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 March 31, 2014
	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 May 14, 2014, was 1,537,306.

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 Income	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	34
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	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	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

	March 31, 2014			December 31, 2013
	(Unaudited)
	(In Thousands, Except Share Amounts)
Assets
Cash and due from banks	$	2,955		$	4,366
Interest-bearing demand deposits		10,889			3,913
Federal funds sold		4,011			1,965
Cash and cash equivalents		17,855			10,244
Interest-bearing deposits		1,984			1,984
Investment securities available for sale		117,333			119,887
Loans held for sale		-			341
Loans		316,806			320,738
Allowance for loan losses		4,196			4,510
Net loans		312,610			316,228
Premises and equipment, net		10,873			10,775
Real estate, held for sale		1,258			155
Federal Home Loan Bank stock		4,595			4,595
Interest receivable		2,107			2,178
Cash value of life insurance		10,310			10,230
Goodwill		200			200
Core deposit intangibles		404			428
Other assets		4,414			5,592
Total assets	$	483,943		$	482,837
Liabilities
Deposits
Noninterest-bearing	$	49,475		$	47,499
Interest-bearing		351,771			347,516
Total deposits		401,246			395,015
Borrowings		42,717			49,717
Interest payable		246			270
Other liabilities		3,627			3,371
Total liabilities		447,836			448,373
Commitments and Contingencies
Stockholders’ Equity
Preferred stock – liquidation preference $1,000 per share – no par value
Authorized – 2,000,000 shares		5,000			5,000
Issued and outstanding – 5,000 shares
Common stock, no par value
Authorized – 5,000,000 shares
Issued and outstanding – 1,536,306 and 1,532,306 shares		7,936			7,824
Retained earnings		24,115			23,463
Accumulated other comprehensive loss		(944	)		(1,823	)
Total stockholders’ equity		36,107			34,464
Total liabilities and stockholders’ equity	$	483,943		$	482,837

See Notes to Consolidated Condensed Financial Statements.

3

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Income

(Unaudited)

	Three Months Ended March 31,
	2014			2013
	(In Thousands, Except Share Amounts)
Interest Income
Loans receivable	$	4,003		$	4,057
Investment securities		745			686
Interest-earning deposits and other		71			49
Total interest income		4,819			4,792
Interest Expense
Deposits		516			616
Borrowings		391			474
Total interest expense		907			1,090
Net Interest Income		3,912			3,702
Provision for loan losses		174			318
Net Interest Income After Provision for Loan Losses		3,738			3,384
Other Income
Service fees and charges		544			593
Net realized gains on sale of available-for-sale securities (includes $87 and $79 for the three months ended March 31, 2014 and 2013, respectively, related to accumulated other comprehensive earnings reclassifications)		87			79
Net gains on loan sales		78			325
Interchange fee income		147			140
Increase in cash value of life insurance		82			68
Loss on real estate held for sale		(21	)		(144	)
Other income		106			109
Total other income		1,023			1,170
Other Expenses
Salaries and employee benefits		1,841			1,689
Net occupancy and equipment expenses		537			476
Data processing fees		144			130
Advertising		99			106
Mortgage servicing rights		44			65
Office supplies		16			32
Professional fees		135			91
Federal Deposit Insurance Corporation assessment		105			82
Loan related expenses		134			102
Other expenses		363			408
Total other expenses		3,418			3,181
Income Before Income Tax		1,343			1,373
Income tax expense (includes $29 and $27 for the three months ended March 31, 2014 and 2013, respectively, related to income tax expense from reclassification items)		277			367
Net Income		1,066			1,006
Preferred stock dividends		91			90
Net Income Available to Common Stockholders	$	975		$	916
Basic earnings per common share	$	.64		$	.60
Diluted earnings per common share		.63			.60
Dividends per share		.21			.21

See Notes to Consolidated Condensed Financial Statements.

4

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
	2014		2013
	(In Thousands)
Net income	$	1,066	$	1,006
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities available for sale
Unrealized holding gains (losses) arising during the period, net of tax (expense) benefit of $(499) and $219		937		(397	)
Less: Reclassification adjustment for gains included in net income, net of tax expense of $29 and $27		58		52
		879		(449	)
Comprehensive income	$	1,945	$	557

See Notes to Consolidated Condensed Financial Statements.

5

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2014			2013
	(In Thousands)
Operating Activities
Net income	$	1,066		$	1,006
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		174			318
Depreciation and amortization		197			193
Investment securities gains		(87	)		(79	)
Loans originated for sale in the secondary market		(2,393	)		(8,041	)
Proceeds from sale of loans in the secondary market		2,783			8,326
Gain on sale of loans		(78	)		(325	)
Amortization of net loan origination cost		33			35
Loss on real estate held for sale		21			144
Net change in
Interest receivable		71			279
Interest payable		(24	)		(28	)
Other adjustments		714			541
Net cash provided by operating activities		2,477			2,369
Investing Activities
Purchases of securities available for sale		(9,500	)		(21,599	)
Proceeds from maturities and paydowns of securities available for sale		5,207			5,694
Proceeds from sales of securities available for sale		8,264			2,056
Net change in loans		2,301			9,502
Purchases of premises and equipment		(292	)		(150	)
Proceeds from sale of real estate acquired through foreclosure		45			221
Other investing activity		(1	)		3
Net cash provided by (used in) investing activities		6,024			(4,273	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		10,714			12,051
Certificates of deposit		(4,483	)		(2,848	)
Proceeds from borrowings		10,000			-
Repayment of borrowings		(17,000	)		-
Cash dividends		(412	)		(91	)
Proceeds from exercise of stock options		111			-
Advances by borrowers for taxes and insurance		180			125
Net cash used in financing activities		(890	)		(9,237	)
Net Change in Cash and Cash Equivalents		7,611			7,333
Cash and Cash Equivalents, Beginning of Period		10,244			19,152
Cash and Cash Equivalents, End of Period	$	17,855			26,485
Additional Cash Flows and Supplementary Information
Interest paid	$	931		$	1,118
Income tax paid, net of refunds		-			-
Transfers to real estate held for sale		1,166			690
Dividends declared not paid		323			320

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 bank holding company whose activities are primarily limited to holding the stock of River Valley Financial Bank (“River Valley” or the “Bank”), an Indiana commercial bank. The Bank conducts a general banking business in southeastern and south central Indiana and in northern 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 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, 2013. 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 period ended March 31, 2014, 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, 2013 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.

