River Valley Bancorp 10-Q 2011 Q1 Quarterly report

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

Commission file number: 0-21765

RIVER VALLEY BANCORP

(Exact name of registrant as specified in its charter)

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

(812) 273-4949

(Registrant’s telephone number, including area code)

[None]

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

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

Yes  x          No  ¨

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

Yes  ¨          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 13, 2011 was 1,514,472.

RIVER VALLEY BANCORP

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of 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	27
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	36
Item 4.	Controls and Procedures	36
PART II. OTHER INFORMATION		36
Item 1.	Legal Proceedings	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	(Removed and Reserved)	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES		38
EXHIBIT INDEX		39

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RIVER VALLEY BANCORP

Consolidated Condensed Balance Sheets

	March 31, 2011			December 31, 2010
	(Unaudited)
	(In Thousands, Except Share Amounts)
Assets
Cash and due from banks	$	2,270		$	2,021
Interest-bearing demand deposits		12,351			12,864
Federal funds sold		1,904			1,903
Cash and cash equivalents		16,525			16,788
Investment securities available for sale		80,316			75,231
Loans held for sale		-			1,089
Loans		264,347			269,254
Allowance for loan losses		(3,708	)		(3,806	)
Net loans		260,639			265,448
Premises and equipment, net		7,887			7,975
Real estate, held for sale		2,517			400
Federal Home Loan Bank stock		4,496			4,496
Interest receivable		1,790			1,953
Cash value of life insurance		9,613			9,532
Goodwill		79			79
Other assets		3,172			3,618
Total assets	$	387,034		$	386,609
Liabilities
Deposits
Noninterest-bearing	$	25,447		$	23,480
Interest-bearing		263,183			262,857
Total deposits		288,630			286,337
Borrowings		62,217			65,217
Interest payable		457			485
Other liabilities		3,449			3,102
Total liabilities		354,753			355,141
Commitments and Contingencies
Stockholders’ Equity
Preferred stock – liquidation preference $1,000 per share – no par value
Authorized – 2,000,000 shares
Issued and outstanding – 5,000 shares		5,000			5,000
Common stock, no par value
Authorized – 5,000,000 shares
Issued and outstanding – 1,514,472 shares		7,532			7,546
Retained earnings		18,872			18,479
Accumulated other comprehensive income		877			443
Total stockholders’ equity		32,281			31,468
Total liabilities and stockholders’ equity	$	387,034		$	386,609

See Notes to Consolidated Condensed Financial Statements.

3

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Income

(Unaudited)

	Three Months Ended March 31,
	2011			2010
	(In Thousands, Except Share Amounts)
Interest Income
Loans receivable	$	3,859		$	3,957
Investment securities		645			696
Interest-earning deposits and other		36			30
Total interest income		4,540			4,683
Interest Expense
Deposits		888			1,080
Borrowings		587			906
Total interest expense		1,475			1,986
Net Interest Income		3,065			2,697
Provision for loan losses		474			165
Net Interest Income After Provision for Loan Losses		2,591			2,532
Other Income
Service fees and charges		455			464
Net realized gains on sale of available-for-sale securities		126			34
Net gains on loan sales		160			87
Interchange fee income		97			84
Increase in cash value of life insurance		81			77
Loss on sale of premises, equipmentand real estate held for sale		(49	)		(16	)
Other income		45			48
Total other income		915			778
Other Expenses
Salaries and employee benefits		1,297			1,239
Net occupancy and equipment expenses		358			338
Data processing fees		110			112
Advertising		81			97
Mortgage servicing rights		43			38
Office supplies		27			41
Professional fees		118			92
Federal Deposit Insurance Corporation assessment		121			126
Other expenses		289			286
Total other expenses		2,444			2,369
Income Before Income Tax		1,062			941
Income tax expense		260			222
Net Income		802			719
Preferred stock dividends		91			89
Net Income Available to Common Stockholders	$	711		$	630
Basic earnings per common share	$	.47		$	.42
Diluted earnings per common share		.47			.42
Dividends per common 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,
	2011		2010
	(In Thousands)
Net income	$	802	$	719
Other comprehensive income, net of tax
Unrealized gains on securities available for sale
Unrealized holding gains arising during the period, net of tax expense of $267 and $169		517		334
Less: Reclassification adjustment for gains included in net income, net of tax expense of $43 and $13		83		21
		434		313
Comprehensive income	$	1,236	$	1,032

See Notes to Consolidated Condensed Financial Statements.

