River Valley Bancorp 10-Q 2013 Q2 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 June 30, 2013
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number: 0-21765

RIVER VALLEY BANCORP

(Exact name of registrant as specified in its charter)

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

(812) 273-4949

(Registrant’s telephone number, including area code)

[None]

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

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

Yes  x          No  ¨

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

Yes  x          No  ¨

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

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

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

The number of shares of the Registrant’s common stock, without par value, outstanding as of August 7, 2013, was 1,529,106.

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 (Loss)	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	38
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	49
Item 4.	Controls and Procedures	49
PART II. OTHER INFORMATION		50
Item 1.	Legal Proceedings	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	50
SIGNATURES		51
EXHIBIT INDEX		52

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RIVER VALLEY BANCORP

Consolidated Condensed Balance Sheets

	June 30, 2013			December 31, 2012
	(Unaudited)
	(In Thousands, Except Share Amounts)
Assets
Cash and due from banks	$	2,518		$	3,675
Interest-bearing demand deposits		13,386			8,732
Federal funds sold		3,923			6,745
Cash and cash equivalents		19,827			19,152
Investment securities available for sale		126,308			113,770
Loans held for sale		355			394
Loans		298,402			309,082
Allowance for loan losses		4,036			3,564
Net loans		294,366			305,518
Premises and equipment, net		10,736			10,905
Real estate, held for sale		1,543			1,610
Federal Home Loan Bank stock		4,595			4,595
Interest receivable		2,053			2,292
Cash value of life insurance		10,298			10,161
Goodwill		79			79
Core deposit intangibles		467			518
Other assets		5,110			3,861
Total assets	$	475,737		$	472,855
Liabilities
Deposits
Noninterest-bearing	$	45,936		$	40,516
Interest-bearing		342,682			343,739
Total deposits		388,618			384,255
Borrowings		49,717			49,717
Interest payable		319			362
Other liabilities		3,387			2,934
Total liabilities		442,041			437,268
Commitments and Contingencies
Stockholders’ Equity
Preferred stock – liquidation preference $1,000 per share – no par value
Authorized – 2,000,000 shares		5,000			5,000
Issued and outstanding – 5,000 shares
Common stock, no par value
Authorized – 5,000,000 shares
Issued and outstanding – 1,528,306 and 1,524,872 shares		7,753			7,700
Retained earnings		22,309			20,990
Accumulated other comprehensive income (loss)		(1,366	)		1,897
Total stockholders’ equity		33,696			35,587
Total liabilities and stockholders’ equity	$	475,737		$	472,855

See Notes to Consolidated Condensed Financial Statements.

3

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Income

(Unaudited)

	Six Months Ended June 30,						Three Months Ended June 30,
	2013			2012			2013			2012
	(In Thousands, Except Share Amounts)
Interest Income
Loans receivable	$	8,195		$	7,117		$	4,139		$	3,492
Investment securities		1,415			1,418			728			703
Interest-earning deposits and other		100			81			52			41
Total interest income		9,710			8,616			4,919			4,236
Interest Expense
Deposits		1,207			1,401			591			679
Borrowings		947			1,175			473			587
Total interest expense		2,154			2,576			1,064			1,266
Net Interest Income		7,556			6,040			3,855			2,970
Provision for loan losses		636			796			318			322
Net Interest Income After Provision for Loan Losses		6,920			5,244			3,537			2,648
Other Income
Service fees and charges		1,267			998			673			501
Net realized gains on sale of available-for-sale securities (includes $193, $331, $114 and $197, respectively, related to accumulated other comprehensive earnings reclassifications)		193			331			114			197
Net gains on loan sales		553			509			228			225
Interchange fee income		286			220			147			114
Increase in cash value of life insurance		137			154			69			77
Loss on real estate held for sale		(202	)		(394	)		(59	)		(102	)
Other income		222			163			113			87
Total other income		2,456			1,981			1,285			1,099
Other Expenses
Salaries and employee benefits		3,358			2,901			1,669			1,423
Net occupancy and equipment expenses		951			710			475			351
Data processing fees		256			214			125			112
Advertising		228			201			122			127
Mortgage servicing rights		123			117			58			67
Office supplies		89			67			57			35
Professional fees		221			192			130			96
Federal Deposit Insurance Corporation assessment		193			167			110			88
Loan-related expenses		253			322			152			117
Acquisition expense		18			124			9			81
Other expenses		684			633			286			387
Total other expenses		6,374			5,648			3,193			2,884
Income Before Income Tax		3,002			1,577			1,629			863
Income tax expense (includes $66, $117, $39 and $71, respectively, related to income tax expense from reclassification items)		808			293			441			171
Net Income		2,194			1,284			1,188			692
Preferred stock dividends		181			181			91			91
Net Income Available to Common Stockholders	$	2,013		$	1,103		$	1,097		$	601
Basic earnings per common share	$	1.32		$	.73		$	.72		$	.40
Diluted earnings per common share		1.32			.73			.72			.40
Dividends per share		.42			.42			.21			.21

See Notes to Consolidated Condensed Financial Statements.