NOTE 3: ACQUISITION

On November 22, 2013, the Corporation completed the acquisition of the deposit relationships, real estate and fixed assets of the Osgood, Indiana branch office of Old National Bank, a national banking association. Cash proceeds of $6.3 million were received in the transaction, representing the net book value of the real and personal property acquired and a 2% premium on deposits, as reduced by the deposits assumed at closing. Customer deposits acquired in the transaction totaled $6.5 million, and goodwill recognized in the transaction was $124,000. No loans were acquired in this transaction.

7

The fair value of the assets acquired, liabilities assumed, and the purchase price for the Osgood, Indiana branch acquisition was allocated as follows (in thousands):

Consideration:  Cash paid	$	129
Fair value of assets acquired:
Cash and cash equivalents		6,379
Property and equipment		73
Core deposit intangible		11
Other assets		1
Total assets acquired		6,464
Fair value of liabilities assumed:
Deposits		6,455
Interest payable		2
Other liabilities		2
Total liabilities assumed		6,459
Goodwill	$	124

NOTE 4: EARNINGS PER SHARE

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

	Three Months Ended March 31, 2014					Three Months Ended March 31, 2013
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(Unaudited; In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	975	1,533,333	$	.64	$	916	1,524,872	$	.60
Effect of dilutive stock options			4,636					3,940
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	975	1,537,969	$	.63	$	916	1,528,812	$	.60

Net income for the three-month period ended March 31, 2014, of $1,066,000 was reduced by $91,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $975,000. For the three-month period ending March 31, 2013, net income of $1,006,000 was reduced by $90,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $916,000.

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 period ended March 31, 2013, 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 that period. For the same period ended March 31, 2014, there were no options excluded.

8

NOTE 5: 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

Recurring Measurements

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

Available-for-sale Securities

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

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

9

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at March 31, 2014 and December 31, 2013, respectively.

			March 31, 2014 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)
Available-for-sale securities	(In Thousands)
Federal agencies	$	33,338	$	-	$	33,338	$	-
State and municipal		35,014		-		35,014		-
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		45,629		-		45,629		-
Corporate		3,352		-		1,987		1,365
Total	$	117,333	$	-	$	115,968	$	1,365

			December 31, 2013 Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	37,213	$	-	$	37,213	$	-
State and municipal		37,122		-		37,122		-
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		41,801		-		41,801		-
Corporate		3,751		-		2,483		1,268
Total	$	119,887	$	-	$	118,619	$	1,268

10

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs for the three-month periods ended March 31, 2014 and March 31, 2013:

	Available-for-Sale Securities
	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
	(Unaudited; In Thousands)
Beginning balance	$	1,268		$	1,197
Accretion		2			7
Total realized and unrealized gains and losses
Unrealized gains included in other comprehensive income		102			63
Settlements, including pay downs		(7	)		(59	)
Ending balance	$	1,365		$	1,208
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 periods ended March 31, 2014 and March 31, 2013.

At March 31, 2014, 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 March 31, 2014. 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 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.

11

Nonrecurring Measurements

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 March 31, 2014 and December 31, 2013.

		Fair Value Measurements Using
As of March 31, 2014	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	$     12	$   -	$   -	$     12

		Fair Value Measurements Using
As of December 31, 2013	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans	$5,987	$   -	$   -	$5,987
Real estate held for sale	$     65	$   -	$   -	$     65

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

Impaired Loans (Collateral Dependent)

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

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

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

The Corporation considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by policy. Appraisals are reviewed for accuracy and consistency by loan review personnel and reported to management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by loan review personnel by comparison to historical results.

12

Real Estate Held for Sale

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

Sensitivity of Significant Unobservable Inputs

The following tables represent quantitative information about unobservable Level 3 fair value measurements at March 31, 2014 and December 31, 2013:

	Fair Value at March 31, 2014	Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Unaudited; In Thousands)
Impaired loans	$     12	Comparative sales based on independent appraisal	Marketability Discount	10%-20%
Securities available for sale
Corporate	$1,365	Discounted cash flows	*Default probability	0.85%-100%
			*Loss, given default	85%-100%
			*Discount rate	4.29%-9.50%
			*Recovery rate	0%-90%
			*Prepayment rate	0%-100%

	Fair Value at December 31, 2013	Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Unaudited; In Thousands)
Impaired loans	$5,987	Comparative sales based on independent appraisal	Marketability Discount	10%-20	%
Real estate held for sale	$     65	Comparative sales based on independent appraisal	Marketability Discount	10	%
Securities available for sale
Corporate	$1,268	Discounted cash flows	*Default probability	1.04%-100	%
			*Loss, given default	85%-100	%
			*Discount rate	4.41%-9.50	%
			*Recovery rate	0%-90	%
			*Prepayment rate	0%-100	%

13

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

Securities Available for Sale - Pooled Trust Preferred Securities

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

The significant unobservable inputs used in the fair value measurement of the Corporation’s pooled trust preferred securities are probability of default, estimated loss given default, discount rate, and recovery and prepayment rates. Significant increases (decreases) in any of those inputs in isolation could result in a significant change in the fair value measurement.

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

Cash and Cash Equivalents and Interest-bearing Deposits - The fair value 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 Federal Home Loan Bank (“FHLB”) stock is based on the price at which it may be resold to the FHLB.

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

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

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

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

14

The following tables present estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2014 and December 31, 2013.

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Unaudited; In Thousands)
March 31, 2014:
Assets
Cash and cash equivalents	$	17,855	$	17,855	$	-	$	-
Interest-bearing deposits		1,984		1,984		-		-
Loans, held for sale		-		-		-		-
Loans, net of allowance for losses		312,610		-	324,870			-
Stock in Federal Home Loan Bank		4,595		-		4,595		-
Interest receivable		2,107		-		2,107		-
Liabilities
Deposits		401,246		-	401,979			-
Borrowings		42,717		-	37,386		7,220
Interest payable		246		-		246		-

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Unaudited; In Thousands)
December 31, 2013:
Assets
Cash and cash equivalents	$	10,244	$	10,244	$	-	$	-
Interest-bearing deposits		1,984		1,984		-		-
Loans, held for sale		341		-		341		-
Loans, net of allowance for losses		316,228		-		330,073		-
Stock in Federal Home Loan Bank		4,595		-		4,595		-
Interest receivable		2,178		-		2,178		-
Liabilities
Deposits		395,015		-		395,924		-
Borrowings		49,717		-		44,538		7,218
Interest payable		270		-		270		-