5

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2011			2010
	(In Thousands)
Operating Activities
Net income	$	802			$	719
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		474				165
Depreciation and amortization		143				123
Investment securities gains		(126	)			(34	)
Loans originated for sale in the secondary market		(4,502	)			(3,417	)
Proceeds from sale of loans in the secondary market		5,695				3,359
Gain on sale of loans		(160	)			(87	)
Amortization of net loan origination cost		38				21
Net change in
Interest receivable		163				409
Interest payable		(28	)			(66	)
Prepaid FDIC assessment		112				118
Other adjustments		432				788
Net cash provided by operating activities		3,043				2,098
Investing Activities
Purchases of securities available for sale		(9,719	)			(5,131	)
Proceeds from maturities of securities available for sale		2,610				5,782
Proceeds from sales of securities available for sale		2,796				2,006
Net change in loans		1,983				3,314
Purchases of premises and equipment		(55	)			(57	)
Proceeds from sale of real estate acquired through foreclosure		148				239
Net cash provided by (used in) investing activities		(2,237	)			6,153
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		10,741				47
Certificates of deposit		(8,448	)			5,617
Proceeds from borrowings		10,000				-
Repayment of borrowings		(13,000	)			(8,000	)
Cash dividends		(410	)			(405	)
Acquisition of stock for stock benefit plans		(16	)			-
Advances by borrowers for taxes and insurance		64				46
Net cash used in financing activities		(1,069	)			(2,695	)
Net Change in Cash and Cash Equivalents		(263	)			5,556
Cash and Cash Equivalents, Beginning of Period		16,788				13,387
Cash and Cash Equivalents, End of Period	$	16,525			$	18,943
Additional Cash Flows and Supplementary Information
Interest paid	$	1,503			$	2,052
Income tax paid, net of refunds		-				8
Transfers to real estate held for sale		2,314				63

See Notes to Consolidated Condensed Financial Statements.

6

RIVER VALLEY BANCORP

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

NOTE 1: BASIS OF PRESENTATION

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

NOTE 2: PRINCIPLES OF CONSOLIDATION

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

7

NOTE 3: EARNINGS PER SHARE

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

	Three Months Ended March 31, 2011						Three Months Ended March 31, 2010
	Income		Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	711		1,514,472	$	.47	$	630		1,504,472	$	.42
Effect of dilutive RRP awards and stock options				1,106						7,442
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	711		1,515,578	$	.47	$	630		1,511,914	$	.42

Net income for the period ending March 31, 2011 of $802,000 was reduced by $91,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $711,000. Net income for the period ending March 31, 2010 of $719,000 was reduced by $89,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $630,000.

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:

n   For both the three-month period ended March 31, 2011 and the three-month period ended March 31, 2010, options to purchase 5,000 shares of common stock at an exercise price of $22.25 per share and options to purchase 19,000 shares of common stock at an exercise price of $14.56 were outstanding and were not included in the computation of diluted earnings for those periods.

n   Additionally, for the three-month period ended March 31, 2010, there were options to purchase 8,400 shares of common stock at an exercise price of $13.25 per share outstanding that were not included in the computation of diluted earnings for that period.

NOTE 4: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

8

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 and certain municipal securities. Securities classified within Level 3 of the hierarchy include pooled trust preferred securities which are less liquid securities.

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, 2011 and December 31, 2010, respectively (in thousands).

			March 31, 2011
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities
Federal agencies	$	25,358	$	-	$	25,358	$	-
State and municipal		24,553		-		24,553		-
Government-sponsored enterprise (GSE) -residential mortgage-backed and other asset-backed agency securities		29,245		-		29,245
Corporate		1,160		-		-		1,160
Total	$	80,316	$	-	$	79,156	$	1,160

9

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

10

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs for the three-month periods ended March 31, 2011 and March 31, 2010:

	Available-For-Sale Securities
	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
	(In Thousands)
Beginning balance	$	936		$	848
Total realized and unrealized gains and losses
Amortization included in net income		2			1
Unrealized gains (losses) included in other comprehensive income		225			124
Purchases		-			-
Pay downs		(3	)		(4	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,160		$	969
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, 2011 and March 31, 2010.

At March 31, 2010, Level 3 securities included two pooled trust preferred securities. The fair value on these securities is calculated using a combination of observable and unobservable assumptions as a quoted market price is not readily available. Both securities remain in Level 3 at March 31, 2011. For the past two fiscal years, trading of these types of securities has only been conducted on a distress sale or forced liquidation basis. As a result, the Corporation is now measuring the fair values using discounted cash flow projections and has included the securities in Level 3.