4

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Unaudited)

	Six Months Ended June 30,					Three Months Ended June 30,
	2013			2012		2013			2012
	(In Thousands)
Net income	$	2,194		$	1,284	$	1,188		$	692
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities available for sale
Unrealized holding gains (losses) arising during the period, net of tax benefit (expense) of $1,741, $(228), $1,522 and $(195)		(3,135	)		422		(2,738	)		344
Less: Reclassification adjustment for gains included in net income, net of tax expense of $66, $117, $39 and $71		127			214		75			126
		(3,262	)		208		(2,813	)		218
Comprehensive income (loss)	$	(1,068	)	$	1,492	$	(1,625	)	$	910

See Notes to Consolidated Condensed Financial Statements.

5

RIVER VALLEY BANCORP

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2013			2012
	(In Thousands)
Operating Activities
Net income	$	2,194		$	1,284
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		636			796
Depreciation and amortization		397			341
Investment securities gains		(193	)		(331	)
Loans originated for sale in the secondary market		(14,826	)		(15,985	)
Proceeds from sale of loans in the secondary market		15,294			15,161
Gain on sale of loans		(553	)		(509	)
Amortization of net loan origination cost		76			73
Loss on real estate held for sale		202			394
Net change in
Interest receivable		239			172
Interest payable		(43	)		(70	)
Prepaid Federal Deposit Insurance Corporation assessment		703			158
Other adjustments		(137	)		595
Net cash provided by operating activities		3,989			2,079
Investing Activities
Purchases of securities available for sale		(37,299	)		(19,845	)
Proceeds from maturities and paydowns of securities available for sale		11,948			10,428
Proceeds from sales of securities available for sale		7,817			4,821
Net change in loans		9,854			(1,366	)
Purchases of premises and equipment		(227	)		(122	)
Proceeds from sale of real estate acquired through foreclosure		657			1,329
Other investing activity		(13	)		(52	)
Net cash used in investing activities		(7,263	)		(4,807	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		13,599			2,891
Certificates of deposit		(9,236	)		(2,636	)
Cash dividends		(501	)		(817	)
Exercise of stock options		50			-
Advances by borrowers for taxes and insurance		37			57
Net cash provided by (used in) financing activities		3,949			(505	)
Net Change in Cash and Cash Equivalents		675			(3,233	)
Cash and Cash Equivalents, Beginning of Period		19,152			18,714
Cash and Cash Equivalents, End of Period	$	19,827		$	15,481
Additional Cash Flows and Supplementary Information
Interest paid	$	2,197		$	2,646
Income tax paid, net of refunds		575			119
Transfers to real estate held for sale		839			1,593
Dividends declared not paid		321			-

See Notes to Consolidated Condensed Financial Statements.

6

RIVER VALLEY BANCORP

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

River Valley Bancorp (the “Corporation” or the “Company”) is a bank holding company whose activities are primarily limited to holding the stock of River Valley Financial Bank (“River Valley” or the “Bank”), an Indiana commercial bank. The Bank conducts a general banking business in southeastern and south central Indiana and in 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, 2012. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and six-month periods ended June 30, 2013, 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, 2012 has been derived from the audited consolidated balance sheet of the Corporation as of that date.

NOTE 2: PRINCIPLES OF CONSOLIDATION

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

NOTE 3: ACQUISITION

On November 9, 2012, the Corporation completed its acquisition of Dupont State Bank, an Indiana commercial bank wholly owned by Citizens Union Bancorp of Shelbyville, Inc. In conjunction with the acquisition, River Valley Financial Bank (Bank) merged with and into Dupont State Bank, which changed its name to River Valley Financial Bank, effecting the conversion of the Bank from a federally chartered thrift to a state chartered commercial bank. Under the terms of the acquisition, the Bank paid $5,700,000 for the stock of Dupont State Bank with a resulting bargain purchase gain, after application of purchase accounting adjustments, of $988,000. The bargain gain was recorded as other income in the three-month period ended December 31, 2012. For the twelve-month period ended December 31, 2012, the Corporation had approximately $382,000 in costs relative to the acquisition. Acquisition expense for the same period ended December 31, 2011 was approximately $212,000. Acquisition expense for the three- and six-month periods ended June 30, 2013 was $9,000 and $18,000 as compared to $81,000 and $124,000 for the three and six months ended June 30, 2012. As a result of the acquisition, and the addition of two market areas, the Corporation will have an opportunity to expand both lending and deposit services. Cost savings are expected through economies of scale and consolidation of operating centers.

