total non-performing loans to net loans
    3.64 %   3.55 %   3.90 %   3.91 %   2.60 %
 
Total non-performing loans, including troubled debt restructured, to net loans
    4.87 %   4.81 %   6.64 %   6.45 %   3.20 %
 
Total non-performing loans to total assets
    2.38 %   2.29 %   2.43 %   2.69 %   1.82 %
 
Total non-performing assets to total assets
    3.22 %   3.45 %   4.74 %   4.53 %   2.30 %

 
The Company would have recorded interest income of $466,000 for the year ended December 31, 2013 if loans on nonaccrual status had been current in accordance with their original terms. Actual interest collected and recognized was $289,000 for the year ended December 31, 2013.
 
At December 31, 2013, the Bank held loans delinquent from 30 to 89 days totaling $2.2 million. As of that date, management was not aware of any other assets that would need to be disclosed as non-performing assets.
 

 
9

 

Delinquent Loans. The following table sets forth certain information at December 31, 2013, 2012, and 2011 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 periods ended December 31, 2013 and 2012, delinquent purchased credit-impaired loans acquired in the Dupont State Bank acquisition with a fair value of $2.4 million and $2.5 million, respectively, were excluded from the table below.
 
   
At December 31, 2013
 
At December 31, 2012
 
At December 31, 2011
 
   
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/Land
  2   $ 207   1   $ 71   1   $ 63   2   $ 556   2   $ 343   4   $ 3,080  
One-to-four family residential
  22     1,129   30     2,322   35     2,115   10     1,408   20     1,198   36     2,946  
Multi-family residential
  -     -   -     -   -     -   -     -   -     -   -     -  
Nonresidential
  5     665   8     940   6     276   5     753   4     1,054   6     1,831  
Commercial
  3     66   4     96   1     100   3     251   2     41   3     297  
Consumer
  11     111   3     7   9     36   1     2   7     44   1     3  
Total
  43   $ 2,178   46   $ 3,436   52   $ 2,590   21   $ 2,970   35   $ 2,680   50   $ 8,157  
Delinquent loans to net loans
                  1.78 %                 1.82 %                 4.28 %
 
 
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 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 2013 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’s Chief Executive Officer, Vice President – Finance, Loan Review personnel, Collection Officer, and 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 sustained performance in accordance with the loan’s terms by the borrower.
 

 
10

 

At December 31, 2013, the Bank’s classified assets, were as follows:
 
     
At December 31, 2013
 
     
(In thousands)
 
 
Substandard assets
  $ 19,070  
 
Doubtful assets
    1,346  
 
Loss assets
    -  
 
Total classified assets
  $ 20,416  

 
Regulatory definition requires that total classified assets include classified loans, which at December 31, 2013 included $18.9 million classified as substandard and $1.3 million classified as doubtful, and other real estate owned as a result of foreclosure or other legal proceedings of $155,000. Detail of classified loans by loan segment is provided in Footnote 6 to the Consolidated Financial Statements presented in Item 8 - Financial Statements and Supplementary Data 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, 2013. 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, 2013. Additional detail about loan loss experience is presented in Footnote 6 to the Consolidated Financial Statements presented Item 8 - Financial Statements and Supplementary Data in this Report on Form 10-K.
 

     
Year Ended December 31,
 
     
2013
   
2012
   
2011
   
2010
   
2009
 
     
(Dollars in thousands)
 
         
 
Balance at beginning of period
  $ 3,564     $ 4,003     $ 3,806     $ 2,611     $ 2,364  
 
Charge-offs:
                                       
 
Construction/Land
    (99 )     (341 )     (824 )     (5 )     (1 )
 
One-to-four family residential
    (245 )     (1,136 )     (604 )     (252 )     (1,929 )
 
Multi-family residential
    -       -       (36 )     (8 )     (184 )
 
Nonresidential
    (182 )     (366 )     (1,056 )     (1,425 )     (339 )
 
Commercial
    (140 )     -       -       (405 )     (141 )
 
Consumer and other
    (177 )     (89 )     (102 )     (130 )     (169 )
 
Total charge-offs
    (843 )     (1,932 )     (2,622 )     (2,225 )     (2,763 )
 
Recoveries
    857       111       48       775       127  
 
Net recoveries (charge-offs)
    14       (1,821 )     (2,574 )     (1,450 )     (2,636 )
 
Provision for losses on loans
    932       1,382       2,771       2,645       2,883  
 
Balance end of period
  $ 4,510     $ 3,564     $ 4,003     $ 3,806     $ 2,611  
 
Allowance for loan losses as a percent of total loans outstanding
    1.41 %     1.15 %     1.56 %     1.41 %     .94 %
 
Ratio of net charge-offs to average loans outstanding before net items (1)
    (0.01 )%     .69 %     .98 %     .53 %     .94 %
 
___________________________
(1) Net items consist of deferred loan origination costs, undisbursed portions of loans in process and the allowance for loan losses.