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

11

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

				March 31, 2011
				Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(In Thousands)
Impaired loans		$	1,107		$	-		$	-		$	1,107
Mortgage Servicing Rights			55			-			-			55

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

Impaired Loans (Collateral Dependent)

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

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

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

12

Mortgage Servicing Rights

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

Mortgage servicing rights recorded as an asset and into income during the three months ended March 31, 2011 and the year ended December 31, 2010 totaled $55,000 and $234,000, respectively. During the same periods, impairment on prior period mortgage servicing rights was included in net income in the amount of $6,000 and $12,000, respectively. Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair values of new mortgage servicing rights are estimated using discounted cash flow models. Due to the nature of the valuation inputs, recording initial mortgage servicing rights are classified within Level 3 of the hierarchy.

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

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

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

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

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

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

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

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

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

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

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

13

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

	March 31, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets	(In Thousands)
Cash and cash equivalents	$	16,525	$	16,525	$	16,788	$	16,788
Investment securities available for sale		80,316		80,316		75,231		75,231
Loans, held for sale		-		-		1,089		1,110
Loans, net of allowance for losses		260,639		267,381		265,488		273,029
Stock in FHLB		4,496		4,496		4,496		4,496
Interest receivable		1,790		1,790		1,953		1,953
Mortgage servicing rights		601		843		588		834
Liabilities
Deposits		288,630		291,545		286,337		289,576
FHLB advances		55,000		58,206		58,000		61,974
Borrowings		7,217		5,880		7,217		4,871
Interest payable		457		457		485		485
Advance payments by borrowers for taxes and insurance		169		169		105		105
Off-Balance Sheet Assets (Liabilities)
Commitments to extend credit		-		-		-		-
Standby letters of credit		-		-		-		-

14

NOTE 5:  INVESTMENT SECURITIES

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

	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	25,067	$	367	$	76	$	25,358
State and municipal		23,736		864		47		24,553
Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		28,392		921		68		29,245
Corporate		1,767		-		607		1,160
Total investment securities	$	78,962	$	2,152	$	798	$	80,316

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

15

The amortized cost and fair value of available-for-sale securities at March 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Available-for-Sale
	March 31, 2011	Amortized Cost		Fair Value
		(In Thousands)
	Within one year	$	1,345	$	1,364
	One to five years		22,086		22,469
��	Five to ten years		13,343		13,604
	After ten years		13,796		13,634
			50,570		51,071
	Government-sponsored enterprise (GSE) - residential mortgage-backed and other asset-backed agency securities		28,392		29,245
	Totals	$	78,962	$	80,316

No securities were pledged at March 31, 2011 or at December 31, 2010 to secure FHLB advances. Securities with a carrying value of $15,720,000 and $18,580,000 were pledged at March 31, 2011 and December 31, 2010 to secure public deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the three-month period ended March 31, 2011 were $2,796,000, and were $2,006,000 during the same period in 2010. Gross gains of $126,000 and $34,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended March 31, 2011 and March 31, 2010, respectively. No losses were realized for either period. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2011 was $18,866,000, which is approximately 23.5% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2010 was $13,352,000, which represented 17.7% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

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

16

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, 2011 and December 31, 2010:

	March 31, 2011
	Less than 12 Months					12 Months or More					Total
Description ofSecurities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Federal agencies	$	8,855	$	(76	)	$	-	$	-		$	8,855	$	(76	)
State and municipal		2,176		(19	)		750		(28	)		2,926		(47	)
GSE - residential mortgage-backed and other asset-backed agency securities		5,925		(68	)		-		-			5,925		(68	)
Corporate		-		-			1,160		(607	)		1,160		(607	)
Total temporarily impaired securities	$	16,956	$	(163	)	$	1,910	$	(635	)	$	18,866	$	(798	)

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

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, 2011.

There are no U.S. government agency investments in a continuous loss position for 12 months or more as of March 31, 2011.

17

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, 2011.

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

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

There are no residential mortgage or other asset-backed agency security investments in a continuous loss position for 12 months or more as of March 31, 2011.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at March 31, 2011 of $392,000 and $215,000, respectively. At December 31, 2010, the unrealized losses on these two investments were $530,000 and $302,000, respectively. These two securities are both “A” tranche investments (A2A and A-1 respectively) and have performed as agreed since purchase. The two are rated B2 and Baa3, respectively by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent less than 2.3% of the book value of the Corporation investment portfolio and approximately 1.4% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at March 31, 2011.

