10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2011
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number: 0-21765

RIVER VALLEY BANCORP

(Exact name of registrant as specified in its charter)

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

(812) 273-4949

(Registrant’s telephone number, including area code)

[None]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x          No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x          No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨          No  x

The number of shares of the Registrant’s common stock, without par value, outstanding as of November 11, 2011, was 1,514,472.

RIVER VALLEY BANCORP

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Operations	4
	Consolidated Condensed Statements of Comprehensive Income	5
	Consolidated Condensed Statements of Cash Flows	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	43
Item 4.	Controls and Procedures	43
PART II. OTHER INFORMATION		43
Item 1.	Legal Proceedings	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	(Removed and Reserved)	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
SIGNATURES		45
EXHIBIT INDEX		46

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RIVER VALLEY BANCORP

Consolidated Condensed Balance Sheets

	September 30, 2011			December 31, 2010
	(Unaudited)
	(In Thousands, Except Share Amounts)
Assets
Cash and due from banks	$	1,913		$	2,021
Interest-bearing demand deposits		15,587			12,864
Federal funds sold		1,905			1,903
Cash and cash equivalents		19,405			16,788
Investment securities available for sale		95,150			75,231
Loans held for sale		1,243			1,089
Loans		258,915			269,254
Allowance for loan losses		(3,780	)		(3,806	)
Net loans		255,135			265,448
Premises and equipment, net		8,119			7,975
Real estate, held for sale		3,209			400
Federal Home Loan Bank stock		4,226			4,496
Interest receivable		1,962			1,953
Cash value of life insurance		9,774			9,532
Goodwill		79			79
Other assets		3,647			3,618
Total assets	$	401,949		$	386,609
Liabilities
Deposits
Noninterest-bearing	$	24,690		$	23,480
Interest-bearing		274,446			262,857
Total deposits		299,136			286,337
Borrowings		65,217			65,217
Interest payable		398			485
Other liabilities		4,096			3,102
Total liabilities		368,847			355,141
Commitments and Contingencies
Stockholders’ Equity
Preferred stock – liquidation preference $1,000 per share – no par value
Authorized – 2,000,000 shares
Issued and outstanding – 5,000 shares		5,000			5,000
Common stock, no par value
Authorized – 5,000,000 shares
Issued and outstanding – 1,514,472 shares		7,561			7,546
Retained earnings		18,469			18,479
Accumulated other comprehensive income		2,072			443
Total stockholders’ equity		33,102			31,468
Total liabilities and stockholders’ equity	$	401,949		$	386,609

See Notes to Consolidated Condensed Financial Statements.

3

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Operations

(Unaudited)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
	(In Thousands, Except Share Amounts)
Interest Income
Loans receivable	$	11,215		$	12,022		$	3,732		$	3,996
Investment securities		2,037			2,022			711			653
Interest-earning deposits and other		107			92			36			29
Total interest income		13,359			14,136			4,479			4,678
Interest Expense
Deposits		2,633			3,185			864			1,030
Borrowings		1,775			2,523			600			765
Total interest expense		4,408			5,708			1,464			1,795
Net Interest Income		8,951			8,428			3,015			2,883
Provision for loan losses		2,297			1,915			1,449			1,390
Net Interest Income After Provision for Loan Losses		6,654			6,513			1,566			1,493
Other Income
Service fees and charges		1,431			1,469			516			527
Net realized gains on sale of available-for-sale securities		270			306			105			175
Net gains on loan sales		367			385			138			223
Interchange fee income		303			274			103			97
Increase in cash value of life insurance		242			245			81			86
Loss on premises, equipment and real estate held for sale		(683	)		(10	)		(533	)		-
Other income		54			129			(15	)		40
Total other income		1,984			2,798			395			1,148
Other Expenses
Salaries and employee benefits		3,945			3,703			1,329			1,211
Net occupancy and equipment expenses		1,069			996			363			339
Data processing fees		312			356			101			129
Advertising		318			318			128			113
Mortgage servicing rights		87			92			45			35
Office supplies		92			111			30			35
Professional fees		331			252			149			55
Federal Deposit Insurance Corporation assessment		290			351			47			111
Other expenses		957			1,006			358			361
Total other expenses		7,401			7,185			2,550			2,389
Income (Loss) Before Income Tax		1,237			2,126			(589	)		252
Income tax expense (benefit)		21			400			(382	)		(39	)
Net Income (Loss)		1,216			1,726			(207	)		291
Preferred stock dividends		(272	)		(272	)		(91	)		(90	)
Net Income Available to Common Stockholders	$	944		$	1,454		$	(298	)	$	201
Basic earnings per common share	$	.62		$	.96		$	(.20	)	$	.13
Diluted earnings per common share		.62			.96			(.20	)		.13
Dividends per share		.63			.63			.21			.21

See Notes to Consolidated Condensed Financial Statements.

4

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

	Nine Months Ended September 30,				Three Months Ended September 30,
	2011		2010		2011			2010
	(In Thousands)
Net income (loss)	$	1,216	$	1,726	$	(207	)	$	291
Other comprehensive income, net of tax
Unrealized gains on securities available for sale
Unrealized holding gains arising during the period, net of tax expense of $990, $756, $424, and $332		1,805		1,353		770			593
Less: Reclassification adjustment for gains included in net income, net of tax expense of $94, $116, $38, and $69		176		190		67			105
		1,629		1,163		703			488
Comprehensive income	$	2,845	$	2,889	$	496		$	779

See Notes to Consolidated Condensed Financial Statements.

5

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2011			2010
	(In Thousands)
Operating Activities
Net income	$	1,216		$	1,726
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		2,297			1,915
Depreciation and amortization		441			376
Investment securities gains		(270	)		(306	)
Loans originated for sale in the secondary market		(12,932	)		(14,253	)
Proceeds from sale of loans in the secondary market		13,020			14,051
Gain on sale of loans		(367	)		(385	)
Amortization of net loan origination cost		103			71
Loss on premises, equipment and real estate held for sale		683			10
Employee Stock Ownership Plan compensation		26			29
Net change in
Interest receivable		(9	)		156
Interest payable		(87	)		(135	)
Prepaid FDIC assessment		268			325
Other adjustments		(292	)		(502	)
Net cash provided by operating activities		4,097			3,078
Investing Activities
Proceeds from sale of FHLB Stock		270			-
Purchases of securities available for sale		(31,803	)		(16,822	)
Proceeds from maturities of securities available for sale		7,057			11,722
Proceeds from sales of securities available for sale		7,585			9,637
Net change in loans		3,602			6,686
Purchases of premises and equipment		(585	)		(172	)
Net cash received in branch acquisition		-			582
Proceeds from sale of real estate acquired through foreclosure		893			485
Other investing activity		(182	)		-
Net cash provided by (used in) investing activities		(13,163	)		12,118
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		6,046			(4,781	)
Certificates of deposit		6,753			8,135
Proceeds from borrowings		15,000			3,000
Repayment of borrowings		(15,000	)		(24,000	)
Cash dividends		(1,226	)		(1,222	)
Acquisition of stock for stock benefit plans		(16	)		-
Advances by borrowers for taxes and insurance		126			68
Other financing activities		-			36
Net cash provided by (used in) financing activities		11,683			(18,764	)
Net Change in Cash and Cash Equivalents		2,617			(3,568	)
Cash and Cash Equivalents, Beginning of Period		16,788			13,387
Cash and Cash Equivalents, End of Period	$	19,405		$	9,819
Additional Cash Flows and Supplementary Information
Interest paid	$	4,495		$	5,843
Income tax paid, net of refunds		388			328
Transfers to real estate held for sale		4,311			811

See Notes to Consolidated Condensed Financial Statements.

6

RIVER VALLEY BANCORP

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

NOTE 1: BASIS OF PRESENTATION

The accompanying consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation included in the Annual Report on Form 10-K for the year ended December 31, 2010. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and nine-month periods ended September 30, 2011, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Corporation as of December 31, 2010 has been derived from the audited consolidated balance sheet of the Corporation as of that date.

NOTE 2: PRINCIPLES OF CONSOLIDATION

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

7

NOTE 3: EARNINGS PER SHARE

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

	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
	Income		Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	944		1,514,472	$	.62	$	1,454		1,508,904	$	.96
Effect of dilutive RRP awards and stock options				2,034						5,300
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	944		1,516,506	$	.62	$	1,454		1,514,204	$	.96

	Three Months Ended September 30, 2011								Three Months Ended September 30, 2010
	Income			Weighted Average Shares		Per Share Amount			Income		Weighted Average Shares		Per Share Amount
	(In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	(298	)		1,514,472	$	(.20	)	$	201		1,512,472	$	.13
Effect of dilutive RRP awards and stock options					-							3,456
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	(298	)		1,514,472	$	(.20	)	$	201		1,515,928	$	.13

Net income for the nine-month period ending September 30, 2011, of $1,216,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $944,000. For the nine-month period ending September 30, 2010, net income of $1,726,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $1,454,000.

Net loss for the three-month period ending September 30, 2011 of $207,000 was increased by $91,000 for dividends on preferred stock in the same period, to arrive at a loss of $298,000. For the three-month period ending September 30, 2010, net income of $291,000 was reduced by $90,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $201,000.

8

Certain groups of options were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares.  For the three-month and nine-month periods ended September 30, 2011 and September 30, 2010, options to purchase 5,000 shares at an exercise price of $22.25 per share were outstanding and were not included in the computation of diluted earnings for those periods. .  In addition, for the three months ended September 30, 2011, options to purchase 8,400 shares and 19,000 shares at exercise prices of $13.25 and $14.56 per share were also outstanding and were not included in the computation of diluted earnings per share due to the net loss reported for that period.

NOTE 4: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

Available-for-sale Securities

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

9

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010, respectively (in thousands).

			September 30, 2011
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	32,998	$	-	$	32,998	$	-
State and municipal		27,228		-		27,228		-
Government-sponsored enterprise (GSE) -residential mortgage-backed and other asset-backed agency securities		31,485		-		31,485		-
Corporate		3,439		-		2,276		1,163
Total	$	95,150	$	-	$	93,987	$	1,163

			December 31, 2010
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	22,528	$	-	$	22,528	$	-
State and municipal		22,855		-		22,855		-
Government-sponsored enterprise (GSE) -residential mortgage-backed and other asset-backed agency securities		28,912		-		28,912		-
Corporate		936		-		-		936
Total	$	75,231	$	-	$	74,295	$	936

10

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010:

	Available-For-Sale Securities
	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
	(In Thousands)
Beginning balance	$	936		$	848
Total realized and unrealized gains and losses
Amortization included in net income		6			6
Unrealized gains (losses) included in other comprehensive income		231			102
Purchases		-			-
Pay downs		(10	)		(12	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,163		$	944
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	-

	Available-For-Sale Securities
	Three Months Ended September 30, 2011			Three Months Ended September 30, 2010
	(In Thousands)
Beginning balance	$	1,169		$	1,000
Total realized and unrealized gains and losses
Amortization included in net income		3			2
Unrealized gains (losses) included in other comprehensive income		(6	)		(54	)
Purchases		-			-
Pay downs		(3	)		(4	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,163		$	944
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	-

There were no realized or unrealized gains or losses of Level 3 securities included in net income for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010.

11

At September 30, 2010, Level 3 securities included two pooled trust preferred securities. The fair value on these securities is calculated using a combination of observable and unobservable assumptions as a quoted market price is not readily available. Both securities remain in Level 3 at September 30, 2011. For the past two fiscal years, trading of these types of securities has only been conducted on a distress sale or forced liquidation basis, although some trading activity has occurred in recent months for instruments similar to the instruments held by the Corporation. As a result, the Corporation continues to measure the fair values using discounted cash flow projections and has included the securities in Level 3.