15

NOTE 6: INVESTMENT SECURITIES

The amortized cost and approximate fair values of securities as of March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Unaudited; In Thousands)
Available-for-sale securities
Federal agencies	$	33,976	$	189	$	(827	)	$	33,338
State and municipal		34,716		868		(570	)		35,014
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		46,477		164		(1,012	)		45,629
Corporate		3,658		3		(309	)		3,352
Total investment securities	$	118,827	$	1,224	$	(2,718	)	$	117,333
	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available-for-sale securities
Federal agencies	$	38,075	$	224	$	(1,086	)	$	37,213
State and municipal		37,709		748		(1,335	)		37,122
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		42,782		176		(1,157	)		41,801
Corporate		4,164		-		(413	)		3,751
Total investment securities	$	122,730	$	1,148	$	(3,991	)	$	119,887

The amortized cost and fair value of available-for-sale securities at March 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
	(Unaudited; In Thousands)
Within one year	$	4,016	$	4,051
One to five years		12,617		12,740
Five to ten years		30,489		29,928
After ten years		25,228		24,985
		72,350		71,704
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		46,477		45,629
Totals	$	118,827	$	117,333

16

No securities were pledged at March 31, 2014 or at December 31, 2013 to secure FHLB advances. Securities with a carrying value of $21,367,000 and $22,828,000 were pledged at March 31, 2014 and December 31, 2013 to secure public deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the three-month periods ended March 31, 2014 and March 31, 2013 were $8,264,000 and $2,056,000. Gross gains of $279,000 and $79,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended March 31, 2014 and March 31, 2013, respectively. Gross losses of $192,000 were realized for the three-month period ended March 31, 2014. There were no gross losses realized for the three-month period ended March 31, 2013.

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 March 31, 2014 was $69,857,000 which is approximately 59.5% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2013 was $76,903,000, which represented approximately 64.1% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

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

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 March 31, 2014 and December 31, 2013:

	March 31, 2014
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Unaudited; In Thousands)
Federal agencies	$	20,892	$	(721	)	$	1,894	$	(106	)	$	22,786	$	(827	)
State and municipal		8,526		(348	)		3,153		(222	)		11,679		(570	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		30,129		(895	)		2,663		(117	)		32,792		(1,012	)
Corporate		1,499		(3	)		1,101		(306	)		2,600		(309	)
Total temporarily impaired securities	$	61,046	$	(1,967	)	$	8,811	$	(751	)	$	69,857	$	(2,718	)
	December 31, 2013
	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	$	21,518	$	(962	)	$	1,876	$	(124	)	$	23,394	$	(1,086	)
State and municipal		18,556		(1,271	)		540		(64	)		19,096		(1,335	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		30,717		(1,131	)		444		(26	)		31,161		(1,157	)
Corporate		2,732		(26	)		520		(387	)		3,252		(413	)
Total temporarily impaired securities	$	73,523	$	(3,390	)	$	3,380	$	(601	)	$	76,903	$	(3,991	)

17

Federal Agencies

The unrealized losses on the Corporation’s investments in direct obligations of U.S. government agencies 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 March 31, 2014.

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 March 31, 2014.

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

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost bases over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2014.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due primarily to a loss on one pooled trust preferred issue held by the Corporation. The ALESCO 9A issue had an unrealized loss at March 31, 2014 of $294,000. The PRETSL XXVII issue was at a slight gain at March 31, 2014. This compares to December 31, 2013, which showed unrealized losses on both ALESCO 9A and PRETSL XXVII of $387,000 and $6,000, 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 Baa3 and A2, 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 1.4% of the book value of the Corporation’s investment portfolio and approximately 1.2% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and the Corporation expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at March 31, 2014.

18

NOTE 7: ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

The Corporation acquired loans in the acquisition of Dupont State Bank during the year ended December 31, 2012. Certain of the transferred loans had evidence of deterioration of credit quality since origination and it was probable that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration, for which it is probable that all contractually required payments will not be collected, are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include deterioration of collateral value, past due status and/or nonaccrual status, and borrower credit scores. Purchased credit-impaired loans are accounted for under accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and are initially measured at fair value, which includes estimated future losses that may be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over at the acquisition date. Management utilized cash flows prepared by a third party in arriving at the discount for credit-impaired loans acquired in the transaction. Those cash flows included estimation of current key assumptions, such as default rates, severity, and prepayment speeds.

The carrying amount of those loans included in the balance sheet as loans receivable at March 31, 2014 and December 31, 2013 were (in thousands):

	March 31, 2014			December 31, 2013
	(Unaudited)
Construction/Land	$	713		$	713
One-to-four family residential		1,441			1,812
Multi-family residential		685			685
Nonresidential real estate and agricultural land		1,109			1,124
Commercial		25			26
Consumer and other		37			38
Outstanding balance of acquired credit-impaired loans		4,010			4,398
Fair value adjustment for credit-impaired loans		(1,364	)		(1,541	)
Carrying balance of acquired credit-impaired loans	$	2,646		$	2,857

Accretable yield, or income expected to be collected is as follows:

	Three Months Ended March 31,
	2014			2013
	(Unaudited; In Thousands)
Balance at the beginning of the period	$	1,345		$	673
Additions		-			-
Accretion		(113	)		(124	)
Reclassification from non-accretable difference		34			5
Disposals		-			-
Balance at March 31, 2014	$	1,266		$	554

19

Loans acquired during 2012 for which it was probable at acquisition that all contractually required payments would not be collected were as follows (in thousands):

Contractually required payments receivable at acquisition
Construction / Land	$	750
One-to-four family residential		2,193
Multi-family residential		687
Nonresidential and agricultural land		1,530
Commercial		73
Consumer		52
Total required payments receivable at acquisition	$	5,285
Cash flows expected to be collected at acquisition	$	3,838
Basis in acquired loans at acquisition	$	3,088

During the three months ended March 31, 2014, increases to the allowance for loan losses for loans acquired with deteriorated credit quality were immaterial to financial reporting. No allowances for loan losses were reversed in 2014.

NOTE 8: LOANS AND ALLOWANCE

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

Loans

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

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

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.

20

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

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

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

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

Allowance for Loan Losses

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

The allowance for loan losses is evaluated at least quarterly by management and is based upon management’s periodic review of the collectability of the loans in light of several factors, including 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.

21

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 five years. Previously, management utilized a three-year historical loss experience methodology. Given the loss experiences of financial institutions over the last five years, management believes it is appropriate to utilize a five-year look-back period for loss history and made this change effective in 2013. Other adjustments (qualitative or environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

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

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

The following table presents the breakdown of loans as of March 31, 2014 and December 31, 2013 (in thousands).