18

NOTE 6:  LOANS AND ALLOWANCE

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

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

Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

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

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

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.

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

19

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

	March 31, 2011			December 31, 2010
	(In Thousands)
Residential real estate
Construction	$	4,876		$	6,975
One-to-four family residential		114,535			117,616
Multi-family residential		16,597			14,997
Nonresidential real estate and agricultural land		87,882			89,607
Land (not used for agricultural purposes)		20,529			21,016
Commercial		16,759			16,413
Consumer and other		4,206			4,533
		265,384			271,157
Unamortized deferred loan costs		476			485
Undisbursed loans in process		(1,513	)		(2,388	)
Allowance for loan losses		(3,708	)		(3,806	)
Total loans	$	260,639		$	265,448

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

	Residential
	Construction			1-4 Family			Multi-Family		Nonresidential			Land			Commercial		Consumer			Total
	(In Thousands)
Three Months Ended March 31, 2011 Balances at beginning of Period:	$	35		$	746		$	138	$	1,632		$	976		$	157	$	122		$	3,806
Provision for losses		(5	)		340			-		205			(26	)		-		(40	)		474
Loans charged off		-			(197	)		-		(368	)		-			-		(19	)		(584	)
Recoveries on loans		-			-			-		-			-			-		12			12
Balances at end of period	$	30		$	889		$	138	$	1,469		$	950		$	157	$	75		$	3,708
As of March 31, 2011 Allowance for losses:
Individually evaluated for impairment:	$	14		$	253		$	30	$	34		$	661		$	37	$	-		$	1,029
Collectively evaluated for impairment:		16			636			108		1,435			289			120		75			2,679
Balances at end of period	$	30		$	889		$	138	$	1,469		$	950		$	157	$	75		$	3,708
Loans:
Individually evaluated for impairment:	$	167		$	5,078		$	2,324	$	4,468		$	6,275		$	422	$	-		$	18,734
Collectively evaluated for impairment:		4,709			109,457			14,273		83,414			14,254			16,337		4,206			246,650
Balances at end of period	$	4,876		$	114,535		$	16,597	$	87,882		$	20,529		$	16,759	$	4,206		$	265,384

20

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

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

March 31, 2011	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	4,876	$	4,624	$	85	$	167	$	-
1-4 family residential		114,535		105,869		3,398		4,991		277
Multi-family residential		16,597		14,273		-		2,324		-
Nonresidential		87,882		81,669		1,745		4,468		-
Land		20,529		13,859		2,692		3,978		-
Commercial		16,759		16,113		224		422		-
Consumer		4,206		4,160		19		27		-
Total Loans	$	265,384	$	240,567	$	8,163	$	16,377	$	277

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

21

Credit Quality Indicators

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

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

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

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

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

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

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

·   The borrower has filed for bankruptcy protection.

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

·   The guarantors have been called upon to make payments.

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

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

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

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

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

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

22

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

March 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands, Except Share Amounts)
Construction	$	-	$	-	$	167	$	167	$	4,710	$	4,876	$	-
1-4 family residential		1,181		331		2,542		4,054		110,481		114,535		-
Multi-family residential		-		-		337		337		16,260		16,597		-
Nonresidential		127		171		2,634		2,932		84,950		87,882		-
Land		89		79		1,774		1,942		18,587		20,529		-
Commercial		53		50		325		428		16,331		16,759		-
Consumer		22		-		23		45		4,160		4,206		-
	$	1,472	$	631	$	7,802	$	9,905	$	255,479	$	265,384	$	-

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

At March 31, 2011 and December 31, 2010, the Company had non-accruing loans totaling $7,802,000 and $10,381,000, respectively, which equaled the loans delinquent 90 days or more. At March 31, 2011 and December 31, 2010 there were no accruing loans delinquent 90 days or more.