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

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010.

				September 30, 2011
				Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans		$	6,868		$	-		$	-		$	6,868
Real estate held for sale			1,373			-			-			1,373
Mortgage servicing rights			126			-			-			126

				December 31, 2010
				Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans		$	8,956		$	-		$	-		$	8,956
Real estate held for sale			-			-			-			-
Mortgage servicing rights			234			-			-			234

Impaired Loans (Collateral Dependent)

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

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

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

Real estate held for sale

Real estate held for sale is carried at the fair value less cost to sell and is periodically evaluated for impairment.  Real estate held for sale recorded during the current accounting period is recorded at fair value, less cost to sell and is disclosed as a nonrecurring measurement.

12

Mortgage Servicing Rights

Mortgage servicing rights are initially recorded at fair value and are subsequently reported at amortized cost and periodically evaluated for impairment. New mortgage servicing rights recorded during the current accounting period are recorded at fair value and are disclosed as a nonrecurring measurement.

Mortgage servicing rights recorded as an asset and into income during the nine months ended September 30, 2011 and the year ended December 31, 2010 totaled $126,000 and $234,000, respectively. For the year ended December 31, 2010, $12,000 was recorded as impairment on mortgage servicing rights and included in net income. For the nine months ended September 30, 2011, the Corporation reduced the recorded impairment, increasing net income by $39,000 as pool values increased. Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair values of new mortgage servicing rights are estimated using discounted cash flow models. Due to the nature of the valuation inputs, recording initial mortgage servicing rights are classified within Level 3 of the hierarchy.

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

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

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

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

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

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

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

Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt.

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

Advance Payment by Borrowers for Taxes and Insurance - The fair value approximates carrying value.

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

13

The estimated fair values of the Corporation’s financial instruments are as follows:

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Assets
Cash and cash equivalents	$	19,405	$	19,405	$	16,788	$	16,788
Investment securities available for sale		95,150		95,150		75,231		75,231
Loans, held for sale		1,243		1,270		1,089		1,110
Loans, net of allowance for losses		255,135		263,191		265,488		273,029
Stock in FHLB		4,226		4,226		4,496		4,496
Interest receivable		1,962		1,962		1,953		1,953
Mortgage servicing rights		628		929		588		834
Liabilities
Deposits		299,136		303,168		286,337		289,576
FHLB advances		58,000		63,096		58,000		61,974
Borrowings		7,217		5,543		7,217		4,725
Interest payable		398		398		485		485
Advance payments by borrowers for taxes and insurance		231		231		105		105
Off-Balance Sheet Assets (Liabilities)
Commitments to extend credit		-		-		-		-
Standby letters of credit		-		-		-		-

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NOTE 5:  INVESTMENT SECURITIES

The amortized cost and approximate fair values of securities as of September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Gains		Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	32,079	$	919	$	-	$	32,998
State and municipal		25,644		1,600		16		27,228
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		30,096		1,391		2		31,485
Corporate		4,110		-		671		3,439
Total investment securities	$	91,929	$	3,910	$	689	$	95,150

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	22,139	$	452	$	63	$	22,528
State and municipal		22,516		463		124		22,855
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		28,113		908		109		28,912
Corporate		1,768		-		832		936
Total investment securities	$	74,536	$	1,823	$	1,128	$	75,231

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The amortized cost and fair value of available-for-sale securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
	(In Thousands)
Within one year	$	2,351	$	2,385
One to five years		26,264		26,990
Five to ten years		17,910		18,627
After ten years		15,308		15,663
		61,833		63,665
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		30,096		31,485
Totals	$	91,929	$	95,150

No securities were pledged at September 30, 2011 or at December 31, 2010 to secure FHLB advances. Securities with a carrying value of $13,405,000 and $18,580,000 were pledged at September 30, 2011 and December 31, 2010 to secure public deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the nine-month periods ended September 30, 2011 and September 30, 2010 were $7,585,000 and $9,637,000, respectively. Gross gains of $270,000 resulting from sales and calls of available-for-sale securities were realized during the nine-month period ended September 30, 2011. There were no losses recorded for the period. Comparatively, gross gains of $309,000 and gross losses of $3,000 were realized for the nine-month period ended September 30, 2010.

Proceeds from sales of securities available for sale during the three-month period ended September 30, 2011 were $4,251,000 and $2,271,000 during the same period in 2010. Gross gains of $105,000 and $175,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended September 30, 2011 and September 30, 2010, respectively. No losses were recorded for the three-month period ended September 30, 2011 or September 30, 2010. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2011 was $4,952,000, which is approximately 5.20% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2010 was $13,352,000, which represented 17.7% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

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

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The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010:

	September 30, 2011
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Federal agencies	$	-	$	-		$	-	$	-		$	-	$	-
State and municipal		741		(10	)		771		(6	)		1,512		(16	)
GSE - residential mortgage-backed and other asset-backed agency securities		-		-			1		(2	)		1		(2	)
Corporate		2,277		(70	)		1,162		(601	)		3,439		(671	)
Total temporarily impaired securities	$	3,018	$	(80	)	$	1,934	$	(608	)	$	4,952	$	(689	)

	December 31, 2010
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Federal agencies	$	3,952	$	(63	)	$	-	$	-		$	3,952	$	(63	)
State and municipal		2,752		(70	)		724		(54	)		3,476		(124	)
GSE - residential mortgage-backed and other asset-backed agency securities		4,988		(109	)		-		-			4,988		(109	)
Corporate		-		-			936		(832	)		936		(832	)
Total temporarily impaired securities	$	11,692	$	(242	)	$	1,660	$	(886	)	$	13,352	$	(1,128	)

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State and Municipal

The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were primarily caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September30, 2011.

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

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September30, 2011.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at September30, 2011 of $387,000 and $214,000, respectively. At December 31, 2010, the unrealized losses on these two investments were $530,000 and $302,000, respectively. These two securities are both “A” tranche investments (A2A and A-1 respectively) and have performed as agreed since purchase. The two are rated B2 and Baa3, respectively by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent 1.92% of the book value of the Corporation investment portfolio and approximately 1.22% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at September30, 2011.

In August, the Corporation purchased four corporate floating rate bonds, $1.9 million in total, rated A+, AA+, A and A- by Standard & Poor’s.  All are uncapped and tied to 3 month LIBOR.  These investments had unrealized losses at September 30, 2011 of $69,000, due primarily to interest rate changes.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September30, 2011.

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NOTE 6:  LOANS AND ALLOWANCE

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

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

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

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

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

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

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

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

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

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

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

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

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Corporation utilizes the discounted cash flows to determine the level of impairment, the Corporation includes the entire change in the present value of cash flows as provision expense.

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

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The following table presents the breakdown of loans as of September30, 2011 and December 31, 2010.

	September 30, 2011			December 31, 2010
	(In Thousands)
Residential real estate
Construction	$	8,637		$	6,975
One-to-four family residential		111,728			117,616
Multi-family residential		18,550			14,997
Nonresidential real estate and agricultural land		83,067			89,607
Land (not used for agricultural purposes)		17,884			21,016
Commercial		17,578			16,413
Consumer and other		4,445			4,533
		261,889			271,157
Unamortized deferred loan costs		480			485
Undisbursed loans in process		(3,454	)		(2,388	)
Allowance for loan losses		(3,780	)		(3,806	)
Total loans	$	255,135		$	265,448

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

Construction

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

One-to-Four Family Residential and Consumer

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

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

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

21

Commercial

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

The following table presents the activity in the allowance for loan losses for the three and nine months ended September30, 2011 and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio segment and impairment method, as of September30, 2011 and December 31, 2010.

	Residential
	Construction			1-4 Family			Multi-Family			Nonresidential			Land			Commercial			Consumer			Total
	(In Thousands)
Three Months Ended September 30, 2011
Balances at beginning of period:	$	32		$	1,088		$	108		$	1,226		$	959		$	113		$	63		$	3,589
Provision for losses		(11	)		675			23			69			690			(27	)		30			1,449
Loans charged off		-			(116	)		-			(381	)		(736	)		-			(34	)		(1,267	)
Recoveries on loans		-			-			-			-			-			-			9			9
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
Nine Months Ended September 30, 2011
Balances at beginning of period:	$	35		$	746		$	138		$	1,632		$	976		$	157		$	122		$	3,806
Provision for losses		(14	)		1,354			(7	)		290			755			(71	)		(10	)		2,297
Loans charged off		-			(453	)		-			(1,008	)		(818	)		-			(77	)		(2,356	)
Recoveries on loans		-			-			-			-			-			-			33			33
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
As of September 30, 2011
Allowance for losses:
Individually evaluated for impairment:	$	-		$	691		$	36		$	-		$	403		$	-		$	-		$	1,130
Collectively evaluated for impairment:		21			956			95			914			510			86			68			2,650
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
Loans:
Individually evaluated for impairment:	$	169		$	6,026		$	2,317		$	3,641		$	5,138		$	342		$	19		$	17,652
Collectively evaluated for impairment:		8,468			105,702			16,233			79,426			12,746			17,236			4,426			244,237
Balances at end of period	$	8,637		$	111,728		$	18,550		$	83,067		$	17,884		$	17,578		$	4,445		$	261,889

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	Residential
	Construction		1-4 Family		Multi-Family		Nonresidential		Land		Commercial		Consumer		Total
	(In Thousands)
As of December 31, 2010
Allowance for losses:
Individually evaluated for impairment:	$	14	$	200	$	34	$	351	$	578	$	37	$	-	$	1,214
Collectively evaluated for impairment:		21		546		104		1,281		398		120		122		2,592
Balances at end of period	$	35	$	746	$	138	$	1,632	$	976	$	157	$	122	$	3,806
Loans:
Individually evaluated for impairment:	$	278	$	7,769	$	910	$	6,493	$	6,341	$	901	$	-	$	22,692
Collectively evaluated for impairment:		6,697		109,847		14,087		83,114		14,675		15,512		4,533		248,465
Balances at end of period	$	6,975	$	117,616	$	14,997	$	89,607	$	21,016	$	16,413	$	4,533	$	271,157

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of September 30, 2011 and December 31, 2010:

September 30, 2011	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	8,637	$	8,468	$	-	$	169	$	-
1-4 family residential		111,728		103,652		1,136		6,717		223
Multi-family residential		18,550		16,233		-		2,317		-
Nonresidential		83,067		77,469		1,763		3,835		-
Land		17,884		12,371		229		5,284		-
Commercial		17,578		16,844		329		405		-
Consumer		4,445		3,840		295		310		-
Total Loans	$	261,889	$	238,877	$	3,752	$	19,037	$	223

December 31, 2010	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	6,975	$	6,681	$	16	$	278	$	-
1-4 family residential		117,616		107,010		5,256		5,224		126
Multi-family residential		14,997		14,087		-		334		576
Nonresidential		89,607		81,624		1,471		6,512		-
Land		21,016		14,199		2,845		3,972		-
Commercial		16,413		15,290		230		893		-
Consumer		4,533		4,188		25		320		-
Total Loans	$	271,157	$	243,079	$	9,843	$	17,533	$	702

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Credit Quality Indicators

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

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

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

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

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

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

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

·   The borrower has filed for bankruptcy protection.

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

·   The guarantors have been called upon to make payments.