 
 

 
11

 

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.

     
At December 31,
 
     
2013
   
2012
   
2011
   
2010
   
2009
 
     
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:
                                                 
 
Construction/Land
  $ 676   7.5 %   $ 648   8.4 %   $ 1,016   10.5 %   $ 1,011   10.3 %   $ 135   11.0 %
 
One-to-four family   residential
    1,749   42.1       1,423   43.7       1,986   42.5       746   43.4       700   45.4  
 
Multi-family residential
    404   5.0       281   6.3       65   7.1       138   5.5       63   4.6  
 
Nonresidential
    1,470   36.5       1,078   33.8       822   31.8       1,632   33.0       1,636   31.2  
 
Commercial
    189   7.6       133   6.2       70   6.6       157   6.1       46   6.1  
 
Consumer and other
    22   1.3       1   1.6       44   1.5       122   1.7       31   1.7  
 
Total
  $ 4,510   100.0 %   $ 3,564   100.0 %   $ 4,003   100.0 %   $ 3,806   100.0 %   $ 2,611   100.0 %

 
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
 
General. The Bank’s investment portfolio consists of U.S. government and agency obligations, corporate bonds, municipal securities, FHLB stock and mortgage-backed securities. At December 31, 2013, total investments in the portfolio had a combined carrying value of approximately $124.5 million, or 25.8%, 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 2012 and 2013, liquidity needs were met primarily through deposit growth. Sales of investments over the last twelve 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 $6.1 million from December 31, 2012 to the same date in 2013, as $23.0 million in purchases of high quality mortgage and asset-backed securities, $12.8 million in purchases of municipal securities, and lesser amounts of agency and corporate purchases were offset by reductions in the form of maturities, calls, sales, and principal paydown, for a gross increase of $11.8 million in amortized cost. Despite this gross increase, a $5.7 million swing in the fair value of the Company’s investment portfolio reduced overall growth in the portfolio to $6.1 million. A net unrealized gain on the portfolio of $2.9 million at December 31, 2012 was replaced by a $2.8 million loss at December 31, 2013. The carrying value of the two trust preferred investments held by the Company, considered to be of higher risk than most investments, improved slightly from $1.2 million as of December 31, 2012 to $1.3 million as of December 31, 2013.
 

 
12

 

Investments. 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,
 
     
2013
   
2012
   
2011
 
     
Amortized Cost
 
Market Value
   
Amortized Cost
 
Market Value
   
Amortized Cost
 
Market Value
 
     
(In thousands)
 
 
Available for sale:
                             
 
U.S. Government and agency obligations
  $ 38,075   $ 37,213     $ 42,581   $ 43,409     $ 37,107   $ 37,917  
 
Municipal securities
    37,709     37,122       29,331     31,162       27,076     28,715  
 
Corporate
    4,164     3,751       3,652     3,177       4,115     3,360  
 
Total available for sale
    79,948     78,086       75,564     77,748       68,298     69,992  
 
FHLB stock
    4,595     4,595       4,595     4,595       4,226     4,226  
 
Total investments
  $ 84,543   $ 82,681     $ 80,159   $ 82,343     $ 72,524   $ 74,218  

 
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, 2013.
 
     
Amount at December 31, 2013 which matures
 
     
One Year or Less
   
After One Year through Five Years
   
After Five Years through 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
  $ 6,011   2.09 %   $ 10,206   1.65 %   $ 21,858   1.66 %   $ -   0.00 %
 
Municipal securities
    244   4.13       1,944   3.83       9,636   3.81       25,885   3.04  
 
Corporate
    500   1.34       1,002   .70       1,000   1.26       1,662   1.43  

 
Yields on tax exempt obligations have been computed on a tax equivalent basis.  These yields assume a 34% federal tax rate and a 69 basis points cost of funds which is used in determining the disallowance on the Company’s municipal income under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).
 