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

23

The following tables present various breakdowns of impaired loans as of Mach 31, 2011 (in thousands):

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	-	$	-	$	-	$	19	$	1
1-4 family residential		3,198		3,373		-		4,401		54
Multi-family residential		1,987		1,987		-		1,516		9
Nonresidential		4,039		5,024		-		4,697		34
Land		2,383		2,383		-		2,406		27
Commercial		364		392		-		410		5
Consumer		-		-		-		-		-
	$	11,971	$	13,159	$	-	$	13,449	$	130

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	167	$	167	$	14		166	$	-
1-4 family residential		1,880		1,880		253		1,895		5
Multi-family residential		337		337		30		335		-
Nonresidential		429		743		34		428		-
Land		3,892		4,402		661		3,889		12
Commercial		58		58		37		482		-
Consumer		-		-		-		-		-
	$	6,763	$	7,587	$	1,029	$	7,195	$	17

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Total Impaired Loans:
Construction	$	167	$	167	$	14	$	185	$	1
1-4 family residential		5,078		5,253		253		6,296		59
Multi-family residential		2,324		2,324		30		1,851		9
Nonresidential		4,468		5,767		34		5,125		34
Land		6,275		6,785		661		6,295		39
Commercial		422		450		37		892		5
Consumer		-		-		-		-		-
	$	18,734	$	20,746	$	1,029	$	20,644	$	147

24

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

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

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

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

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

25

NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS

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

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-01, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“TDR”),” which provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Management is currently in the process of determining what effect the provisions of this statement will have on the Corporation’s financial position or results of operations.

NOTE 8:  BUSINESS ACQUISITION

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

NOTE 9:   RECLASSIFICATIONS

Certain reclassifications have been made to the 2010 consolidated condensed financial statements to conform to the March 31, 2011 presentation.

26

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

Forward Looking Statements

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

Effect of Current Events

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

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

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

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

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

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

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

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

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

Additional Increases in Insurance Premiums. The FDIC insures the Bank’s deposits up to certain limits. Current economic conditions have increased expectations for bank failures. The FDIC takes control of failed banks and ensures payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC charges us premiums to maintain the Deposit Insurance Fund. The FDIC has set the Deposit Insurance Fund long-term target reserve ratio at 2% of insured deposits. Due to recent bank failures, the FDIC insurance fund reserve ratio has fallen below the statutory minimum. The FDIC has implemented a restoration plan beginning January 1, 2009, that is intended to return the reserve ratio to an acceptable level. The restoration plan uniformly increased insurance assessments by 7 basis points (annualized). Further increases in premium assessments are also possible and would increase the Company’s expenses.

Increased assessment rates and special assessments have had a material impact on the Company’s results of operations and could continue to do so.

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

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

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

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

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

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

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

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

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

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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.

Critical Accounting Policies

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

Allowance for Loan Losses

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

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

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

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

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

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

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

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

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

Other-Than-Temporary Impairment

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

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If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. The Corporation ‘s consolidated statement of income would reflect the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For securities that management has no intent to sell, and it is not more likely than not that the Corporation will be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the noncredit loss would be recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. The Corporation did not record any other-than-temporary impairment during the year ended March 31, 2011.

Valuation of Mortgage Servicing Rights

The Corporation recognizes the rights to service mortgage loans as separate assets in the consolidated balance sheet. The total cost of loans, when sold, is allocated between loans and mortgage servicing rights based on the relative fair values of each. 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, 2011 and December 31, 2010, mortgage servicing rights had carrying values of $601,000 and $588,000 respectively. The December 31, 2010 amount included a $50,000 valuation allowance for impairment on certain pools of servicing rights as of that date. The March 31, 2011 amount included a $56,000 valuation for impairment on certain pools of servicing rights, as of that date.

Financial Condition

At March 31, 2011, the Corporation’s consolidated assets totaled $387.0 million, a slight increase of $425,000, or 0.1%, from December 31, 2010. The change in assets was driven by a $4.8 million decrease in loan receivables as the difficult lending environment continued to affect loan production and $2.3 million of real estate collateral for non-performing loans was foreclosed upon and transferred to real estate held for sale. Countering the decrease in the loan portfolio was growth in investments available for sale, with investments held by the Corporation increasing $5.1 million, period to period, an overall increase of 6.8% from $75.2 million at December 31, 2010 to $80.3 million as of March 31, 2011. Over the same period, the Corporation repaid $3.0 million in borrowings with the Federal Home Loan Bank of Indianapolis (FHLB) and restructured an additional $10.0 million to lock in lower borrowing rates. Those rates decreased 20 basis points across the period, from 3.84% as of December 31, 2010 to 3.64% as of March 31, 2011. Total deposits increased $2.3 million from December 31, 2010 to March 31, 2011, with the majority of the increase in noninterest bearing deposits. Changes in other assets and other liabilities over the period were comprised of changes in prepaid asset balances and non-earning liabilities such as clearing accounts for official checks.