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

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

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

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

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

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

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The following tables present the Company’s loan portfolio aging analysis as of September 30, 2011 and December 31, 2010:

September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands)
Construction	$	-	$	-	$	169	$	169	$	8,468	$	8,637	$	-
1-4 family residential		381		853		2,448		3,682		108,046		111,728		-
Multi-family residential		-		-		343		343		18,207		18,550		-
Nonresidential		783		1,147		1,306		3,236		79,831		83,067		-
Land		229		-		3,080		3,309		14,575		17,884		-
Commercial		100		-		379		479		17,099		17,578		-
Consumer		48		-		289		337		4,108		4,445		-
	$	1,541	$	2,000	$	8,014	$	11,555	$	250,334	$	261,889	$	-

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands)
Construction	$	-	$	-	$	165	$	165	$	6,810	$	6,975	$	-
1-4 family residential		132		839		2,304		3,275		114,341		117,616		-
Multi-family residential		-		-		910		910		14,087		14,997		-
Nonresidential		-		-		4,673		4,673		84,934		89,607		-
Land		-		372		1,749		2,121		18,895		21,016		-
Commercial		542		-		265		807		15,606		16,413		-
Consumer		37		-		315		352		4,181		4,533		-
	$	711	$	1,211	$	10,381	$	12,303	$	258,854	$	271,157	$	-

The following table presents the Company’s nonaccrual loans as of September 30, 2011.  At December 31, 2010, the Company had nonaccruing loans totaling $10,381,000 which equaled loans delinquent 90 days or more.

	September 30, 2011
	(In Thousands)
Residential real estate
Construction	$	169
One-to-four family residential		3,451
Multi-family residential		343
Nonresidential real estate and agricultural land		2,262
Land (not used for agricultural purposes)		3,803
Commercial		379
Consumer and other		308
Total nonaccrual loans	$	9,992

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

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The following tables present information pertaining to the principal balances and specific reserve allocations for impaired loans as of September 30, 2011 (in thousands):

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Impaired loans without a specific allowance:
Construction	$	169	$	169	$	-
1-4 family residential		2,635		2,740		-
Multi-family residential		1,974		1,974		-
Nonresidential		3,641		5,170		-
Land		2,329		2,329		-
Commercial		342		371		-
Consumer		19		19		-
	$	11,109	$	12,772	$	-

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Impaired loans with a specific allowance:
Construction	$	-	$	-	$	-
1-4 family residential		3,391		3,391		691
Multi-family residential		343		343		36
Nonresidential		-		-		-
Land		2,809		2,809		403
Commercial		-		-		-
Consumer		-		-		-
	$	6,543	$	6,543	$	1,130

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Total Impaired Loans:
Construction	$	169	$	169	$	-
1-4 family residential		6,026		6,131		691
Multi-family residential		2,317		2,317		36
Nonresidential		3,641		5,170		-
Land		5,138		5,138		403
Commercial		342		371		-
Consumer		19		19		-
	$	17,652	$	19,315	$	1,130

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The following tables present information pertaining to the average balances of and interest recognized on impaired loans for the three- and nine-month periods ended September 30, 2011 (in thousands):

	For the nine months ended				For the three months ended
	September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	180	$	1	$	169	$	-
1-4 family residential		2,717		163		2,985		67
Multi-family residential		1,638		54		1,974		32
Nonresidential		4,708		120		4,758		49
Land		4,076		54		4,012		-
Commercial		542		10		342		2
Consumer		7		-		19		1
	$	13,868	$	402	$	14,259	$	151

	For the nine months ended				For the three months ended
	September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	-	$	-	$	-	$	-
1-4 family residential		3,187		43		3,391		24
Multi-family residential		340		-		343		-
Nonresidential		-		-		-		-
Land		2,366		32		2,809		11
Commercial		-		-		-		-
Consumer		-		-		-		-
	$	5,893	$	75	$	6,543	$	35

	For the nine months ended				For the three months ended
	September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Total impaired loans:
Construction	$	180	$	1	$	169	$	-
1-4 family residential		5,904		206		6,376		91
Multi-family residential		1,978		54		2,317		32
Nonresidential		4,708		120		4,758		49
Land		6,442		86		6,821		11
Commercial		542		10		342		2
Consumer		7		-		19		1
	$	19,761	$	477	$	20,802	$	186

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The following tables present various breakdowns of impaired loans as of December 31, 2010 (in thousands):

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	113	$	113	$	-	$	260	$	9
1-4 family residential		5,834		6,011		-		2,602		67
Multi-family residential		334		334		-		875		16
Nonresidential		5,106		6,405		-		6,125		141
Land		2,856		3,366		-		1,609		51
Commercial		381		410		-		713		32
Consumer		-		-		-		-		-
	$	14,624	$	16,639	$	-	$	12,184	$	316

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	165	$	165	$	14		165	$	1
1-4 family residential		1,935		1,935		200		1,866		43
Multi-family residential		576		576		34		230		-
Nonresidential		1,387		1,387		351		792		-
Land		3,485		3,485		578		1,779		8
Commercial		520		520		37		520		34
Consumer		-		-		-		-		-
	$	8,068	$	8,068	$	1,214	$	5,352	$	86

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Total Impaired Loans:
Construction	$	278	$	278	$	14	$	425	$	10
1-4 family residential		7,769		7,946		200		4,468		110
Multi-family residential		910		910		34		1,105		16
Nonresidential		6,493		7,792		351		6,917		141
Land		6,341		6,851		578		3,388		59
Commercial		901		930		37		1,233		66
Consumer		-		-		-		-		-
	$	22,692	$	24,707	$	1,214	$	17,536	$	402

For 2010 and 2011, interest income recognized on a cash basis included above was immaterial.

Troubled Debt Restructurings

In the course of working with borrowers, the Corporation may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Corporation attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Corporation to identify if a troubled debt restructuring (“TDR”) has occurred.

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A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Corporation grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Corporation do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated.  At any time prior to a sale of the property at foreclosure, the Corporation may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

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

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

The balance of nonaccrual restructured loans, which is included in total nonaccrual loans, was $2.0 million at September 30, 2011.  If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $7.4 million at September 30, 2011. Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter. All TDRs are considered impaired by the Corporation, unless it is determined that the borrower has met the six month satisfactory performance period under the modified terms.  On at least a quarterly basis, the Corporation reviews all TDR loans to determine if the loan meets this criterion.

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

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

					Loans Restructured During
					9 Months Ending 9/30/11						3 Months Ending 9/30/11
	# of Loans		Total Troubled Debt Restructured		# of Loans		Balance at restructure		Current Balance		# of Loans		Balance at restructure		Current Balance
Residential Real Estate
Construction		-	$	-		-	$	-	$	-		-	$	-	$	-
One-to-four family residential		8		3,196,690		2		1,004,603		1,003,423		2		1,004,603	$	1,003,423
Multi-family residential		1		1,974,022		1		1,735,280		1,974,022		-		-		-
Nonresidential real estate and agricultural land		4		2,076,338		1		1,117,878		955,713		-		-		-
Land not agricultural		1		2,137,065				-		-		-		-		-
Commercial		2		71,114		1		45,815		23,169		-		-		-
Consumer		1		18,689		1		18,769		18,689		-		-		-
		17	$	9,473,917		6	$	3,922,345	$	3,975,015		2	$	1,004,603	$	1,003,423

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

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

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

NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. Management has determined the adoption of these provisions of this ASU only affected the disclosure requirements for fair value measurements and as a result did not have a material effect on the Company’s financial position or results of operations. This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective beginning with the Company’s reporting period ending March 31, 2011. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“TDR”),” which provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

NOTE 8:  BUSINESS ACQUISITION

In the second quarter of 2010, the Company acquired a commercial bank branch in New Albany, Indiana. The Company purchased premises and equipment and customer deposits. Net cash proceeds of $582,000 were received in the transaction. Goodwill recognized in the transaction was $48,000 and is expected to be fully deductible for tax purposes.

NOTE 9:  RECLASSIFICATIONS

Certain reclassifications have been made to the 2010 consolidated condensed financial statements to conform to the September 30, 2011 presentation.

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

Forward Looking Statements

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

Effect of Current Events

The global and U.S. economies have been experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system for a prolonged period. Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have been significantly adversely affected as a result. The volatility and disruption in the capital and credit markets has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength.

Further adverse effects on the U.S. banking and financial industries as well as on the broader U.S. and global economies could have an adverse effect on the Corporation and its business.

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

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

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

Impact of Recent and Future Legislation. Congress and the Treasury Department have adopted legislation and taken actions to address the disruptions in the financial system and declines in the housing market. The actual impact that EESA, ARRA and related measures undertaken to alleviate the credit crisis will have on the financial markets is unknown. The failure of such measures to help stabilize the financial markets, and a continuation or worsening of current financial market conditions, could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock. Finally, there can be no assurance regarding the specific impact that such measures may have on us and no assurance whether or to what extent we will be able to benefit from such programs.

In addition to the legislation mentioned above, federal and state governments could pass additional legislation responsive to current credit conditions. As an example, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that limits its ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Also, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has made sweeping changes to the United States financial system. The Dodd-Frank Act eliminated the OTS as of July 21, 2011. The Dodd-Frank Act transferred to the Office of the Comptroller of the Currency (the “OCC”) all functions and all rulemaking authority of the OTS relating to federal savings associations. The Dodd-Frank Act also transferred to the Board of Governors of the Federal Reserve System (the “Federal Reserve”) all functions of the OTS relating to savings and loan holding companies and their non-depository institution subsidiaries. Thus, the Holding Company and all of its subsidiaries other than the Bank are being supervised by the Federal Reserve from and after July 21, 2011. The Federal Reserve is also to regulate loans to insiders, transactions with affiliates, and tying arrangements. No later than the effective date of the transfer of these responsibilities, the OCC and the Federal Reserve are to publish regulations that will apply to the entities that they are to regulate for the first time. OTS guidance, orders, interpretations, and policies to which federal savings associations like the Bank and savings and loan holding companies like the Holding Company are subject are to remain in effect until they are suspended.

Additional Increases in Insurance Premiums. The FDIC insures the Bank’s deposits up to certain limits. Current economic conditions have increased expectations for bank failures. The FDIC takes control of failed banks and ensures payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC charges us premiums to maintain the Deposit Insurance Fund. The FDIC has set the Deposit Insurance Fund long-term target reserve ratio at 2% of insured deposits. Due to recent bank failures, the FDIC insurance fund reserve ratio has fallen below the statutory minimum. The FDIC has implemented a restoration plan beginning January 1, 2009, that is intended to return the reserve ratio to an acceptable level. The restoration plan uniformly increased insurance assessments by 7 basis points (annualized). Further increases in premium assessments are also possible and would increase the Company’s expenses. Effective with the June 2011 reporting period the FDIC changed the assessment from a deposit-based assessment to an asset-based assessment, and reevaluated the base rate assessed to financial institutions.  As a result of these changes, the Company experienced a decrease in premiums. However, increased assessment rates and special assessments could have a material impact on the Company’s results of operations.

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

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

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

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

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

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

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

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

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

33

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

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

Critical Accounting Policies

Note 1 to the consolidated financial statements presented on pages 61 through 64 of the Annual Report on Form 10-K for the year ended December 31, 2010 contains a summary of the Corporation’s significant accounting policies. Certain of these policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, analysis of other-than-temporary impairment on available-for-sale investments, and the valuation of mortgage servicing rights.

Allowance for Loan Losses

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

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

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

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

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Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation. Included in the review of individual loans are those that are considered impaired. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral. The Corporation evaluates the collectibility of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

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

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

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

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

Other-Than-Temporary Impairment

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

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If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. The Corporation ‘s consolidated statement of income would reflect the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For securities that management has no intent to sell, and it is not more likely than not that the Corporation will be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the noncredit loss would be recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. The Corporation did not record any other-than-temporary impairment during the three-month or nine-month periods ended September 30, 2011.