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 the payment of 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 and interest 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 the 1% to 2% maximum annual interest rate adjustments on the underlying loans.
 
At December 31, 2013, the Bank held mortgage-backed securities with a carrying value of approximately $41.8 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.
 

 
13

 

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,
 
     
2013
   
2012
   
2011
 
     
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
  $ 19,393     $ 18,913     $ 13,595     $ 13,851     $ 17,952     $ 18,529  
 
Collateralized mortgage obligations
    23,389       22,888       21,663       22,171       15,613       16,168  
 
Total mortgage-backed securities
  $ 42,782     $ 41,801     $ 35,258     $ 36,022     $ 33,565     $ 34,697  

 
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, 2013.
 
     
Amount at December 31, 2013 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
  $ -       - %   $ -       - %   $ 1,451       4.62 %   $ 17,942       2.33 %
 
Collateralized mortgage obligations
    -       -       1       8.50       15       2.31       23,373       2.12  

 
The following table sets forth the changes in the Bank’s mortgage-backed securities portfolio at amortized cost for the years ended December 31, 2013, 2012, and 2011.
 
     
For the Year Ended December 31,
 
     
2013
   
2012
   
2011
 
     
(In thousands)
 
 
Beginning balance
  $ 35,258     $ 33,565     $ 28,113  
 
Purchases
    22,959       26,223       17,550  
 
Sales proceeds
    (7,023 )     (13,706 )     (5,947 )
 
Repayments
    (8,315 )     (11,197 )     (6,138 )
 
Gain on sales
    159       497       148  
 
Premium and discount amortization, net
    (256 )     (124 )     (161 )
 
Ending balance
  $ 42,782     $ 35,258     $ 33,565  
 
 
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, Jennings and Ripley 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.
 

 
14

 

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. Over the last few years, the Bank has experienced movement from maturity deposits into transactional deposits, as customers, frustrated with low interest rates, placed their funds in more fluid products such as demand deposit accounts, both interest-bearing and noninterest-bearing.
 
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 continued low interest rate environment for deposits, certificate of deposit balances decreased $12.4 million, or 8.3%, from $149.4 million as of December 31, 2012 to $137.0 million at December 31, 2013. As certificates of deposit repriced and new certificates were added, the lower interest rates paid caused a significant decline in the cost of deposits overall. Transactional, or “withdrawable,” deposits increased for the period, partially due to the $6.5 million in deposits acquired from Old National Bank in the branch acquisition.
 
The cost of deposits for the year ended December 31, 2013 was 0.67% as compared to 0.94% for the year ended December 31, 2012, a drop of 27 basis points, period to period. This change resulted in a weighted average rate for deposits of 0.58% at December 31, 2013, a decline of 14 basis points from 0.72% at December 31, 2012.
 
An analysis of the Company’s deposit accounts by type, maturity and rate at December 31, 2013 is as follows:
 
 
Type of Account
 
Minimum Opening Balance
   
Balance at December 31, 2013
   
% of Deposits
   
Weighted
Average Rate
 
     
(Dollars in thousands)
 
 
Withdrawable:
                       
 
Noninterest bearing accounts
  $ 100     $ 47,499       12.02 %     0.00 %
 
Savings accounts
    50       56,363       14.27       0.14  
 
MMDA
    2,500       40,098       10.15       0.22  
 
NOW accounts
    1,000       114,041       28.87       0.46  
 
Total withdrawable
            258,001       65.31       0.27  
 
Certificates (original terms):
                               
 
I.R.A.
    2,500       12,348       3.13       1.50  
 
3 months
    2,500       61       0.02       0.10  
 
6 months
    2,500       588       0.15       0.14  
 
9 months
    2,500       -       -       -  
 
12 months
    2,500       76       0.02       0.46  
 
15 months
    2,500       23,615       5.98       0.38  
 
18 months
    2,500       2,456       0.62       0.50  
 
24 months
    2,500       6,000       1.52       0.67  
 
30 months
    2,500       682       0.17       0.80  
 
36 months
    2,500       4,391       1.11       1.04  
 
41 months
    2,500       -       -       -  
 
48 months
    2,500       5,921       1.50       2.44  
 
60 months
    2,500       14,685       3.72       2.10  
 
10 year & misc
    2,500       132       0.03       4.13  
 
Jumbo certificates
    2,500       66,059       16.72       1.12  
 
Total certificates
            137,014       34.69       1.15  
 
Total deposits
          $ 395,015       100.00 %     0.58 %


 
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The following table presents the average daily amount of deposits bearing interest and average rates paid on such deposits for the years indicated.
 