	March 31, 2014			December 31, 2013
	(Unaudited)
Construction/Land	$	25,978		$	24,307
One-to-four family residential		136,098			137,298
Multi-family residential		18,107			16,408
Nonresidential		112,067			118,946
Commercial		22,458			24,741
Consumer		3,667			4,326
		318,375			326,026
Unamortized deferred loan costs		494			487
Undisbursed loans in process		(2,063	)		(5,775	)
Allowance for loan losses		(4,196	)		(4,510	)
Total loans	$	312,610		$	316,228

22

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

Construction, Land and Land Development

The Construction, Land and Land Development segments include loans for raw land, loans to develop raw land preparatory to building construction, and construction loans of all types. Construction and development 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 and development loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. These 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.

Land loans are secured by raw land held as an investment, for future development, or as collateral for other use. Management monitors and evaluates these loans based on collateral, geography and risk grade criteria. These loans are underwritten based on the underlying purpose of the loan with repayment primarily from the sale or use of the underlying collateral.

One-to-Four Family Residential and Consumer

With respect to residential loans that are secured by one-to-four family residences and are usually 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 residential 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) and Multi-family Residential

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 residential 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 residential real estate loans versus non-owner-occupied residential loans.

23

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 tables present the activity in the allowance for loan losses for the three-month periods ended March 31, 2014 and 2013, and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio class and impairment method, as of March 31, 2014 and December 31, 2013.

	Construction/ Land		1-4 Family			Multi-Family		Nonresidential			Commercial			Consumer			Total
	(Unaudited; In Thousands)
Three Months Ended March 31, 2014
Balances at beginning of period:	$	676	$	1,749		$	404	$	1,470		$	189		$	22		$	4,510
Provision for losses		18		256			10		(93	)		(20	)		3			174
Loans charged off		-		(484	)		-		(11	)		-			(38	)		(533	)
Recoveries on loans		-		3			-		12			7			23			45
Balances at end of period	$	694	$	1,524		$	414	$	1,378		$	176		$	10		$	4,196
As of March 31, 2014
Allowance for losses:
Individually evaluated for impairment:	$	195	$	302		$	196	$	97		$	88		$	-		$	878
Collectively evaluated for impairment:		499		1,139			110		1,208			88			10			3,054
Loans acquired with a deteriorated credit quality:		-		83			108		73			-			-			264
Balances at end of period	$	694	$	1,524		$	414	$	1,378		$	176		$	10		$	4,196
Loans:
Individually evaluated for impairment:	$	4,256	$	4,838		$	1,015	$	4,093		$	330		$	-		$	14,532
Collectively evaluated for impairment:		21,360		130,230			16,581		107,264			22,113			3,649			301,197
Loans acquired with a deteriorated credit quality:		362		1,030			511		710			15			18			2,646
Balances at end of period	$	25,978	$	136,098		$	18,107	$	112,067		$	22,458		$	3,667		$	318,375

24

	Construction/ Land			1-4 Family			Multi-Family			Nonresidential			Commercial		Consumer			Total
	(Unaudited; In Thousands)
Three Months Ended March 31, 2013
Balances at beginning of period:	$	648		$	1,423		$	281		$	1,078		$	133	$	1		$	3,564
Provision for losses		152			176			(3	)		(18	)		2		9			318
Loans charged off		(61	)		(65	)		-			(175	)		-		(31	)		(332	)
Recoveries on loans		18			-			-			294			-		22			334
Balances at end of period	$	757		$	1,534		$	278		$	1,179		$	135	$	1		$	3,884

	Construction/ Land		1-4 Family		Multi-Family		Nonresidential		Commercial		Consumer		Total
	(In Thousands)
As of December 31, 2013
Allowance for losses:
Individually evaluated for impairment:	$	195	$	552	$	196	$	97	$	68	$	-	$	1,108
Collectively evaluated for impairment:		481		1,101		110		1,305		120		21		3,138
Loans acquired with a deteriorated credit quality:		-		96		98		68		1		1		264
Balances at end of period	$	676	$	1,749	$	404	$	1,470	$	189	$	22	$	4,510
Loans:
Individually evaluated for impairment:	$	4,104	$	5,917	$	1,074	$	4,096	$	372	$	12	$	15,563
Collectively evaluated for impairment:		19,866		130,100		14,834		114,145		24,354		4,307		307,606
Loans acquired with a deteriorated credit quality:		337		1,281		500		705		15		19		2,857
Balances at end of period	$	24,307	$	137,298	$	16,408	$	118,946	$	24,741	$	4,326	$	326,026

The following tables present the credit risk profile of the Corporation’s loan portfolio based on rating category as of March 31, 2014 and December 31, 2013. Loans acquired from Dupont State Bank in the November 2012 acquisition have been adjusted to fair value for these periods.

March 31, 2014	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(Unaudited; In Thousands)
Construction/Land	$	25,978	$	21,617	$	32	$	4,329	$	-
1-4 family residential		136,098		125,315		4,116		6,336		331
Multi-family residential		18,107		15,865		44		2,198		-
Nonresidential		112,067		104,975		2,663		4,017		412
Commercial		22,458		22,033		11		349		65
Consumer		3,667		3,637		-		30		-
Total loans	$	318,375	$	293,442	$	6,866	$	17,259	$	808

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December 31, 2013	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction/Land	$	24,307	$	20,023	$	33	$	4,251	$	-
1-4 family residential		137,298		124,765		4,144		7,691		698
Multi-family residential		16,408		14,798		44		1,566		-
Nonresidential		118,946		110,622		2,686		5,066		572
Commercial		24,741		24,341		8		316		76
Consumer		4,326		4,301		-		25		-
Total loans	$	326,026	$	298,850	$	6,915	$	18,915	$	1,346

Credit Quality Indicators

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

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

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

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

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

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

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

· The borrower has filed for bankruptcy protection.

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

· The guarantors have been called upon to make payments.

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

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

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

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

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

Doubtful: These loans exhibit the same characteristics as those rated “substandard,” plus weaknesses that make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. This would include inadequately secured loans that are

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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 Corporation evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the quarter or fiscal year.