Valuation of Mortgage Servicing Rights

The Corporation recognizes the rights to service mortgage loans as separate assets in the consolidated balance sheet.  Under the servicing assets and liabilities accounting guidance (ASC860-50), servicing rights resulting from the sale or securitization of loans originated by the Corporation are initially measured at fair value at the date of transfer.   Mortgage servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Factors included in the calculation of fair value of the mortgage servicing rights include, estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic factors will change over the life of the mortgage servicing rights, resulting in different valuations of the mortgage servicing rights. The differing valuations will affect the carrying value of the mortgage servicing rights on the consolidated balance sheet as well as the income recorded from loan servicing in the consolidated income statement. As of September 30, 2011 and December 31, 2010, mortgage servicing rights had carrying values of $628,000 and $588,000 respectively. The December 31, 2010 amount included a $50,000 valuation allowance for impairment on certain pools of servicing rights as of that date. The September 30, 2011 amount included an $11,000 valuation for impairment on certain pools of servicing rights, as of that date.

Financial Condition

At September 30, 2011, the Corporation’s consolidated assets totaled $401.9 million, an increase of $15.3 million, or 4.0%, from the December 31, 2010 total.  The increase was primarily due to an increase in investment securities available for sale funded by a $10.4 million decrease in loan receivables and a $12.8 million increase in deposits, period to period.  Funds made available by these changes to loans and deposits were placed in investment securities available for sale, primarily U.S. government agency securities and to a lesser extent municipal securities and government-sponsored-enterprise (GSE) residential mortgage-backed securities.   Investment securities available for sale of the Corporation increased $20.0 million, or 26.5%, for the period, from $75.2 million at December 31, 2010 to $95.2 million as of September 30, 2011.  A portion of the increase in investment securities available for sale came from the mark-to-market changes with a net change of $2.5 million as the unrealized gain on the Corporation’s portfolio increased from $695,000 at December 31, 2010 to $3.2 million at September 30, 2011.  The decrease in gross loans, excluding loans held for sale, over the period, from $269.3 million at December 31, 2010 to $258.9 million at September 30, 2011, was reflective of the difficult lending environment which continued to affect loan production and of the equally difficult economy, as $4.3 million of real estate collateral for non-performing loans was foreclosed upon and transferred to real estate owned and held for sale (REO).  Foreclosed real estate converted to REO during the period included a professional office building in New Albany, Indiana, a car wash in Charlestown, Indiana, an apartment complex in Scottsburg, Indiana, a condominium in New Albany, Indiana, a funeral home in Madison, Indiana, several building lots, and a few lesser residential properties. The Corporation closely monitored the values of these properties and additional charge downs have been taken as necessary based on current fair value information such as appraisal data and pending sales offers.

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Liquidity for the Corporation continued to be strong, with the balances in cash and cash equivalents at $19.4 million as of September 30, 2011, as compared to balances of $16.8 million as of December 31, 2010.  Amounts borrowed by the Corporation remained constant period to period at $65.2 million, with advances from the Federal Home Loan Bank the largest portion of those balances at $58.0 at both dates. The Federal Home Loan Bank (FHLB) is the Corporation’s primary source of wholesale funding.  The average rates paid on those borrowings, however, decreased 29 basis points across the period, from 3.84% as of December 31, 2010 to 3.55% as of September 30, 2011, as the Corporation restructured $10.0 million in advances, taking advantage of lower borrowing costs to lock in advances over a range of terms, and repaid and replaced an additional $5.0 million.  Other significant changes during the period included $270,000 received from the FHLB for a repurchase of FHLB stock and a decrease in the prepaid FDIC assessment which decreased $268,000 over the period.

The difficult lending environment continued to challenge loan production for the Corporation. Total loans, net of the allowance for loan losses, decreased $10.3 million, or 3.9%, from $265.4 million at December 31, 2010 to $255.1 million at September 30, 2011. The decrease was primarily attributable to $4.3 million in non-performing loans removed from the portfolio into real estate held for sale and sales of conventional mortgages into the secondary market. Sales to the Federal Home Loan Mortgage Corporation (Freddie Mac) for the nine months ended September 30, 2011 were $12.8 million, including $1.1 million originated for sale at December 31, 2010 and sold in January. These sales compare to $13.8 million in sales for the nine months ended September 30, 2010. The Corporation’s consolidated allowance for loan losses totaled $3.8 million at both September 30, 2011 and December 31, 2010. Provision expense of $2.3 million for the nine months ended September 30, 2011 was offset by net charge-offs of $2.3 million.  This compared to provision expense for the nine months ended September 30, 2010 of $1.9 million and net charge-offs of $1.8 million. Net charge-offs for the nine-month period ended September 30, 2011 were primarily comprised of properties that have labored through the foreclosure process, most for as long as two to three years.  $453,000 was charged off for a variety of residential properties, including a $200,000 loan charged off due to bankruptcy.  $1,008,000 was charged off for nonresidential and commercial real estate properties, including loans previously provisioned by specific reserve allocations and loans relating to a relationship with a local funeral home business.    Finally, $818,000 was charged off for land loans, primarily the culmination of foreclosure proceedings with two development relationships in the south-central Indiana area.   Funding for the allowance represented 1.46% of total loans as of September 30, 2011 as compared to 1.41% as of December 31, 2010. The allowance at September 30, 2011 is directionally consistent with the balance outstanding at December 31, 2010.

Delinquency 30 or more days past due as of September 30, 2011 was $11.6 million, or 4.44% of total loans, as compared to $12.3 million, or 4.59%, at December 31, 2010. The September 30, 2011 decrease was due primarily to loan foreclosures that resulted in the real estate held for sale discussed above.

Non-performing loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) as of September 30, 2011 were $10.0 million, compared to $6.9 million at the same date in 2010 and $10.4 million at December 31, 2010. Non-performing loans as a percent of total loans were 3.86%, 2.54% and 3.86%, respectively, for those periods. Non-performing levels are primarily comprised of loans in the lengthy process of foreclosure or debt that has been restructured.

Although management believes that its allowance for loan losses at September 30, 2011 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation’s results of operations. Management is diligent in monitoring delinquent loans and in the analysis of the factors affecting the allowance.

Deposits totaled $299.1 million at September 30, 2011, an increase of $12.8 million, or 4.5%, from total deposits of $286.3 million at December 31, 2010. During the nine-month period, noninterest-bearing transactional deposit accounts increased slightly by 5.2%, while interest-bearing accounts increased 4.4%, or $11.6 million. The increases were primarily seen in the Corporation’s NOW accounts, which increased by $23.9 million from $42.3 million at December 31, 2010 to $66.0 million at September 30, 2011.  A significant portion of the change in NOW account balances came from movement out of Money Market Demand (MMDA) accounts and certificate of deposit accounts, with MMDA accounts decreasing $10.2 million, or 25.0%, over the nine-month period and certificate of deposit balances decreasing $3.2 million, or 2.3%.  In the current rate environment borrowers appeared to be trading minimal differences in interest rates for accessibility to their funds in selecting the transactional accounts over the non-transactional.

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Borrowings totaled $65.2 million at September 30, 2011 with no change from December 31, 2010. The Corporation took advantage of low rates to lock in borrowings with a variety of terms. Of total borrowings, $58.0 million represented Federal Home Loan Bank (FHLB) advances with average rates of 3.55% and 3.84% at the respective dates. These balances and average rates on advances from the FHLB represent a reduction from the same at September 30, 2010, which were also $58.0 million and 3.84%. The drop in average balances and rates, September 2010 to September 2011, resulted in a $748,000, or 29.7%, decrease in the cost of borrowing period to period. Borrowing costs of $1.8 million for the nine months ended September 30, 2011 compared to $2.5 million for the same period in 2010. A significant contributor to the decrease in the cost of borrowing, period to period, was the restructuring of $29.0 million in advances over the last 12 months, with the Corporation taking advantage of lower borrowing costs and locking in those low costs against future rate volatility.

Other liabilities totaled $4.1 million at September 30, 2011, an increase of $1.0 million from the December 31, 2010 balance of $3.1 million, primarily due to changes in escrowed balances and deferred tax liabilities.

Stockholders’ equity totaled $33.1 million at September 30, 2011, an increase of $1.6 million, or 5.2%, from the $31.5 million at December 31, 2010. The increase was primarily due to the change in unrealized gains on available-for-sale securities, at a gain position of $2.1 million at September 30, 2011, as compared to $443,000 at December 31, 2010, and year-to-date earnings of $1.2 million. During the nine months ending September 30, 2011, $16,000 was used to purchase 1,000 shares of Corporation stock, in satisfaction of a 2010 award under one of the corporate employee benefit plans, and the Corporation paid dividends totaling $1.2 million to preferred and common shareholders. Dividends to common shareholders for the nine-month period were $.63 per share.

The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2011, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

General

The Corporation’s net income for the nine months ended September 30, 2011 totaled $1.2 million, a decrease of $510,000, or 29.5%, from net income reported for the nine-month period ended September 30, 2010. The change in income period to period was comprised of a variety of changes that occurred over the period. Total interest income decreased $777,000, or 5.5%, from $14.1 million for the nine months ended September 30, 2010 to $13.4 million for the same period in 2011, as yields and average balances on interest-earning assets dropped. Offsetting the decrease in interest income was a more dramatic decrease in interest expense, with interest expense for the nine months ended September 30, 2011 of $4.4 million as compared to $5.7 million for the same period in 2010, a decrease of $1.3 million, or 22.8%, period to period, as deposit and borrowing costs of funds dropped from 1.82% at September 30, 2010 to 1.52% at September 30, 2011. Meanwhile, provision expense for the nine-month period ended September 30, 2011 was $2.3 million as compared to $1.9 million for the same period in 2010, an increase of $382,000, reflecting the continuing economic stagnation. Noninterest income decreased $814,000, period to period, primarily due to losses on REO, while noninterest expense increased a slight $216,000, period to period.

Net Interest Income

Total interest income for the nine months ended September 30, 2011 decreased $777,000, or 5.5%, from $14.1 million at September 30, 2010 to $13.4 million at September 30, 2011. The reduction was due primarily to a combination of decreased average balances in the loan portfolio, with slightly lower yields period to period, and higher average balances in the investment portfolio, at lower yields. The average yield on loans as of September 30, 2011 was 5.82% as compared to 6.00% a year earlier. Book yields on available-for-sale securities experienced more dramatic change, period to period, with the yield as of September 30, 2011 of 3.20% as compared to 3.62% at the same point in 2010. The effect of the decline in investment yields was mitigated by the increase in the volume of average investments held, $93.2 million for the 2011 period as compared to $79.2 million for the 2010 period.

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Total interest expense for the same period decreased more significantly, $1.3 million, or 22.8%, from the $5.7 million reported for the 2010 period to $4.4 million for the 2011 period.  For the nine months ended September 30, 2011, interest expense from deposits totaled $2.6 million while interest expense from borrowings totaled $1.8 million, as compared to $3.2 million and $2.5 million for the same period in 2010. Of the overall decrease in interest expense, $552,000 was attributable to interest expense on deposits, primarily fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates. Over the same period, the Corporation experienced a dramatic decrease of $748,000 for interest expense on borrowings as advances were repaid or restructured and the average balance of funds borrowed from the FHLB dropped. The average rate paid on those borrowings dropped from 3.84% at September 30, 2010 to 3.55% at September 30, 2011, as $5.0 million in advances were repaid over the period and $10.0 million in advances were restructured to take advantage of lower rates currently and into the future. Borrowing at the FHLB as of September 30, 2011 totaled $58.0 million with an additional $44.0 million available by authorization of the board of directors of the Corporation.