The difficult lending environment continued to challenge loan production for the Corporation. Total loans, net of the allowance for loan losses, decreased $4.8 million, or 1.8%, from $265.4 million at December 31, 2010 to $260.6 million at March 31, 2011. As discussed above, $2.3 million in non-performing loans were removed from the portfolio and into real estate held for sale. The collateral for this real estate was comprised of a professional office building in New Albany, Indiana, a car wash in Charlestown, Indiana, and an apartment complex in Scottsburg, Indiana. The only other piece of real estate held by the Corporation for sale as of March 31, 2011was a car wash in Louisville, Kentucky. Except for the Louisville car wash all are operating commercial properties.

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The Corporation’s consolidated allowance for loan losses totaled $3.7 million at March 31, 2011 as compared to $3.8 million at December 31, 2010. Provision expense of $474,000 for the three months ended March 31, 2011 was offset by net charge-offs of $572,000. This compared to provision expense for the three months ended March 31, 2010 of $165,000 and net recoveries of $230,000. Net charge-offs for the three-month period ended March 31, 2011 were primarily comprised of a $200,000 unsecured loan charged off due to bankruptcy and a $370,000 loan previously provisioned by a specific reserve allocation during 2010. Funding for the allowance represented 1.41% of total loans, for March 31, 2011 and December 31, 2010.

Delinquency 30 or more days past due as of March 31, 2011 was $9.9 million, or 3.78% of total loans, as compared to $12.3 million, or 4.59%, at December 31, 2010. The March 31, 2011 decrease was due primarily to loan foreclosures that resulted in the real estate held for sale discussed above.

Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) as of March 31, 2011 were $7.8 million, compared to $7.1 million at the same date in 2010 and $10.4 million at December 31, 2010. Non-performing loans as a percent of total loans were 2.97%, 2.57% and 3.86%, respectively, for those periods. Non-performing levels continue to be almost entirely comprised of loans in the lengthy process of foreclosure. Of the total amount in foreclosure, 82% relates to four large relationships that have been in process for six months or more.

Although management believes that its allowance for loan losses at March 31, 2011 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation’s results of operations. Management is diligent in monitoring delinquent loans and in the analysis of the factors affecting the allowance. Additional segmentation of the allowance factors was incorporated effective December 31, 2010, as detailed in the tables earlier in this report.

Other changes in the asset mix of the Corporation occurred with varying impact on the financial statements. Interest receivable decreased 8.2% over the three-month period from $2.0 million as of December 31, 2010 to $1.8 million as of March 31, 2011, as average balances dropped. Prepaid assets dropped as $112,000 in prepaid FDIC assessments were expensed for the first three months of 2011 and other prepaid items were expensed. An additional $6,000 of FDIC expense for the period relates to other deposit insurance related costs, including the Temporary Liquidity Guarantee Program (TLGP) assessment which provides 100% coverage on noninterest bearing deposits.

Deposits totaled $288.6 million at March 31, 2011, an increase of $2.3 million, or 0.8%, compared to total deposits at December 31, 2010 of $286.3 million. During the three-month period, noninterest bearing transactional deposit accounts increased by 8.4%, or $2.0 million, while interest bearing accounts, primarily certificate of deposit accounts, increased 0.1%, or $326,000. The largest deposit increases for the period came primarily from the south central Indiana branches, including the newest branch in New Albany, Indiana.

Borrowing totaled $62.2 million at March 31, 2011 versus $65.2 million at December 31, 2010, a drop of $3.0 million, or 4.6%, period to period, as the Corporation used portions of excess liquidity to pay down advances. Of total borrowings, $55.0 million and $58.0 million, respectively, represented Federal Home Loan Bank (FHLB) advances with average rates of 3.64% and 3.84% at the respective dates. These balances and average rates on advances from the FHLB represent a reduction from the same at March 31, 2010 which were $71.0 million and 4.60%. The drop in average balances and rates, March 2010 to March 2011, resulted in a $319,000, or 35.2%, decrease in the cost of borrowing period to period. Borrowing costs of $587,000 for the three months ended March 31, 2011 compared to $906,000 for the same period in 2010. A significant contributor to the decrease in the cost of borrowing, period to period, was the restructuring of $29.0 million in advances over the last 12 months, with the Corporation taking advantage of lower borrowing costs and locking in those low costs against future rate volatility.