The following tables present the Corporation’s loan portfolio aging analysis as of March 31, 2014 and December 31, 2013:

March 31, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans Receivables
	(Unaudited; In Thousands)
Construction/Land	$	37	$	83	$	159	$	279	$	25,337	$	362	$	25,978
1-4 family residential		1,016		318		790		2,124		132,944		1,030		136,098
Multi-family residential		-		-		-		-		17,596		511		18,107
Nonresidential		524		1,118		2,159		3,801		107,556		710		112,067
Commercial		96		-		207		303		22,140		15		22,458
Consumer		55		10		3		68		3,581		18		3,667
	$	1,728	$	1,529	$	3,318	$	6,575	$	309,154	$	2,646	$	318,375

December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans Receivables
	(In Thousands)
Construction/Land	$	207	$	-	$	71	$	278	$	23,692	$	337	$	24,307
1-4 family residential		458		671		2,322		3,451		132,566		1,281		137,298
Multi-family residential		-		-		-		-		15,908		500		16,408
Nonresidential		267		398		940		1,605		116,636		705		118,946
Commercial		66		-		96		162		24,564		15		24,741
Consumer		104		7		7		118		4,189		19		4,326
	$	1,102	$	1,076	$	3,436	$	5,614	$	317,555	$	2,857	$	326,026

At March 31, 2014, there were $58,000 of one-to-four family residential loans and $3,000 of consumer loans that were past due 90 days or more and accruing. At December 31, 2013, there was one consumer installment loan of $1,000 that was past due 90 days or more and accruing.

The following table presents the Corporation’s nonaccrual loans as of March 31, 2014 and December 31, 2013, which includes both non-performing troubled debt restructured and loans contractually delinquent 90 days or more (in thousands).

	March 31, 2014		December 31, 2013
	(Unaudited)
Construction/Land	$	3,834	$	3,864
One-to-four family residential		2,623		3,833
Multi-family residential		1,015		1,073
Nonresidential and agricultural land		3,592		2,377
Commercial		374		362
Consumer and other		-		5
Total nonaccrual loans	$	11,438	$	11,514

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

The following tables present information pertaining to the principal balances and specific valuation allocations for impaired loans, as of March 31, 2014 (unaudited; in thousands):

Impaired loans without a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction/Land	$	2,438	$	2,673	$	-
1-4 family residential		4,107		4,117		-
Multi-family residential		-		-		-
Nonresidential		3,193		4,028		-
Commercial		129		143		-
Consumer		-		-		-
	$	9,867	$	10,961	$	-

Impaired loans with a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction/Land	$	1,818	$	1,831	$	195
1-4 family residential		731		747		302
Multi-family residential		1,015		1,032		196
Nonresidential		900		900		97
Commercial		201		346		88
Consumer		-		-		-
	$	4,665	$	4,856	$	878

Total impaired loans:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction Land	$	4,256	$	4,504	$	195
1-4 family residential		4,838		4,864		302
Multi-family residential		1,015		1,032		196
Nonresidential		4,093		4,928		97
Commercial		330		489		88
Consumer		-		-		-
	$	14,532	$	15,817	$	878

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The following is a summary by class of information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2014 and 2013.

	Three Months Ended March 31, 2014				Three Months Ended March 31, 2013
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
	(Unaudited; In Thousands)
Construction/Land	$	4,195	$	33	$	4,820	$	4
1-4 family residential		5,649		47		4,673		32
Multi-family residential		1,038		5		1,091		-
Nonresidential		4,105		28		3,395		17
Commercial		330		1		606		1
Consumer		-		-		12		-
	$	15,317	$	114	$	14,597	$	54

For the three months ended March 31, 2014, interest income recognized on a cash basis included above was $74,000. For the three months ended March 31, 2013, interest income recognized on a cash basis included above was immaterial.

The following tables present information pertaining to the principal balances and specific valuation allocations for impaired loans as of December 31, 2013 (in thousands).

Impaired loans without a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction/Land	$	2,286	$	2,516	$	-
1-4 family residential		4,154		4,184		-
Multi-family residential		52		53		-
Nonresidential		3,194		3,672		-
Commercial		237		395		-
Consumer		-		-		-
	$	9,923	$	10,820	$	-

Impaired loans with a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction/Land	$	1,818	$	1,831	$	195
1-4 family residential		1,763		1,784		552
Multi-family residential		1,022		1,038		196
Nonresidential		902		902		97
Commercial		135		143		68
Consumer		-		-		-
	$	5,640	$	5,698	$	1,108

Total impaired loans:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction/Land	$	4,104	$	4,347	$	195
1-4 family residential		5,917		5,968		552
Multi-family residential		1,074		1,091		196
Nonresidential		4,096		4,574		97
Commercial		372		538		68
Consumer		-		-		-
	$	15,563	$	16,518	$	1,108

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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 collectibility 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.

Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported in this report as non-performing loans. On at least a quarterly basis, the Corporation reviews all TDR loans to determine if the loan meets this criterion. 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.

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 their return to accrual status.

Loans reported as TDR as of March 31, 2014 totaled $9,730,000. TDR loans reported as nonaccrual (non-performing) loans, and included in total nonaccrual (non-performing) loans, were $6,972,000 at March 31, 2014. The remaining TDR loans, totaling $2,758,000, were accruing at March 31, 2014 and reported as performing loans.

All TDRs are considered impaired by the Corporation for the life of the loan and reflected so in the Corporation’s analysis of the allowance for credit losses. 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.

At March 31, 2014, the Corporation had five loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following:  an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

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The following tables present information regarding troubled debt restructurings by class as of the three-month periods ended March 31, 2014 and March 31, 2013, and new troubled debt restructuring for the three-month periods ended March 31, 2014 and March 31, 2013:

	At March 31, 2014				For the Three Months Ended March 31, 2014
	# of Loans		Total Troubled Debt Restructured		# of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
	(Unaudited; In Thousands)
Construction/Land		11	$	4,124		1	$	219	$	218
One-to-four family residential		11		2,840		3		1,892		2,163
Multi-family residential		1		1,015		-		-		-
Nonresidential and agricultural land		4		1,487		-		-		-
Commercial		8		264		1		-		16
Consumer		-		-		-		-		-
		35	$	9,730		5	$	2,111	$	2,397

	At March 31, 2013				For the Three Months Ended March 31, 2013
	# of Loans		Total Troubled Debt Restructured		# of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
	(Unaudited; In Thousands)
Construction/Land		6	$	4,285		2	$	-	$	170
One-to-four family residential		15		3,864		6		240		245
Multi-family residential		1		1,038		-		-		-
Nonresidential and agricultural land		7		2,455		2		935		935
Commercial		11		355		4		38		98
Consumer		-		-		-		-		-
		40	$	11,997		14	$	1,213	$	1,448

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The following tables present information regarding post-modification balances of newly restructured troubled debt by type of modification as of March 31, 2014 and 2013.