Net interest income was $9.0 million for the nine months ended September 30, 2011 and $8.4 million for the same period in 2010, with an increase period to period of $523,000, or 6.2%. This reflects the changes in the mix of the underlying assets and liabilities.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payment, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectibility of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $2.3 million provision for losses on loans for the nine months ended September 30, 2011, as compared to $1.9 million for the same period in 2010. The 2011 expense of $2.3 million was primarily impacted by the culmination of foreclosure activity on two large relationships, for which some reserves had been established, and reserves established for current foreclosure relationships.  The Corporation is diligent in assessing the status of problem loans, including those in the lengthy process of foreclosure.  The 2011 expense corresponds to the annual expenses for 2009, of $2.9 million, and 2010, of $2.6 million, and reflects the loss experience of the Corporation projected for the continuing stagnation in the economy. Delinquencies in total have remained constant as foreclosures pending during the last 12 to 18 months have been resolved, and new delinquencies remain controlled.

Non-performing loans as of September 30, 2011 were $10.0 million, an increase of $3.1 million, from the $6.9 million at the same point in 2010.  Of the total non-performing loans of $10.0 million at September 30, 2011, $2.0 million were troubled debt restructured loans that were less than 90 days past due at September 30, 2011 but were classified as nonaccrual loans as they had not yet performed in accordance with the restructured terms for a period of at least six months.  Of total non-performing loans approximately $2.5 million have been past due for 12 months or more, have been reduced by partial charge-off of confirmed losses or protected by specific reserve allocations, and are in the lengthy process of work out or foreclosure. Non-performing loans of the Corporation average 398 days past due, emphasizing the fact that these are loans that have been moving slowly through the foreclosure process for a period of time.  From time to time, the Company may be required to charge down loans that are performing loans because of collateral shortfalls identified through appraisal review or other methods.  Total loans that have been reduced for confirmed loss amounts through partial charge-off or specific reserve allocations as of September 30, 2011 totaled $5.5 million, with $3.5 million of that relating to loans that are performing according to the terms of their agreements.  While management believes that the allowance for losses on loans is adequate at September 30, 2011, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future.

Other Income

Other income decreased by $814,000, or 29.1%, during the nine months ended September 30, 2011 to $2.0 million, as compared to the $2.8 million reported for the same period in 2010. The decrease was due primarily to net losses on premises, equipment and other real estate owned (REO) as the Corporation recorded fair value adjustments to REO of $613,000 during the nine months ended September 30, 2011. Net losses on premises, equipment and other real estate owned were $683,000 for the nine-month period ended September 30, 2011, as compared to $10,000 for the same period in 2010, a change of $673,000.  Additional factors contributing to the overall decrease in other income included: an increase in income from merchant interchange fees, $303,000 for the nine months ended September 30, 2011 as compared to $274,000 for the same period in 2010; a decrease in service charges, primarily relating to overdrawn accounts, $1,431,000 for the nine months ended September 30, 2011 as compared to

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$1,469,000 for the same period in 2010; a slight decrease in gains on the sale of available-for-sale securities, $270,000 for the nine months ended September 30, 2011 as compared to $306,000 for the same period in 2010; and a slight decrease in gains on the sale of loans into the secondary market, primarily to Freddie Mac, $367,000 for the nine months ended September 30, 2011 as compared to $385,000 for the same nine months in 2010. The trends for the sale of loans into the secondary market is expected to continue into the remainder of 2011 because origination of loans for sale is expected to be minimal as underwriting continues to be tight and refinance activity weak. Unlike interest income, “Other Income” is not always readily predictable and is subject to variations depending on outside influences, including regulatory changes.

Other Expenses

Total other expenses experienced modest change period to period, with a net increase of $216,000, or 3%, from September 30, 2010 to September 30, 2011. In general, decreases were experienced in several financial statement lines.  The most significant financial statement changes were:

·   Salaries and employee benefits, a 6.5% increase period to period, from $3.7 million for the nine months ended September 30, 2010 to $3.9 million for the same period in 2011. This reflects the addition of professional and branch personnel and increases in benefits including health insurance increases.

·   Net occupancy and equipment expenses, a 7.3% increase period to period, reflective of the addition of branches and information technology.

·   Professional fees, which include legal, accounting, and other third party contracted expenses, increased $79,000, or 31.6%, from $252,000 for the nine-month period ended September 30, 2010 to $331,000 for the same period in 2011.  This increase is primarily due to regulatory mandates requiring additional third party review and attestation of financial institutions.

·   FDIC assessments for the nine-month periods decreased $61,000, or 17.5%, 2010 to 2011, as the FDIC moved from a deposit-based assessment to an asset-based assessment and decreased the base rate for the Corporation.

·   Data processing fees decreased $12.4%, period to period, from $356,000 for the nine-month period ended September 30, 2010 to $312,000 for the same period ended September 30, 2011, due to cost containment measures.

·   Other administrative costs, including advertising, professional fees, and office supply costs, decreased for the nine months ended September 30, 2011 as compared to the same period in 2010, reflecting corporate cost containment measures.

Income Taxes

Tax expense of $21,000 was recorded for the nine-month period ended September 30, 2011 as compared to $400,000 for the comparable period in 2010. For the 2011 period, the Corporation had pre-tax income of $1.2 million as compared to $2.1 million for the 2010 period.  The effective tax rate was 1.7% for the nine-month period ended September 30, 2011 as compared to 18.8% for the same period in 2010. The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

General

The Corporation’s net loss for the three months ended September 30, 2011 totaled $207,000, a decrease of $498,000, or 171.1%, from the net income of $291,000 reported for the period ended September 30, 2010. The decrease was primarily attributable to fair value adjustments on real estate owned due to foreclosure or repossession,  decreases in income from loan sales into the secondary market, decreases in income from the sale of investments available for sale, and increased operating expenses.

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For the three-month period ended September 30, 2011, interest income decreased $199,000 from $4.7 million for the period ended September 30, 2010 to $4.5 million for the period ended September 30, 2011, a 4.3% decrease, while interest expense experienced a corresponding decrease of $331,000, from $1.8 million for the three-month period ended September 30, 2010 to $1.5 million for the same period in 2011, an 18.4% decrease. Both decreases are a result of changes in asset average balances and decreases in yields on interest-earning assets and costs of funds on deposits and borrowings.

Gain on loan sales to the secondary market, a significant contributor to net income in 2009 and 2010, was $138,000 for the three-month period ended September 30, 2011 as compared to $223,000 for the same three-month period in 2010, both periods reflecting declines in refinancing activity. Proceeds from sales into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (Freddie Mac), were $5.0 million for the three-month period in 2011, as compared to the $7.6 million in sales during the same period in 2010.

Net Interest Income

Total interest income for the three months ended September 30, 2011 decreased $199,000, or 4.3%, from $4.7 million at September 30, 2010 to $4.5 million at September 30, 2011.  The reduction was due primarily to a combination of decreased average balances in the loan portfolio, with similar yields period to period, and higher average balances in the investment portfolio, at lower yields.

Total interest expense for the same period decreased significantly by $332,000, or 18.4%, from the $1.8 million reported at September 30, 2010 to $1.5 million at September 30, 2011.  For the three months ended September 30, 2011, interest expense from deposits totaled $864,000, while interest expense from borrowings totaled $600,000, as compared to $1.0 million and $765,000 for the same period in 2010. Of the overall decrease in interest expense, $166,000 was attributable to interest expense on deposits, primarily fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates. Over the same period, the Corporation experienced a decrease of $165,000 on interest expense for borrowings as advances were repaid and the average balance of funds borrowed from the FHLB dropped. The average rate paid on those borrowings dropped from 3.84% at September 30, 2010 to 3.55% at September 30, 2011, primarily due to $10.0 million in advances restructured in 2011 to take advantage of lower rates, extended for terms beneficial to the Corporation. Borrowing at the FHLB as of September 30, 2011 totaled $58.0 million with an additional $44.0 million available by authorization of the board of directors of the Corporation.

Net interest income was $3.0 million for the three months ended September 30, 2011, a $131,000 increase in income from the same period in 2010. This reflects the effects of increasing spread between interest-earning assets and interest-bearing liabilities, combined with changes in the mix of the underlying assets and liabilities.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectibility of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $1,449,000 provision for losses on loans for the three months ended September 30, 2011, as compared to $1,390,000 for the same period in 2010. The larger than average expenses for the provision during both three-month periods are reflective of the charge off and reserve allocations discussed in both the financial condition section of this discussion and in the comparative discussion of nine-month activities.  The loan portfolio of the Corporation is decreasing and delinquencies, while not low, seem to have stabilized, with delinquencies greater than 90 days past due comprised of long-term delinquencies in the process of foreclosure and new delinquencies controlled.

Other Income

Other income decreased by $753,000, or 65.6%, during the three months ended September 30, 2011 to $395,000, as compared to the $1,148,000 reported for the same period in 2010. The decrease was due primarily to net losses on premises, equipment and other real estate owned (REO) as the Corporation recorded a $514,000 write down of fair values on foreclosed real estate held for sale based on updated fair value information. Net losses on premises, equipment and other real estate owned were $533,000 for the three-month period ended September 30, 2011, as compared to no gain or loss for the same period in 2010, a change of $533,000. Other notable decreases were:

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·   Service fees and charges, primarily overdraft fees on deposit accounts (NSF fees), $516,000 for the three months ended September 30, 2011 as compared to $527,000 for the same three-month period in 2010, a decrease of $11,000;

·   Net realized gains on sale of available-for-sale securities, $105,000 for the three months ended September 30, 2011, as compared to $175,000 for the same three-month period in 2010, a decrease of $70,000;

·   Net gains on loan sales, $138,000 for the three months ended September 30, 2011, as compared to $223,000 for the same three-month period in 2010, a decrease of $85,000 due primarily to reduced sales activity as noted above;

·   Other income, a $15,000 loss for the three months ended September 30, 2011, as compared to $40,000 of income for the same three-month period in 2010, a decrease of $65,000.  This decrease was primarily attributable to the following changes:  increased costs for maintaining other real estate held for sale, $102,000 for the three-month period in 2011, as compared to $14,000 for the same three-month period in 2010; income on the operating properties with $19,000 realized during the three-month period in 2011 as compared to no income from such activities in 2010;  income from the Corporation’s wealth management division, which increased $14,000 for the 2011 period as compared to the same period in 2010; and other lesser changes.

Unlike interest income, “Other Income” is not always readily predictable and is subject to variations depending on outside influences.

Other Expenses

Total other expenses experienced modest change between the three-month periods, with a net increase of $161,000, or 6.8%, from September 30, 2010 to September 30, 2011. In general, increases were experienced in several financial statement lines. The most significant financial statement changes were:

·   Salaries and employee benefits, a 9.8% increase period to period, reflective of increased branch personnel, addition of professional staff, and increases in health insurance costs.

·   Net occupancy and equipment expenses, a 7.2% increase period to period, reflective of the addition of branches and updates to information technology systems.

·   Increases, period to period, in professional fees increasing from $55,000 for the three-month period ended September 30, 2010 to $149,000 for the same period in 2011, an increase of $94,000, or 170.1%, reflecting third party review, audit and legal costs.

·   FDIC assessment for the three-month periods decreased $64,000, or 57.7%, 2010 to 2011 as the FDIC moved from a deposit-based assessment to an asset-based assessment and decreased the base rate for the Corporation.

Income Taxes

Tax benefit of $382,000 was recorded for the three-month period ended September 30, 2011 as compared to a benefit of $39,000 for the comparable period in 2010. For the 2011 period, the Corporation had a pre-tax loss of $589,000 as compared to pre-tax income of $252,000 for the 2010 period.  The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses.

Other

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

Liquidity Resources

Historically, the Corporation has maintained its liquid assets at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Cash for these purposes is generated through loan sales and repayments, increases in deposits, and through the sale or maturity of investment securities.