 
     
2013
   
2012
   
2011
 
     
Amount
 
Rate %
   
Amount
 
Rate %
   
Amount
 
Rate %
 
     (Dollars in thousands) 
                                       
 
Noninterest-bearing demand deposits
 
$
46,166
 
-
%  
$
31,464
 
-
%  
$
25,418
 
-
%
 
Savings accounts
   
97,601
 
0.19
     
80,287
 
0.36
     
77,565
 
0.65
 
 
Now accounts
   
106,140
 
0.43
     
83,489
 
0.53
     
72,383
 
0.62
 
 
Certificates of deposit
   
141,617
 
1.18
     
122,316
 
1.59
     
120,084
 
2.08
 
 
Total deposits
 
$
391,524
 
0.59
%  
$
317,556
 
0.84
%  
$
295,450
 
1.17
%

 
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,
 
     
2013
   
2012
   
2011
 
     
(In thousands)
 
 
0.00 to 1.00%
  $ 83,970     $ 82,418     $ 17,348  
 
1.01 to 2.00%
    24,341       30,166       59,773  
 
2.01 to 3.00%
    25,891       32,044       30,160  
 
3.01 to 4.00%
    2,753       3,646       3,752  
 
4.01 to 5.00%
    5       1,094       8,161  
 
5.01 to 6.00%
    54       51       903  
 
Total
  $ 137,014     $ 149,419     $ 120,097  

 
The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 2013. Matured certificates, which have not been renewed as of December 31, 2013, have been allocated based upon certain rollover assumptions.
 
     
Amounts at December 31, 2013 Maturing In
 
     
One Year
or Less
   
Two Years
   
Three Years
   
Greater Than Three Years
 
     
(In thousands)
 
 
0.00 to 1.00%
  $ 67,476     $ 12,305     $ 2,956     $ 1,233  
 
1.01 to 2.00%
    4,275       957       2,892       16,217  
 
2.01 to 3.00%
    9,415       4,715       11,021       740  
 
3.01 to 4.00%
    2,164       559       -       30  
 
4.01 to 5.00%
    -       -       -       5  
 
5.01 to 6.00%
    -       -       -       54  
 
Total
  $ 83,330     $ 18,536     $ 16,869     $ 18,279  


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, 2013.
 
     
At December 31, 2013
 
 
Maturity Period
 
(In thousands)
 
 
Three months or less
  $ 10,266  
 
Greater than 3 months through 6 months
    8,655  
 
Greater than 6 months through 12 months
    24,710  
 
Over 12 months
    22,428  
 
Total
  $ 66,059  


 
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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, 2013
   
% of Deposits
   
Increase (Decrease) from 2012
   
Balance at December 31, 2012
   
% of Deposits
   
Increase (Decrease) from 2011
   
Balance at December 31, 2011
   
% of Deposits
 
     
(Dollars in thousands)
 
 
Withdrawable:
                                               
 
Noninterest-bearing accounts
  $ 47,499       12.02 %   $ 6,983     $ 40,516       10.54 %   $ 16,048     $ 24,468       8.02 %
 
Savings accounts
    56,363       14.27       5,463       50,900       13.25       5,897       45,003       14.74  
 
MMDA
    40,098       10.15       (1,884 )     41,982       10.93       10,938       31,044       10.17  
 
NOW accounts
    114,041       28.87       12,603       101,438       26.40       16,824       84,614       27.72  
 
Total withdrawable
    258,001       65.31       23,165       234,836       61.12       49,707       185,129       60.65  
 
Certificates (original terms):
                                                               
 
I.R.A.
    12,348       3.13       (258 )     12,606       3.28       2,431       10,175       3.33  
 
3 months
    61       0.02       -       61       0.01       39       22       0.01  
 
6 months
    588       0.15       19       569       0.15       58       511       0.17  
 
9 months
    -       -       -       -       0.00       (89 )     89       0.03  
 
12 months
    76       0.02       (1,564 )     1,640       0.43       (5,549 )     7,189       2.36  
 