March 31, 2014	Interest Only		Term		Combination		Total Modifications
	(Unaudited; In Thousands)
Construction/Land	$	-	$	218	$	-	$	218
One-to-four family residential		-		96		2,067		2,163
Multi-family residential		-		-		-		-
Nonresidential		-		-		-		-
Commercial		-		-		16		16
Consumer		-		-		-		-
	$	-	$	314	$	2,083	$	2,397

March 31, 2013	Interest Only		Term		Combination		Total Modifications
	(Unaudited; In Thousands)
Construction/Land	$	-	$	-	$	171	$	170
One-to-four family residential		-		14		231		245
Multi-family residential		-		-		-		-
Nonresidential		-		-		935		935
Commercial		-		-		98		98
Consumer		-		-		-		-
	$	-	$	14	$	1,434	$	1,448

One loan totaling $110,000 that was classified and reported as troubled debt restructured within the twelve months prior to March 31, 2014, defaulted during the three-month period ended March 31, 2014. The loan was reported as construction/land. Two loans totaling $122,000 that were classified and reported as troubled debt restructured within the twelve months prior to March 31, 2013, defaulted during the three-month period ended March 31, 2013. Both loans were reported as one-to-four family residential real estate.

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.

Financial impact of these restructurings was immaterial to the financials of the Corporation at March 31, 2014 and 2013.

NOTE 9: RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Corporation’s consolidated financial statements.

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In January 2014, the FASB issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Corporation’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” to require presentation in the financial statements of an unrecognized tax benefit or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward, except as follows. When an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or when the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption of the ASU did not have a significant effect on the Corporation’s consolidated financial statements.

NOTE 10:  RECLASSIFICATIONS

Certain reclassifications have been made to the 2013 consolidated condensed financial statements to conform to March 31, 2014 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 Current Economic Environment. We continue to operate in a challenging and uncertain economic environment, including generally uncertain national conditions and local conditions in our markets. Overall economic growth continues to be slow and national and regional unemployment rates remain at elevated levels. The risks associated with our business become more acute in periods of slow economic growth and high unemployment. Many financial institutions continue to be affected by an uncertain real estate market. While we take 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.

Our loan portfolio includes commercial real estate loans, residential mortgage loans, and construction and land development loans. Declines in real estate values and home sales volumes and increased levels of 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, the current level of low economic growth on a national scale, the occurrence of another national recession, or a 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; 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. During the last five years, U.S. Congress and the Treasury Department have adopted legislation and taken actions to address the disruptions in the financial system, declines in the housing market and the overall regulation of financial institutions and the financial system. See Part I, Item 1 - Regulation and Supervision - Financial System Reform - The Dodd-Frank Act and the CFPB, in our Annual Report on Form 10-K for the year ended December 31, 2013, for a description of recent significant legislation and regulatory actions affecting the financial industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), is expected to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The Corporation’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations of the Consumer Financial Protection Bureau (the “CFPB”), an independent federal agency created under the Dodd-Frank Act with broad authority over consumer financial protection laws, to assess their probable impact on the business, financial

34

condition, and results of operations of the Corporation. However, the ultimate effect of the Dodd-Frank Act and the CFPB on the financial services industry in general, and the Corporation in particular, continues to be uncertain.

New Capital Rules. On July 2, 2013, the Board of Governors of the Federal Reserve System (“Federal Reserve”) approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency subsequently approved these final rules. The final rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The final rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Corporation and the Bank under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Corporation and the Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which would be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

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

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

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

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Changes in Insurance Premiums. The FDIC insures the Bank’s deposits up to certain limits. 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 as a result of the economic turmoil of the past six years, the FDIC insurance fund reserve ratio has fallen below the statutory minimum. The FDIC has implemented a restoration plan beginning January 1, 2009, that is intended to return the reserve ratio to an acceptable level. Further increases in premium assessments are also possible and would increase the Corporation’s expenses. Effective with the June 2011 reporting period, the FDIC changed the assessment from a deposit-based assessment to an asset-based assessment, and reevaluated the base rate assessed to financial institutions. As a result of these changes, the Corporation experienced a decrease in premiums. However, increased assessment rates and special assessments could have a material impact on the Corporation’s results of operations.

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

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 five 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 continued to observe tight lending standards, including with respect to other financial institutions, although there have been signs that lending is increasing. These market conditions have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence and increased market volatility. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Corporation and others in the financial institutions industry. In particular, the Corporation may face the following risks in connection with these events:

· We are experiencing, and expect to continue experiencing increased regulation of our industry, particularly as a result of the Dodd-Frank Act and the CFPB. Compliance with such regulation is expected to increase our costs and may 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.

· 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.

In addition, the Federal Reserve has been injecting vast amounts of liquidity into 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 Corporation or reducing the availability of funds to the Corporation to finance its existing operations.

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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 55 through 59 of the Annual Report on Form 10-K for the year ended December 31, 2013 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. Following the 2012 acquisition of Dupont State Bank, the treatment of acquired impaired loans is also important.

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.

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

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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. 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 has been comprised of Clark, Floyd and Jefferson Counties in southeastern Indiana and portions of northeastern Kentucky adjacent to that market. With the 2012 acquisition of DuPont State Bank and the 2013 acquisition of the Osgood, Indiana branch, the Corporation’s market area now includes Jackson, Jennings and Ripley Counties in Indiana. When evaluating the adequacy of the 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 by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), 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 period ended March 31, 2014.

Valuation of Mortgage Servicing Rights

The Corporation recognizes the rights to service mortgage loans as separate assets in the consolidated balance sheet. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Corporation are initially measured at fair value at the date of transfer. Mortgage servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Factors included in the calculation of fair value of the mortgage servicing rights include estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic factors will change over the life of the mortgage servicing rights, resulting in different valuations of the mortgage servicing rights. The differing valuations will affect the carrying value of the mortgage servicing rights on the consolidated balance sheet as well as the income recorded from loan servicing in the consolidated income statement. As of March 31, 2014, mortgage servicing rights had a carrying value of $640,000.

Acquired Impaired Loans

Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses. Fair value of acquired loans is determined using a discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates. In recording the acquisition date fair values of acquired impaired loans, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

Over the life of the acquired loans, the Corporation continues to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques. The Corporation evaluates at each balance sheet date whether the present value of its pools of loans determined using the effective interest rates has decreased significantly and, if so, recognizes a provision for loan loss in its consolidated statement of income. For any significant increases in cash flows expected to be collected, the Corporation adjusts the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.