42

Loan payments are a relatively stable source of funds, while deposit flows are influenced significantly by the level of interest rates and general money market conditions. Borrowings may be used to compensate for reductions in other sources of funds such as deposits. As a member of the Federal Home Loan Bank (FHLB) system, the Bank may borrow from the FHLB of Indianapolis. At September 30, 2011, the Bank had $58 million in such borrowings, including a $10 million overdraft line of credit, immediately available. An additional $34 million in borrowing capacity, beyond the current fixed rate advances and line of credit was available, previously approved by the Bank’s board of directors. Based on collateral, an additional $25.4 million could be available, if the board of directors determines the need. The FHLB is the Bank’s primary source of wholesale funding. During the first half of 2011, the Bank entered into an agreement with Promontory Inter-financial Network to participate in the Certificate of Deposit Account Registry Service (CDARS) as a customer service product (reciprocal deposits) and as a supplemental source of wholesale liquidity using the CDARS one-way buy program. The Bank also has the ability to borrow from the Federal Reserve Bank Discount Window, an additional source of wholesale funding. At September 30, 2011, the Bank had commitments to fund loan originations of $7.1 million, unused home equity lines of credit of $18.1 million and unused commercial lines of credit of $10.6 million. Commitments to sell loans as of that date were $4.8 million. Generally, a significant portion of amounts available in lines of credit will not be drawn.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for Smaller Reporting Companies.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

43

ITEM 4.  (REMOVED AND RESERVED)

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	XBRL Interactive Data Files

44

SIGNATURES

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

	RIVER VALLEY BANCORP
Date:  November 14, 2011	By:	/s/ Matthew P. Forrester
		Matthew P. Forrester
		President and Chief Executive Officer
Date:  November 14, 2011	By:	/s/ Vickie L. Grimes
		Vickie L. Grimes
		Vice President of Finance

45

EXHIBIT INDEX

No.	Description	Location
31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached
101	XBRL Interactive Data Files (including the following materials from the Company’s Report on Form 10-Q for the quarter ended June 30, 2011: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, tagged as blocks of text.*	Attached

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

EX-3.1

Exhibit 31(1)

CERTIFICATION

I, Matthew P. Forrester, certify that:

1. I have reviewed this quarterly report on Form 10-Q of River Valley Bancorp;

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

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

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

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

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

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

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

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

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

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

Date:  November 14, 2011	/s/ Matthew P. Forrester
	Matthew P. Forrester
	President and Chief Executive Officer

EX-31.2

Exhibit 31(2)

CERTIFICATION

I, Vickie L. Grimes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of River Valley Bancorp;

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

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

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

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

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

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

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

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

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

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

Date:  November 14, 2011	/s/ Vickie L. Grimes
	Vickie L. Grimes
	Vice President of Finance

EX-32

Exhibit 32

CERTIFICATION

By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of River Valley Bancorp.

Signed this 14th day of November, 2011.

/s/ Matthew P. Forrester	/s/ Vickie L. Grimes
Matthew P. Forrester	Vickie L. Grimes
President and Chief Executive Officer	Vice President of Finance

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Consolidated Condensed Balance Sheets (Parentheticals) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Statement Of Financial Position [Abstract]
Preferred stock, liquidation preference per share (in dollars per share)	$ 1,000	$ 1,000
Preferred stock, no par value (in dollars per share)
Preferred stock, shares authorised (in shares)	2,000,000	2,000,000
Preferred stock, shares issued (in shares)	5,000	5,000
Preferred stock, shares outstanding (in shares)	5,000	5,000
Common stock, no par value (in dollars per share)
Common stock, shares authorised (in shares)	5,000,000	5,000,000
Common stock, shares issued (in shares)	1,514,472	1,514,472
Common stock, shares outstanding (in shares)	1,514,472	1,514,472

XML

Consolidated Condensed Statements of Operations (USD $) In Thousands, except Per Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Interest Income
Loans receivable	$ 3,732	$ 3,996	$ 11,215	$ 12,022
Investment securities	711	653	2,037	2,022
Interest-earning deposits and other	36	29	107	92
Total interest income	4,479	4,678	13,359	14,136
Interest Expense
Deposits	864	1,030	2,633	3,185
Borrowings	600	765	1,775	2,523
Total interest expense	1,464	1,795	4,408	5,708
Net Interest Income	3,015	2,883	8,951	8,428
Provision for loan losses	1,449	1,390	2,297	1,915
Net Interest Income After Provision for Loan Losses	1,566	1,493	6,654	6,513
Other Income
Service fees and charges	516	527	1,431	1,469
Net realized gains on sale of available-for-sale securities	105	175	270	306
Net gains on loan sales	138	223	367	385
Interchange fee income	103	97	303	274
Increase in cash value of life insurance	81	86	242	245
Loss on premises, equipment and real estate held for sale	(533)	0	(683)	(10)
Other income	(15)	40	54	129
Total other income	395	1,148	1,984	2,798
Other Expenses
Salaries and employee benefits	1,329	1,211	3,945	3,703
Net occupancy and equipment expenses	363	339	1,069	996
Data processing fees	101	129	312	356
Advertising	128	113	318	318
Mortgage servicing rights	45	35	87	92
Office supplies	30	35	92	111
Professional fees	149	55	331	252
Federal Deposit Insurance Corporation assessment	47	111	290	351
Other expenses	358	361	957	1,006
Total other expenses	2,550	2,389	7,401	7,185
Income (Loss) Before Income Tax	(589)	252	1,237	2,126
Income tax expense (benefit)	(382)	(39)	21	400
Net Income (Loss)	(207)	291	1,216	1,726
Preferred stock dividends	(91)	(90)	(272)	(272)
Net Income Available to Common Stockholders	$ (298)	$ 201	$ 944	$ 1,454
Basic earnings per common share (in dollars per share)	$ (0.20)	$ 0.13	$ 0.62	$ 0.96
Diluted earnings per common share (in dollars per share)	$ (0.20)	$ 0.13	$ 0.62	$ 0.96
Dividends per share (in dollars per share)	$ 0.21	$ 0.21	$ 0.63	$ 0.63

XML

Document and Entity Information In Thousands	9 Months Ended
	Sep. 30, 2011	Nov. 11, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	RIVER VALLEY BANCORP
Entity Central Index Key	0001015593
Trading Symbol	rivr
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		1,514,472
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3

XML

INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2011

Investments, Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES

NOTE 5: INVESTMENT SECURITIES

The amortized cost and approximate fair values of securities as of September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Gains		Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	32,079	$	919	$	-	$	32,998
State and municipal		25,644		1,600		16		27,228
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		30,096		1,391		2		31,485
Corporate		4,110		-		671		3,439
Total investment securities	$	91,929	$	3,910	$	689	$	95,150

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	22,139	$	452	$	63	$	22,528
State and municipal		22,516		463		124		22,855
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		28,113		908		109		28,912
Corporate		1,768		-		832		936
Total investment securities	$	74,536	$	1,823	$	1,128	$	75,231

The amortized cost and fair value of available-for-sale securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
	(In Thousands)
Within one year	$	2,351	$	2,385
One to five years		26,264		26,990
Five to ten years		17,910		18,627
After ten years		15,308		15,663
		61,833		63,665
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		30,096		31,485
Totals	$	91,929	$	95,150

No securities were pledged at September 30, 2011 or at December 31, 2010 to secure FHLB advances. Securities with a carrying value of $13,405,000 and $18,580,000 were pledged at September 30, 2011 and December 31, 2010 to secure public deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the nine-month periods ended September 30, 2011 and September 30, 2010 were $7,585,000 and $9,637,000, respectively. Gross gains of $270,000 resulting from sales and calls of available-for-sale securities were realized during the nine-month period ended September 30, 2011. There were no losses recorded for the period. Comparatively, gross gains of $309,000 and gross losses of $3,000 were realized for the nine-month period ended September 30, 2010.

Proceeds from sales of securities available for sale during the three-month period ended September 30, 2011 were $4,251,000 and $2,271,000 during the same period in 2010. Gross gains of $105,000 and $175,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended September 30, 2011 and September 30, 2010, respectively. No losses were recorded for the three-month period ended September 30, 2011 or September 30, 2010. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2011 was $4,952,000, which is approximately 5.20% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2010 was $13,352,000, which represented 17.7% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

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

The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010:

	September 30, 2011
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Federal agencies	$	-	$	-		$	-	$	-		$	-	$	-
State and municipal		741		(10	)		771		(6	)		1,512		(16	)
GSE - residential mortgage-backed and other asset-backed agency securities		-		-			1		(2	)		1		(2	)
Corporate		2,277		(70	)		1,162		(601	)		3,439		(671	)
Total temporarily impaired securities	$	3,018	$	(80	)	$	1,934	$	(608	)	$	4,952	$	(689	)

	December 31, 2010
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Federal agencies	$	3,952	$	(63	)	$	-	$	-		$	3,952	$	(63	)
State and municipal		2,752		(70	)		724		(54	)		3,476		(124	)
GSE - residential mortgage-backed and other asset-backed agency securities		4,988		(109	)		-		-			4,988		(109	)
Corporate		-		-			936		(832	)		936		(832	)
Total temporarily impaired securities	$	11,692	$	(242	)	$	1,660	$	(886	)	$	13,352	$	(1,128	)

State and Municipal

The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were primarily caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September30, 2011.

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

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September30, 2011.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at September30, 2011 of $387,000 and $214,000, respectively. At December 31, 2010, the unrealized losses on these two investments were $530,000 and $302,000, respectively. These two securities are both “A” tranche investments (A2A and A-1 respectively) and have performed as agreed since purchase. The two are rated B2 and Baa3, respectively by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent 1.92% of the book value of the Corporation investment portfolio and approximately 1.22% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at September30, 2011.

In August, the Corporation purchased four corporate floating rate bonds, $1.9 million in total, rated A+, AA+, A and A- by Standard & Poor’s. All are uncapped and tied to 3 month LIBOR. These investments had unrealized losses at September 30, 2011 of $69,000, due primarily to interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September30, 2011.

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BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2011

Basis Of Presentation [Abstract]

BASIS OF PRESENTATION

NOTE 1: BASIS OF PRESENTATION

The accompanying consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation included in the Annual Report on Form 10-K for the year ended December 31, 2010. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and nine-month periods ended September 30, 2011, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Corporation as of December 31, 2010 has been derived from the audited consolidated balance sheet of the Corporation as of that date.

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RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2011

Accounting Changes and Error Corrections [Abstract]

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. Management has determined the adoption of these provisions of this ASU only affected the disclosure requirements for fair value measurements and as a result did not have a material effect on the Company’s financial position or results of operations. This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective beginning with the Company’s reporting period ending March 31, 2011. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“TDR”),” which provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

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BUSINESS ACQUISITION

9 Months Ended

Sep. 30, 2011

Business Combinations [Abstract]

BUSINESS ACQUISITION

NOTE 8: BUSINESS ACQUISITION

In the second quarter of 2010, the Company acquired a commercial bank branch in New Albany, Indiana. The Company purchased premises and equipment and customer deposits. Net cash proceeds of $582,000 were received in the transaction. Goodwill recognized in the transaction was $48,000 and is expected to be fully deductible for tax purposes.

XML

LOANS AND ALLOWANCE

9 Months Ended

Sep. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Abstract]

LOANS AND ALLOWANCE

NOTE 6: LOANS AND ALLOWANCE

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

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

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

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

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

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

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

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

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

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

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

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

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Corporation utilizes the discounted cash flows to determine the level of impairment, the Corporation includes the entire change in the present value of cash flows as provision expense.

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

The following table presents the breakdown of loans as of September30, 2011 and December 31, 2010.