Other liabilities totaled $3.4 million at March 31, 2011, an increase of $347,000 from the December 31, 2010 balance of $3.1 million as escrowed balances were higher period to period.

Stockholders’ equity totaled $32.3 million at March 31, 2011, an increase of $813,000, or 2.6%, from the $31.5 million at December 31, 2010. The increase was primarily due to the change in the unrealized earnings on available-for-sale investments, at a gain position of $877,000 at March 31, 2011, as compared to $443,000 at December 31, 2010, and first quarter earnings of $802,000. During the three months ending March 31, 2011, $16,000 was used to purchase 1,000 shares of Corporation stock, in satisfaction of a 2010 award under one of the corporate employee benefit plans, and the Corporation paid dividends totaling $409,000 to preferred and common shareholders during the period. Dividends to common shareholders for the three-month period were $.21 per share.

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The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At March 31, 2011, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

General

The Corporation’s net income for the three months ended March 31, 2011 totaled $802,000, an increase of $83,000, or 11.5%, from the net income of $719,000 reported for the period ended March 31, 2010. The increase in income for the 2011 period was primarily attributable to a significant decrease in the cost of funds, period to period, as deposit and borrowing costs of funds dropped from 2.13% at March 31, 2010 to 1.63% at March 31, 2011. This drop translated to a $511,000, or 25.7%, decrease in interest expense period to period. This compared to a slight decrease in income from interest-earning assets of $143,000, or 3.1%, for the same period, with the yield on loans changing only negligibly, from 6.04% at March 31, 2010 to 5.93% a year later, and average balances for the loan portfolio declining. Yields on investments dropped, from 3.62% at March 31, 2010 to 3.43% at March 31, 2011, causing only a slight decrease in interest income, $51,000 period to period, as average balances increased slightly. Gain on loan sales to the secondary market, a significant contributor to net income in 2009 and 2010, was $160,000 for the three-month period ended March 31, 2011 as compared to $87,000 for the same three-month period in 2010. Sales into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (Freddie Mac), which were strong throughout 2010, were $4.5 million for the first three months of 2011, a slight improvement over the $3.4 million in sales during the same period in 2010. This source of income is not expected to continue through 2011as sales into the secondary markets are predicted to decline significantly in response to tightened lending criteria and lack of consumer ability and enthusiasm for refinancing of primary residences.

Other items affecting net income included decreases in service charges for overdrawn accounts, an increase in the provision expense for loan losses, and increases in operating costs. Expense for FDIC insurance for the three-month period ended March 31, 2011 was $121,000, relatively unchanged from the expense for the three-month period ended March 31, 2010 of $126,000.

Net Interest Income

Total interest income for the three months ended March 31, 2011 decreased $143,000, or 3.0%, from $4.7 million at March 31, 2010 to $4.5 million at March 31, 2011. The reduction was due primarily to a combination of decreased average balances in the loan portfolio, with similar yields period to period, and moderately higher average balances in the investment portfolio, at lower yields.

Total interest expense for the same period decreased significantly by $511,000, or 25.7%, from the $2.0 million reported at March 31, 2010 to $1.5 million at March 31, 2010. For the three months ended March 31, 2011, interest expense from deposits totaled $888,000 while interest expense from borrowings totaled $587,000, as compared to $1.1 million and $906,000 for the same period in 2010. Of the overall decrease in interest expense, $192,000 was attributable to interest expense on deposits, primarily fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates. Over the same period, the Corporation experienced a decrease of $319,000 on interest expense for borrowings as advances were repaid and the average balance of funds borrowed from the FHLB dropped. The average rate paid on those borrowings dropped from 4.60% at March 31, 2010 to 3.64% at March 31, 2011 as $16.0 million in advances were repaid over the period and $29.0 million in advances were restructured to take advantage of lower rates currently and into the future. Borrowing at the FHLB as of March 31, 2011 totaled $55.0 million with an additional $47.0 million available by authorization of the board of directors of the Corporation.

Net interest income was $3.1 million for the three months ended March 31, 2011 and $2.7 million for the same period in 2010, with an increase period to period of $368,000, or 13.6%. This reflects the effects of increasing spread between interest-earning assets and interest-bearing liabilities, combined with changes in the mix of the underlying assets and liabilities.