These cash flow evaluations are inherently subjective as they require management to make estimates about expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Changes in these factors, as well as changing economic conditions, will likely impact the carrying value of these acquired loans.

FINANCIAL CONDITION

At March 31, 2014, the Corporation’s consolidated assets totaled $483.9 million, an increase of $1.1 million, or 0.2%, from the December 31, 2013 total. The change was the result of a $7.6 million, or 74.3%, increase in cash, period to period, to $17.9 million as of March 31, 2014, partially offset by decreases in investment securities of $2.6 million and in loans of $3.9 million.

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Available-for-sale securities decreased $2.6 million, or 2.1%, over the period, from $119.9 million as of December 31, 2013 to $117.3 million as of March 31, 2014, as the Corporation disposed of select investments in order to mitigate future risk in the portfolio. The net unrealized loss on the portfolio was $1.5 million at March 31, 2014, compared to $2.8 million as of December 31, 2013, reflecting slight improvements in the bond markets.

Net loans, excluding loans held for sale, decreased $3.6 million, or 1.1%, from $316.2 million at December 31, 2013 to $312.6 million at March 31, 2014. Over the same period, $1.2 million in non-performing loans moved from the portfolio into real estate held for sale. Sales of conventional mortgages into the secondary market declined from the levels a year earlier with proceeds from sales to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) for the three months ended March 31, 2014 at $2.8 million compared to $8.3 million in sales proceeds for the three months ended March 31, 2013, approximately a 66.3% decrease. Sales into the secondary market, primarily to Freddie Mac, are a significant source of noninterest income for the Corporation.

The Corporation’s consolidated allowance for loan losses totaled $4.2 million at March 31, 2014, a decrease of 7.0% from $4.5 million at December 31, 2013. The decrease was primarily due to the decline in specific reserves needed on impaired loans. For the three-month period ended March 31, 2014, $174,000 was expensed and placed in the reserve as compared to $318,000 for the same period in 2013. Charge offs for the three-month period ended March 31, 2014 of $533,000, primarily one-to-four family residential loans, were partially offset by recoveries of $45,000. This compares to charge offs and recoveries for the three-month period ended March 31, 2013 of $332,000 and $334,000, respectively.

The total allowance represented 1.32% of gross loans as of March 31, 2014, as compared to 1.41% as of December 31, 2013. Specific valuation allowances established for impaired loans totaled $878,000 at March 31, 2014, as compared to $1.1 million at December 31, 2013.

Loans past due 30 days or more as of March 31, 2014, excluding purchased credit-impaired loans, were $6.6 million, or 2.10% of net loans, as compared to $5.6 million, or 1.78%, at December 31, 2013.

Non-performing loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status, excluding purchased credit-impaired loans) as of March 31, 2014 were $11.5 million, as compared to $11.5 million at December 31, 2013. Troubled debt restructured loans that were less than 90 days past due included in total non-performing loans were $5.5 million as of March 31, 2014, as compared to $5.8 million as of December 31, 2013. Non-performing loans as a percent of net loans were 3.68% and 3.64%, respectively, for those periods.

Although management believes that its allowance for loan losses at March 31, 2014 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.

Other assets decreased, period to period, a total of $1.2 million or 21.1%, primarily as a result of changes in prepaid asset balances and a decrease in the deferred tax asset relating to unrealized gains on available-for-sale securities.

Deposits totaled $401.2 million at March 31, 2014, an increase of $6.2 million, or 1.6%, from total deposits of $395.0 million at December 31, 2013. During the three-month period, noninterest-bearing deposit accounts increased by 4.2%, or $2.0 million, while interest-bearing deposits increased approximately 1.2%, or $4.2 million. The fluctuations were distributed across all deposit types, with the greatest increases being in money market deposit accounts ($3.8 million), the Corporation’s “Vantage” checking account ($2.4 million), and savings accounts ($3.4 million). The largest decrease, period to period, was in certificate of deposit accounts, which decreased $4.5 million. In the current rate environment, borrowers still appear to be trading minimal differences in interest rates for accessibility to their funds in selecting the transactional accounts over the non-transactional.

Borrowings by the Corporation decreased period to period from $49.7 million as of December 31, 2013, compared to $42.7 million as of March 31, 2014, as the Corporation paid off maturing Federal Home Loan Bank of Indianapolis advances.

Other liabilities totaled $3.6 million at March 31, 2014, an increase of $256,000 from $3.4 million at December 31, 2013, primarily due to changes in escrowed balances and accrued expenses.

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Stockholders’ equity totaled $36.1 million at March 31, 2014, an increase of $1.6 million, or 4.8%, from $34.5 million at December 31, 2013. The increase was primarily due to the fluctuation in unrealized losses on available-for-sale securities, net of tax, from an unrealized loss of $1.8 million at December 31, 2013 to an unrealized loss of $944,000 at March 31, 2014. The fluctuation in unrealized gains/losses on available-for-sale securities was accompanied by net income of $1.1 million and proceeds from stock options exercised of $111,000, offset by dividends to common and preferred shareholders of $413,000. Dividends to common shareholders for the three-month period were $.21 per share.

The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At March 31, 2014, the Bank’s regulatory capital exceeded all applicable minimum regulatory capital requirements.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

General

The Corporation’s net income for the three months ended March 31, 2014 totaled $1.1 million, an increase of $60,000, or 6.0%, from the net income of $1.0 million reported for the period ended March 31, 2013. The increase in net income for the 2014 period as compared to 2013 was attributable to a combination of factors. Net interest income increased $210,000, or 5.7%, from $3.7 million for the period ended March 31, 2013 to $3.9 million for the same period in 2014, a result of both changing interest rates and decreased borrowings. Provision expense decreased $144,000 period to period, or 45.3%, from $318,000 for the three months ended March 31, 2013 to $174,000 for the three months ended March 31, 2014, based on the results of our allowance for loan losses analysis at each period end. Other income decreased $147,000, primarily the result of decreased loan sales into the secondary market partially offset by a decrease in losses on the sale of foreclosed real estate. Other expenses increased $237,000, from $3.2 million for the period ended March 31, 2013 to $3.4 million for the period ended March 31, 2014, primarily due to costs associated with the addition of new branches and the associated personnel.

Net Interest Income

Total interest income for the three months ended March 31, 2014 remained constant at $4.8 million period to period.