	September 30, 2011			December 31, 2010
	(In Thousands)
Residential real estate
Construction	$	8,637		$	6,975
One-to-four family residential		111,728			117,616
Multi-family residential		18,550			14,997
Nonresidential real estate and agricultural land		83,067			89,607
Land (not used for agricultural purposes)		17,884			21,016
Commercial		17,578			16,413
Consumer and other		4,445			4,533
		261,889			271,157
Unamortized deferred loan costs		480			485
Undisbursed loans in process		(3,454	)		(2,388	)
Allowance for loan losses		(3,780	)		(3,806	)
Total loans	$	255,135		$	265,448

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

Construction

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

One-to-Four Family Residential and Consumer

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

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

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

Commercial

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

The following table presents the activity in the allowance for loan losses for the three and nine months ended September30, 2011 and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio segment and impairment method, as of September30, 2011 and December 31, 2010.

	Residential
	Construction			1-4 Family			Multi-Family			Nonresidential			Land			Commercial			Consumer			Total
	(In Thousands)
Three Months Ended September 30, 2011
Balances at beginning of period:	$	32		$	1,088		$	108		$	1,226		$	959		$	113		$	63		$	3,589
Provision for losses		(11	)		675			23			69			690			(27	)		30			1,449
Loans charged off		-			(116	)		-			(381	)		(736	)		-			(34	)		(1,267	)
Recoveries on loans		-			-			-			-			-			-			9			9
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
Nine Months Ended September 30, 2011
Balances at beginning of period:	$	35		$	746		$	138		$	1,632		$	976		$	157		$	122		$	3,806
Provision for losses		(14	)		1,354			(7	)		290			755			(71	)		(10	)		2,297
Loans charged off		-			(453	)		-			(1,008	)		(818	)		-			(77	)		(2,356	)
Recoveries on loans		-			-			-			-			-			-			33			33
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
As of September 30, 2011
Allowance for losses:
Individually evaluated for impairment:	$	-		$	691		$	36		$	-		$	403		$	-		$	-		$	1,130
Collectively evaluated for impairment:		21			956			95			914			510			86			68			2,650
Balances at end of period	$	21		$	1,647		$	131		$	914		$	913		$	86		$	68		$	3,780
Loans:
Individually evaluated for impairment:	$	169		$	6,026		$	2,317		$	3,641		$	5,138		$	342		$	19		$	17,652
Collectively evaluated for impairment:		8,468			105,702			16,233			79,426			12,746			17,236			4,426			244,237
Balances at end of period	$	8,637		$	111,728		$	18,550		$	83,067		$	17,884		$	17,578		$	4,445		$	261,889

	Residential
	Construction		1-4 Family		Multi-Family		Nonresidential		Land		Commercial		Consumer		Total
	(In Thousands)
As of December 31, 2010
Allowance for losses:
Individually evaluated for impairment:	$	14	$	200	$	34	$	351	$	578	$	37	$	-	$	1,214
Collectively evaluated for impairment:		21		546		104		1,281		398		120		122		2,592
Balances at end of period	$	35	$	746	$	138	$	1,632	$	976	$	157	$	122	$	3,806
Loans:
Individually evaluated for impairment:	$	278	$	7,769	$	910	$	6,493	$	6,341	$	901	$	-	$	22,692
Collectively evaluated for impairment:		6,697		109,847		14,087		83,114		14,675		15,512		4,533		248,465
Balances at end of period	$	6,975	$	117,616	$	14,997	$	89,607	$	21,016	$	16,413	$	4,533	$	271,157

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of September 30, 2011 and December 31, 2010:

September 30, 2011	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	8,637	$	8,468	$	-	$	169	$	-
1-4 family residential		111,728		103,652		1,136		6,717		223
Multi-family residential		18,550		16,233		-		2,317		-
Nonresidential		83,067		77,469		1,763		3,835		-
Land		17,884		12,371		229		5,284		-
Commercial		17,578		16,844		329		405		-
Consumer		4,445		3,840		295		310		-
Total Loans	$	261,889	$	238,877	$	3,752	$	19,037	$	223

December 31, 2010	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	6,975	$	6,681	$	16	$	278	$	-
1-4 family residential		117,616		107,010		5,256		5,224		126
Multi-family residential		14,997		14,087		-		334		576
Nonresidential		89,607		81,624		1,471		6,512		-
Land		21,016		14,199		2,845		3,972		-
Commercial		16,413		15,290		230		893		-
Consumer		4,533		4,188		25		320		-
Total Loans	$	271,157	$	243,079	$	9,843	$	17,533	$	702

Credit Quality Indicators

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

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

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

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

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

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

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

· The borrower has filed for bankruptcy protection.

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

· The guarantors have been called upon to make payments.

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

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

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

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

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

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

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2011 and December 31, 2010:

September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands)
Construction	$	-	$	-	$	169	$	169	$	8,468	$	8,637	$	-
1-4 family residential		381		853		2,448		3,682		108,046		111,728		-
Multi-family residential		-		-		343		343		18,207		18,550		-
Nonresidential		783		1,147		1,306		3,236		79,831		83,067		-
Land		229		-		3,080		3,309		14,575		17,884		-
Commercial		100		-		379		479		17,099		17,578		-
Consumer		48		-		289		337		4,108		4,445		-
	$	1,541	$	2,000	$	8,014	$	11,555	$	250,334	$	261,889	$	-

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands)
Construction	$	-	$	-	$	165	$	165	$	6,810	$	6,975	$	-
1-4 family residential		132		839		2,304		3,275		114,341		117,616		-
Multi-family residential		-		-		910		910		14,087		14,997		-
Nonresidential		-		-		4,673		4,673		84,934		89,607		-
Land		-		372		1,749		2,121		18,895		21,016		-
Commercial		542		-		265		807		15,606		16,413		-
Consumer		37		-		315		352		4,181		4,533		-
	$	711	$	1,211	$	10,381	$	12,303	$	258,854	$	271,157	$	-

The following table presents the Company’s nonaccrual loans as of September 30, 2011. At December 31, 2010, the Company had nonaccruing loans totaling $10,381,000 which equaled loans delinquent 90 days or more.

	September 30, 2011
	(In Thousands)
Residential real estate
Construction	$	169
One-to-four family residential		3,451
Multi-family residential		343
Nonresidential real estate and agricultural land		2,262
Land (not used for agricultural purposes)		3,803
Commercial		379
Consumer and other		308
Total nonaccrual loans	$	9,992

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present information pertaining to the principal balances and specific reserve allocations for impaired loans as of September 30, 2011 (in thousands):

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Impaired loans without a specific allowance:
Construction	$	169	$	169	$	-
1-4 family residential		2,635		2,740		-
Multi-family residential		1,974		1,974		-
Nonresidential		3,641		5,170		-
Land		2,329		2,329		-
Commercial		342		371		-
Consumer		19		19		-
	$	11,109	$	12,772	$	-

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Impaired loans with a specific allowance:
Construction	$	-	$	-	$	-
1-4 family residential		3,391		3,391		691
Multi-family residential		343		343		36
Nonresidential		-		-		-
Land		2,809		2,809		403
Commercial		-		-		-
Consumer		-		-		-
	$	6,543	$	6,543	$	1,130

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Total Impaired Loans:
Construction	$	169	$	169	$	-
1-4 family residential		6,026		6,131		691
Multi-family residential		2,317		2,317		36
Nonresidential		3,641		5,170		-
Land		5,138		5,138		403
Commercial		342		371		-
Consumer		19		19		-
	$	17,652	$	19,315	$	1,130

The following tables present information pertaining to the average balances of and interest recognized on impaired loans for the three- and nine-month periods ended September 30, 2011 (in thousands):

	For the nine months ended				For the three months ended
	September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	180	$	1	$	169	$	-
1-4 family residential		2,717		163		2,985		67
Multi-family residential		1,638		54		1,974		32
Nonresidential		4,708		120		4,758		49
Land		4,076		54		4,012		-
Commercial		542		10		342		2
Consumer		7		-		19		1
	$	13,868	$	402	$	14,259	$	151

	For the nine months ended				For the three months ended
	September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	-	$	-	$	-	$	-
1-4 family residential		3,187		43		3,391		24
Multi-family residential		340		-		343		-
Nonresidential		-		-		-		-
Land		2,366		32		2,809		11
Commercial		-		-		-		-
Consumer		-		-		-		-
	$	5,893	$	75	$	6,543	$	35

	For the nine months ended				For the three months ended
	September 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Total impaired loans:
Construction	$	180	$	1	$	169	$	-
1-4 family residential		5,904		206		6,376		91
Multi-family residential		1,978		54		2,317		32
Nonresidential		4,708		120		4,758		49
Land		6,442		86		6,821		11
Commercial		542		10		342		2
Consumer		7		-		19		1
	$	19,761	$	477	$	20,802	$	186

The following tables present various breakdowns of impaired loans as of December 31, 2010 (in thousands):

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	113	$	113	$	-	$	260	$	9
1-4 family residential		5,834		6,011		-		2,602		67
Multi-family residential		334		334		-		875		16
Nonresidential		5,106		6,405		-		6,125		141
Land		2,856		3,366		-		1,609		51
Commercial		381		410		-		713		32
Consumer		-		-		-		-		-
	$	14,624	$	16,639	$	-	$	12,184	$	316

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	165	$	165	$	14		165	$	1
1-4 family residential		1,935		1,935		200		1,866		43
Multi-family residential		576		576		34		230		-
Nonresidential		1,387		1,387		351		792		-
Land		3,485		3,485		578		1,779		8
Commercial		520		520		37		520		34
Consumer		-		-		-		-		-
	$	8,068	$	8,068	$	1,214	$	5,352	$	86

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Total Impaired Loans:
Construction	$	278	$	278	$	14	$	425	$	10
1-4 family residential		7,769		7,946		200		4,468		110
Multi-family residential		910		910		34		1,105		16
Nonresidential		6,493		7,792		351		6,917		141
Land		6,341		6,851		578		3,388		59
Commercial		901		930		37		1,233		66
Consumer		-		-		-		-		-
	$	22,692	$	24,707	$	1,214	$	17,536	$	402

For 2010 and 2011, interest income recognized on a cash basis included above was immaterial.

Troubled Debt Restructurings

In the course of working with borrowers, the Corporation may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Corporation attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Corporation to identify if a troubled debt restructuring (“TDR”) has occurred.

A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Corporation grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Corporation do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Corporation may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

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

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

The balance of nonaccrual restructured loans, which is included in total nonaccrual loans, was $2.0 million at September 30, 2011. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $7.4 million at September 30, 2011. Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter. All TDRs are considered impaired by the Corporation, unless it is determined that the borrower has met the six month satisfactory performance period under the modified terms. On at least a quarterly basis, the Corporation reviews all TDR loans to determine if the loan meets this criterion.