15 months
    23,615       5.98       (6,501 )     30,116       7.84       5,507       24,609       8.06  
 
18 months
    2,456       0.62       (131 )     2,587       0.67       908       1,679       0.55  
 
24 months
    6,000       1.52       (98 )     6,098       1.59       926       5,172       1.69  
 
30 months
    682       0.17       (480 )     1,162       0.30       633       529       0.17  
 
36 months
    4,391       1.11       (1,151 )     5,542       1.44       561       4,981       1.63  
 
41 months
    -       -       -       -       0.00       (1,475 )     1,475       0.48  
 
48 months
    5,921       1.50       257       5,664       1.47       (344 )     6,008       1.97  
 
60 months
    14,685       3.72       1,766       12,919       3.36       4,077       8,842       2.90  
 
10 years
    132       0.03       132       -       -       -       -       -  
 
Jumbo certificates
    66,059       16.72       (4,396 )     70,455       18.34       21,639       48,816       15.99  
 
Total certificates
    137,014       34.69       (12,405 )     149,419       38.88       29,322       120,097       39.35  
 
Total deposits
  $ 395,015       100.00 %   $ 10,760     $ 384,255       100.00 %   $ 79,029     $ 305,226       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, 2013, identical in amount to the balances held at the same point in 2012. The average rates paid on those borrowings, however, decreased across the period, from 3.67% as of December 31, 2012 to 3.58% as of December 31, 2013, as the Company paid and replaced $23.0 million in advances, including a restructuring of $8.0 million in advances, originally scheduled to mature in 2015. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. Of the $23 million paid, $5.0 million in advances were prepaid, with a prepayment penalty of $12,500.
 
The following table presents certain information relating to the Company’s borrowings at or for the years ended December 31, 2013, 2012 and 2011.

     
At or for the Year Ended December 31,
 
     
2013
   
2012
   
2011
 
     
(Dollars in thousands)
 
 
FHLB Advances and Other Borrowed Money:
                 
 
Outstanding at end of period
  $ 49,717     $ 49,717     $ 65,217  
 
Average balance outstanding for period
    52,134       63,175       64,884  
 
Maximum amount outstanding at any month-end during the period
    59,717       65,217       65,217  
 
Weighted average interest rate during the period
    3.58 %     3.67 %     3.64 %
 
Weighted average interest rate at end of period
    3.23 %     3.78 %     3.57 %


 
17

 

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 (as discussed in Item 2, Properties), but does not otherwise engage in significant business activities. The Bank established three subsidiaries in Nevada, 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 decreased from $2.2 million for the year ended December 31, 2012 to $1.8 million for the same period in 2013, a decrease of 18.2%, due primarily to reduced gains on the sale of available-for-sale securities.
 
 
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 was to issue and sell certain trust preferred 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, 2013, the Bank employed 120 persons on a full-time basis and 8 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, Ripley, Floyd and Clark Counties, Indiana and Trimble and Carroll Counties, Kentucky. 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 26 banks and 8 credit unions located in the 8-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

 
18

 

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, 2013, the
 

 
19

 

Bank’s investment in stock of the FHLB of Indianapolis was $4.6 million. For the fiscal year ended December 31, 2013, the FHLB of Indianapolis paid approximately $161,000 in cash dividends to the Bank. Annualized, this income would have a rate of 3.50%. The rate paid during the period ended December 31, 2013 was higher than the 3.08% paid for the period ended December 31, 2012, 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, 2013, the Bank had $42.5 million in such borrowings, with an additional $49.5 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, 2013, 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 noninterest bearing accounts through December 31, 2012. Under this program, traditional noninterest 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. Because this program expired on December 31, 2012, there is no longer unlimited insurance coverage for noninterest bearing transaction accounts. Deposits held in noninterest 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. 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 tangible equity. The Bank’s assessment rate reflected in its invoices for the 2013 quarters was 9.35 basis points for each $100 of average consolidated assets less average tangible equity. 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 2013, the FICO assessment rate was 0.64 basis points for each $100 of the same assessment bases applicable to the FDIC assessment. For the first quarter of 2014, the FICO assessment rate is 0.62 basis points. The Bank expensed deposit insurance assessments (including the FICO
 

 
20

 

assessments) of $397,000 during the year ended December 31, 2013. 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&#