Total interest expense for the same period decreased by $183,000, or 16.8%, from the $1.1 million reported for the three months ended March 31, 2013 to $907,000 for the three months ended March 31, 2014. For the three months ended March 31, 2014, interest expense from deposits totaled $516,000, as compared to $616,000 for the same period in 2013. The decrease was primarily attributable to interest expense on fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates, but also due somewhat to the changes in the composition of the deposit base as mentioned above, as depositors moved from maturity and interest-bearing accounts to transactional and noninterest-bearing accounts. The cost of borrowings decreased $83,000, period to period, as the result of the decrease in both the average rate and the average balance of borrowings. Total borrowings as of March 31, 2014 were $42.7 million, as compared to $49.7 million for the same period in 2013. The Corporation borrows primarily from the Federal Home Loan Bank of Indianapolis. The average rate for the existing advances was 3.83% at March 31, 2013, as compared to 3.23% at March 31, 2014.

Net interest income was $3.9 million for the three-month period ended March 31, 2014, compared to $3.7 million for the same period in 2013, an increase of $210,000, or 5.7%, period to period, as slight increases in interest income were supplemented by reduced interest expense period to period. The net interest margin for the three-month period ended March 31, 2014 was 3.48% as compared to 3.34% for the comparable period in 2013. For the years ended December 31, 2013 and 2012, the net interest margins were 3.41% and 3.17%, respectively. Included in net interest income for the three-month periods ended March 31, 2014 and 2013 was $71,000 and $106,000, respectively, of net accretion related to the purchase accounting adjustments on loans and deposits from the 2012 acquisition of Dupont State Bank. Comparably, the net accretion (amortization) included in net interest income for the years ended December 31, 2013 and 2012 was $674,000 and $(46,000), respectively. Without the accretion of these purchase accounting adjustments, the net interest margin for the three-month period ended March 31, 2014, would have been 3.42% as compared to 3.25% for the comparable period in 2013, and would have been 3.26% for the year ended December 31, 2013, as compared to 3.18% for the comparable period in 2012. Accretion and amortization of these

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purchase accounting adjustments are impacted by the estimated and actual cash flows of these financial instruments and therefore could significantly change in subsequent periods.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectability of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $174,000 provision for losses on loans for the three months ended March 31, 2014, $144,000 lower than the amount expensed for the same period in 2013. The level of the provision expense period to period was reflective of improvements in the economy overall, and stabilization in loan performance trends in general. At December 31, 2009, 2010 and 2011, delinquencies 30 days or more past due, as a percentage of net loans, were 3.70%, 4.63% and 4.28%, respectively. Since 2011, these percentages have declined and stabilized a level below the trends experience from December 31, 2009 to 2011. At December 31, 2012 and 2013 and March 31, 2014, these percentages were 1.82%, 1.78% and 2.10%, respectively. The slight increase in the delinquency percentage from December 31, 2013 to March 31, 2014 was primarily a result of an increase in loans past due 30 to 89 days. Loans past due 30 to 89 days increased $1.1 million from December 31, 2013 to March 31, 2014, while loans past due 90 or more days declined slightly period to period.

While management believes that the allowance for losses is adequate at March 31, 2014, 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 $147,000, or 12.6%, during the three months ended March 31, 2014 to $1.0 million, as compared to the $1.2 million reported for the same period in 2013. The decrease was due primarily to a decrease in gains on the sale of loans into the secondary market, with $78,000 in gains for the three-month period ended March 31, 2014, compared to $325,000 for the same period in 2013. Losses on the sale of foreclosed real estate decreased to $21,000 for the three-month period ended March 31, 2014, from $144,000 for the comparable period in 2013, a decrease of $123,000. Unlike interest income, “other income” is not always readily predictable and is subject to variations depending on outside influences.

Other Expenses

Total other expenses increased period to period, with a net increase of $237,000, or 7.4%, from March 31, 2013 to March 31, 2014. The most significant financial statement changes were:

· Salaries and employee benefits increased 9.0%, period to period, reflecting increased salary costs and increased costs associated with group insurance.

· Occupancy and equipment expense increased $61,000, from $476,000 for the period ended March 31, 2013, as compared to $537,000 for the same period in 2014, primarily due to additional branches (Osgood and Jeffersonville, Indiana), as well as increased snow removal costs.

Income Taxes

Tax expense of $277,000 was recorded for the three-month period ended March 31, 2014, as compared to $367,000 for the comparable period in 2013. For the 2014 period, the Corporation had pre-tax income of $1.3 million, as compared to $1.4 million for the 2013 period. The effective tax rate was 20.7% for the three-month period ended March 31, 2014, as compared to 26.7% for the same period in 2013. The tax calculations for both periods include the benefit of tax-exempt income from loans and municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses. The decrease, period to period, was primarily attributable to increased tax exempt loan income 2014 over 2013.

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Other

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

Liquidity Resources

Historically, the Corporation has maintained its liquid assets at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Cash for these purposes is generated through loan sales and repayments, increases in deposits, and through the sale or maturity of investment securities. Loan payments are a relatively stable source of funds, while deposit flows are influenced significantly by the level of interest rates and general money market conditions. Borrowings may be used to compensate for reductions in other sources of funds such as deposits. As a member of the FHLB system, the Bank may borrow from the Federal Home Loan Bank of Indianapolis. At March 31, 2014, the Bank had $35.5 million in such borrowings outstanding, with a $10.0 million overdraft line of credit immediately available. An additional $56.5 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 $76.6 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 March 31, 2014, the Bank had commitments to fund loan originations and loans in process of $36.1 million, unused home equity lines of credit of $24.4 million and unused commercial lines of credit of $24.1 million. Commitments to sell loans as of that date were $1.2 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 during the quarter ended March 31, 2014, 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.

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	XBRL Interactive Data Files, including the following materials from the Corporation’s Report on Form 10-Q for the quarter ended March 31, 2014: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, with detailed tagging of notes and financial statement schedules.

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SIGNATURES

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

	RIVER VALLEY BANCORP
Date: May 15, 2014	By:	/s/ Matthew P. Forrester
		Matthew P. Forrester
		President and Chief Executive Officer
Date: May 15, 2014	By:	/s/ Vickie L. Grimes
		Vickie L. Grimes
		Vice President of Finance

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EXHIBIT INDEX

No.	Description	Location
31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached
101	XBRL Interactive Data Files, including the following materials from the Corporation’s Report on Form 10-Q for the quarter ended March 31, 2014: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, with detailed tagging of notes and financial statement schedules.	Attached

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