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

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

					Loans Restructured During
					9 Months Ending 9/30/11						3 Months Ending 9/30/11
	# of Loans		Total Troubled Debt Restructured		# of Loans		Balance at restructure		Current Balance		# of Loans		Balance at restructure		Current Balance
Residential Real Estate
Construction		-	$	-		-	$	-	$	-		-	$	-	$	-
One-to-four family residential		8		3,196,690		2		1,004,603		1,003,423		2		1,004,603	$	1,003,423
Multi-family residential		1		1,974,022		1		1,735,280		1,974,022		-		-		-
Nonresidential real estate and agricultural land		4		2,076,338		1		1,117,878		955,713		-		-		-
Land not agricultural		1		2,137,065				-		-		-		-		-
Commercial		2		71,114		1		45,815		23,169		-		-		-
Consumer		1		18,689		1		18,769		18,689		-		-		-
		17	$	9,473,917		6	$	3,922,345	$	3,975,015		2	$	1,004,603	$	1,003,423

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

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

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

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Consolidated Condensed Statements of Comprehensive Income (Parentheticals) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Statement Of Income and Comprehensive Income [Abstract]
Unrealized holding gains arising during the period, Tax expense (in dollars)	$ 424	$ 332	$ 990	$ 756
Reclassification adjustment for gains included in net income, Tax expense (in dollars)	$ 38	$ 69	$ 94	$ 116

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PRINCIPLES OF CONSOLIDATION

9 Months Ended

Sep. 30, 2011

Principles Of Consolidation [Abstract]

PRINCIPLES OF CONSOLIDATION

NOTE 2: PRINCIPLES OF CONSOLIDATION

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

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EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2011

Earnings Per Share [Abstract]

EARNINGS PER SHARE

NOTE 3: EARNINGS PER SHARE

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

	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
	Income		Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	944		1,514,472	$	.62	$	1,454		1,508,904	$	.96
Effect of dilutive RRP awards and stock options				2,034						5,300
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	944		1,516,506	$	.62	$	1,454		1,514,204	$	.96

	Three Months Ended September 30, 2011								Three Months Ended September 30, 2010
	Income			Weighted Average Shares		Per Share Amount			Income		Weighted Average Shares		Per Share Amount
	(In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	(298	)		1,514,472	$	(.20	)	$	201		1,512,472	$	.13
Effect of dilutive RRP awards and stock options					-							3,456
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	(298	)		1,514,472	$	(.20	)	$	201		1,515,928	$	.13

Net income for the nine-month period ending September 30, 2011, of $1,216,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $944,000. For the nine-month period ending September 30, 2010, net income of $1,726,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $1,454,000.

Net loss for the three-month period ending September 30, 2011 of $207,000 was increased by $91,000 for dividends on preferred stock in the same period, to arrive at a loss of $298,000. For the three-month period ending September 30, 2010, net income of $291,000 was reduced by $90,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $201,000.

Certain groups of options were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares. For the three-month and nine-month periods ended September 30, 2011 and September 30, 2010, options to purchase 5,000 shares at an exercise price of $22.25 per share were outstanding and were not included in the computation of diluted earnings for those periods. . In addition, for the three months ended September 30, 2011, options to purchase 8,400 shares and 19,000 shares at exercise prices of $13.25 and $14.56 per share were also outstanding and were not included in the computation of diluted earnings per share due to the net loss reported for that period.

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DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Abstract]

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 4: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

Available-for-sale Securities

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

9

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010, respectively (in thousands).

			September 30, 2011
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	32,998	$	-	$	32,998	$	-
State and municipal		27,228		-		27,228		-
Government-sponsored enterprise (GSE) -residential mortgage-backed and other asset-backed agency securities		31,485		-		31,485		-
Corporate		3,439		-		2,276		1,163
Total	$	95,150	$	-	$	93,987	$	1,163

			December 31, 2010
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	22,528	$	-	$	22,528	$	-
State and municipal		22,855		-		22,855		-
Government-sponsored enterprise (GSE) -residential mortgage-backed and other asset-backed agency securities		28,912		-		28,912		-
Corporate		936		-		-		936
Total	$	75,231	$	-	$	74,295	$	936

10

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010:

	Available-For-Sale Securities
	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
	(In Thousands)
Beginning balance	$	936		$	848
Total realized and unrealized gains and losses
Amortization included in net income		6			6
Unrealized gains (losses) included in other comprehensive income		231			102
Purchases		-			-
Pay downs		(10	)		(12	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,163		$	944
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	-

	Available-For-Sale Securities
	Three Months Ended September 30, 2011			Three Months Ended September 30, 2010
	(In Thousands)
Beginning balance	$	1,169		$	1,000
Total realized and unrealized gains and losses
Amortization included in net income		3			2
Unrealized gains (losses) included in other comprehensive income		(6	)		(54	)
Purchases		-			-
Pay downs		(3	)		(4	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,163		$	944
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	-

There were no realized or unrealized gains or losses of Level 3 securities included in net income for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010.

11

At September 30, 2010, Level 3 securities included two pooled trust preferred securities. The fair value on these securities is calculated using a combination of observable and unobservable assumptions as a quoted market price is not readily available. Both securities remain in Level 3 at September 30, 2011. For the past two fiscal years, trading of these types of securities has only been conducted on a distress sale or forced liquidation basis, although some trading activity has occurred in recent months for instruments similar to the instruments held by the Corporation. As a result, the Corporation continues to measure the fair values using discounted cash flow projections and has included the securities in Level 3.

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

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010.

				September 30, 2011
				Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans		$	6,868		$	-		$	-		$	6,868
Real estate held for sale			1,373			-			-			1,373
Mortgage servicing rights			126			-			-			126

				December 31, 2010
				Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans		$	8,956		$	-		$	-		$	8,956
Real estate held for sale			-			-			-			-
Mortgage servicing rights			234			-			-			234

Impaired Loans (Collateral Dependent)

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

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

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

Real estate held for sale

Real estate held for sale is carried at the fair value less cost to sell and is periodically evaluated for impairment.  Real estate held for sale recorded during the current accounting period is recorded at fair value, less cost to sell and is disclosed as a nonrecurring measurement.

12

Mortgage Servicing Rights

Mortgage servicing rights are initially recorded at fair value and are subsequently reported at amortized cost and periodically evaluated for impairment. New mortgage servicing rights recorded during the current accounting period are recorded at fair value and are disclosed as a nonrecurring measurement.

Mortgage servicing rights recorded as an asset and into income during the nine months ended September 30, 2011 and the year ended December 31, 2010 totaled $126,000 and $234,000, respectively. For the year ended December 31, 2010, $12,000 was recorded as impairment on mortgage servicing rights and included in net income. For the nine months ended September 30, 2011, the Corporation reduced the recorded impairment, increasing net income by $39,000 as pool values increased. Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair values of new mortgage servicing rights are estimated using discounted cash flow models. Due to the nature of the valuation inputs, recording initial mortgage servicing rights are classified within Level 3 of the hierarchy.

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

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

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

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

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

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

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

Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt.

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

Advance Payment by Borrowers for Taxes and Insurance - The fair value approximates carrying value.

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

13

The estimated fair values of the Corporation’s financial instruments are as follows:

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Assets
Cash and cash equivalents	$	19,405	$	19,405	$	16,788	$	16,788
Investment securities available for sale		95,150		95,150		75,231		75,231
Loans, held for sale		1,243		1,270		1,089		1,110
Loans, net of allowance for losses		255,135		263,191		265,488		273,029
Stock in FHLB		4,226		4,226		4,496		4,496
Interest receivable		1,962		1,962		1,953		1,953
Mortgage servicing rights		628		929		588		834
Liabilities
Deposits		299,136		303,168		286,337		289,576
FHLB advances		58,000		63,096		58,000		61,974
Borrowings		7,217		5,543		7,217		4,725
Interest payable		398		398		485		485
Advance payments by borrowers for taxes and insurance		231		231		105		105
Off-Balance Sheet Assets (Liabilities)
Commitments to extend credit		-		-		-		-
Standby letters of credit		-		-		-		-

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Consolidated Condensed Statements of Comprehensive Income (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Statement Of Income and Comprehensive Income [Abstract]
Net income (loss)	$ (207)	$ 291	$ 1,216	$ 1,726
Unrealized gains on securities available for sale
Unrealized holding gains arising during the period, net of tax expense of $990, $756, $424, and $332	770	593	1,805	1,353
Less: Reclassification adjustment for gains included in net income, net of tax expense of $94, $116, $38, and $69	67	105	176	190
Other Comprehensive Income (Loss), Available-for-sale Securities Adjustment, Net of Tax	703	488	1,629	1,163
Comprehensive income	$ 496	$ 779	$ 2,845	$ 2,889

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Consolidated Condensed Statements of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Operating Activities
Net income	$ 1,216	$ 1,726
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses	2,297	1,915
Depreciation and amortization	441	376
Investment securities gains	(270)	(306)
Loans originated for sale in the secondary market	(12,932)	(14,253)
Proceeds from sale of loans in the secondary market	13,020	14,051
Gain on sale of loans	(367)	(385)
Amortization of net loan origination cost	103	71
Loss on premises, equipment and real estate held for sale	683	10
Employee Stock Ownership Plan compensation	26	29
Net change in
Interest receivable	(9)	156
Interest payable	(87)	(135)
Prepaid FDIC assessment	268	325
Other adjustments	(292)	(502)
Net cash provided by operating activities	4,097	3,078
Investing Activities
Proceeds from sale of FHLB Stock	270	0
Purchases of securities available for sale	(31,803)	(16,822)
Proceeds from maturities of securities available for sale	7,057	11,722
Proceeds from sales of securities available for sale	7,585	9,637
Net change in loans	3,602	6,686
Purchases of premises and equipment	(585)	(172)
Net cash received in branch acquisition	0	582
Proceeds from sale of real estate acquired through foreclosure	893	485
Other investing activity	(182)	0
Net cash provided by (used in) investing activities	(13,163)	12,118
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits	6,046	(4,781)
Certificates of deposit	6,753	8,135
Proceeds from borrowings	15,000	3,000
Repayment of borrowings	(15,000)	(24,000)
Cash dividends	(1,226)	(1,222)
Acquisition of stock for stock benefit plans	(16)	0
Advances by borrowers for taxes and insurance	126	68
Other financing activities	0	36
Net cash provided by (used in) financing activities	11,683	(18,764)
Net Change in Cash and Cash Equivalents	2,617	(3,568)
Cash and Cash Equivalents, Beginning of Period	16,788	13,387
Cash and Cash Equivalents, End of Period	19,405	9,819
Additional Cash Flows and Supplementary Information
Interest paid	4,495	5,843
Income tax paid, net of refunds	388	328
Transfers to real estate held for sale	$ 4,311	$ 811

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RECLASSIFICATIONS

9 Months Ended

Sep. 30, 2011

Reclassifications [Abstract]

RECLASSIFICATIONS

NOTE 9: RECLASSIFICATIONS

Certain reclassifications have been made to the 2010 consolidated condensed financial statements to conform to the September 30, 2011 presentation.

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Consolidated Condensed Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 1,913	$ 2,021
Interest-bearing demand deposits	15,587	12,864
Federal funds sold	1,905	1,903
Cash and cash equivalents	19,405	16,788
Investment securities available for sale	95,150	75,231
Loans held for sale	1,243	1,089
Loans	258,915	269,254
Allowance for loan losses	(3,780)	(3,806)
Net loans	255,135	265,448
Premises and equipment, net	8,119	7,975
Real estate, held for sale	3,209	400
Federal Home Loan Bank stock	4,226	4,496
Interest receivable	1,962	1,953
Cash value of life insurance	9,774	9,532
Goodwill	79	79
Other assets	3,647	3,618
Total assets	401,949	386,609
Deposits
Noninterest-bearing	24,690	23,480
Interest-bearing	274,446	262,857
Total deposits	299,136	286,337
Borrowings	65,217	65,217
Interest payable	398	485
Other liabilities	4,096	3,102
Total liabilities	368,847	355,141
Commitments and Contingencies
Stockholders' Equity
Preferred stock - liquidation preference $1,000 per share - no par value Authorized - 2,000,000 shares Issued and outstanding - 5,000 shares	5,000	5,000
Common stock, no par value Authorized - 5,000,000 shares Issued and outstanding - 1,514,472 shares	7,561	7,546
Retained earnings	18,469	18,479
Accumulated other comprehensive income	2,072	443
Total stockholders' equity	33,102	31,468
Total liabilities and stockholders' equity	$ 401,949	$ 386,609