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Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payment, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectibility of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $474,000 provision for losses on loans for the three months ended March 31, 2011, as compared to $165,000 for the same period in 2010. The quarterly expense of $474,000 corresponds to the annual expenses for 2009, of $2.9 million, and 2010, of $2.6 million, and reflects the loss experience of the Corporation projected for the continued stagnation in the economy. Delinquencies in total have decreased as foreclosures pending during the last 12 to 18 months have been resolved, and new delinquencies remain controlled.

Non-performing loans as of March 31, 2011 were $7.8 million, an increase of $700,000, from the $7.1 million at the same point in 2010. Of the total non-performing loans of $7.8 million at March 31, 2011, approximately $4.3 million have been past due for 12 months or more, have been reduced by partial charge-off of confirmed losses or protected by specific reserve allocations, and are in the lengthy process of work out or foreclosure. While management believes that the allowance for losses on loans is adequate at March 31, 2011, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future.

Other Income

Other income increased by $137,000, or 17.6%, during the three months ended March 31, 2011 to $915,000, as compared to the $778,000 reported for the same period in 2010. The increase was due primarily to the increase in loan sales into the secondary market, period to period. Gains on sales to the FHLMC (Freddie Mac) for the three months ending March 31, 2011 totaled $160,000, an increase of $73,000 over the $87,000 recorded for the same period ended March 31, 2010. The other major contributor to the increase, period to period, was in the gains on the sale of available-for-sale investments, $126,000 for the three-month period ended March 31, 2011 as compared to $34,000 for the same period in 2010, as the Corporation took advantage of gain positions on investments. Period to period, service fees and charges, which includes income from overdrawn deposit accounts (NSF fees), decreased slightly as customers appeared to be more frugal in their spending habits. Losses on foreclosed real estate owned, $16,000 for the three-month period ended March 31, 2010, increased moderately to $49,000 for the same three-month period in 2011. Unlike interest income, “Other Income” is not always readily predictable and is subject to variations depending on outside influences.

Other Expense

Total other expense experienced only modest change period to period, with a net increase of $75,000, or 3.2%, from March 31, 2010 to March 31, 2011. In general, decreases were experienced in several financial statement lines. The most significant financial statement increases were:

·   Salaries and employee benefits, a 4.7% increase period to period, reflective of increased branch personnel

·  Net occupancy and equipment expenses, a 5.9% increase period to period, reflective of the addition of branches and information technology

·   Professional fees, a 28.3% increase period to period, reflective of the current regulatory environment which has placed pressure on financial institutions to provide third party analysis at all levels of the operation

Income Taxes

Tax expense of $260,000 was recorded for the three-month period ended March 31, 2011 as compared to $222,000 for the comparable period in 2010. For the 2011 period, the Corporation had pre-tax income of $1,062,000 as compared to $941,000 for the 2010 period. The effective tax rate was 24.5% for the three-month period ended March 31, 2011 as compared to 23.6% for the same period in 2010. The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses.

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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 Federal Home Loan Bank (FHLB) system, the Bank may borrow from the FHLB of Indianapolis. At March 31, 2011, the Bank had $55.0million in such borrowings, with an additional $47.0 million available, previously approved by the Bank’s board of directors. Based on collateral, an additional $40.1 million could be available, if the board of directors determines the need. In addition, at March 31, 2011, the Bank had commitments to fund loan originations of $3.3 million, unused home equity lines of credit of $16.6 million and unused commercial lines of credit of $9.0 million. Commitments to sell loans as of that date were $643,000. Generally, a significant portion of amounts available in lines of credit will not be drawn.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for Smaller Reporting Companies.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

Purchases of common stock made by or on behalf of the Company during the three months ended March 31, 2011 are set forth below:

Period	Total Number of Shares (or Units) Purchased (1)		Average Price Paid Per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 2011 (1/1/11 thru 1/31/11)		-		-		-		13,830
February 2011 (2/1/11 thru 2/28/11)		100		15.50		100		13,730
March 2011 (3/1/11 thru 3/31/11)		900		15.84		900		12,830
Total		1,000		15.81		1,000		12,830

(1)   During the periods reported above, there were 1,000 shares of Common Stock that were purchased by the Company through a publicly announced plan or program. The shares of Common Stock were purchased in open-market transactions for the purpose of satisfying a 2010 award under the Corporation’s Recognition and Retention Plan.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  (REMOVED AND RESERVED)

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

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

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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 16, 2011	By:	/s/ Matthew P. Forrester
		Matthew P. Forrester
		President and Chief Executive Officer
Date: May 16, 2011	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

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