7

Under the purchase method of accounting for purchases, the total purchase price is allocated to the net tangible and intangible assets based on their current estimated fair values as of the date of acquisition. Based on independent, third party valuation of the fair value of those assets acquired, and liabilities assumed, the purchase price for the Dupont State Bank acquisition was allocated as follows (in thousands):

Consideration:  Cash  paid	$	5,700
Fair value of assets acquired:
Cash and cash equivalents		14,893
Investment securities available-for-sale		12,139
Loans		52,125
Property and equipment		3,160
Federal Home Loan Bank Stock		369
Real estate, held for sale		334
Core deposit intangible		514
Interest receivable		364
Other assets		1,243
Total assets acquired		85,141
Fair value of liabilities assumed:
Deposits		78,300
Interest payable		69
Other liabilities		84
Total liabilities assumed		78,453
Bargain purchase gain	$	(988	)

At the time of acquisition, the fair value of the assets acquired included loans with a fair value of $52,125,000. The gross principal and contractual interest due under the contracts was $53,982,000, of which $2,960,000 was expected to be uncollectible.

8

NOTE 4: EARNINGS PER SHARE

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

	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
	Income		Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(Unaudited; In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	2,013		1,525,460	$	1.32	$	1,103		1,514,472	$	.73
Effect of dilutive stock options				4,672						1,842
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	2,013		1,530,132	$	1.32	$	1,103		1,516,314	$	.73

	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
	Income		Weighted Average Shares		Per Share Amount		Income		Weighted Average Shares		Per Share Amount
	(Unaudited; In Thousands, Except Share Amounts)
Basic earnings per share
Income available to common stockholders	$	1,097		1,526,042	$	.72	$	601		1,514,472	$	.40
Effect of dilutive stock options				5,405						2,304
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	1,097		1,531,447	$	.72	$	601		1,516,776	$	.40

Net income for the six-month period ending June 30, 2013, of $2,194,000 was reduced by $181,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $2,013,000. For the six-month period ending June 30, 2012, net income of $1,284,000 was reduced by $181,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $1,103,000.

Net income for the three-month period ending June 30, 2013, of $1,188,000 was reduced by $91,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $1,097,000. For the three-month period ending June 30, 2012, net income of $692,000 was reduced by $91,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $601,000.

Certain groups of options were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares. For the three-month and six-month periods ended June 30, 2012, options to purchase 5,000 shares at an exercise price of $22.25 per share were outstanding and were not included in the computation of diluted earnings for those periods.  For the same periods ending June 30, 2013, there were no options excluded.

9

NOTE 5: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

Available-for-sale Securities

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

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

10

The following tables present the fair value measurements of assets 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 June 30, 2013 and December 31, 2012, respectively.

			June 30, 2013
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Unaudited; In Thousands)
Available-for-sale securities
Federal agencies	$	44,940	$	-	��	$	44,940	$	-
State and municipal		34,386		-			34,386		-
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		44,264		-			44,264		-
Corporate		2,718		-			1,497		1,221
Total	$	126,308	$	-		$	125,087	$	1,221

			December 31, 2012
			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	$	43,409	$	-	$	43,409	$	-
State and municipal		31,162		-		31,162		-
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		36,022		-		36,022		-
Corporate		3,177		-		1,980		1,197
Total	$	113,770	$	-	$	112,573	$	1,197

11

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs for the three-month and six-month periods ended June 30, 2013 and June 30, 2012:

	Available-for-Sale Securities
	Six Months Ended June 30, 2013			Six Months Ended June 30, 2012
	(Unaudited; In Thousands)
Beginning balance	$	1,197		$	1,090
Accretion		8			4
Total realized and unrealized gains and losses
Included in net income		-			-
Unrealized gains included in other comprehensive income		78			60
Purchases		-			-
Settlements, including pay downs		(62	)		(8	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,221		$	1,146
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	-

	Available-for-Sale Securities
	Three Months Ended June 30, 2013			Three Months Ended June 30, 2012
	(Unaudited; In Thousands)
Beginning balance	$	1,208		$	1,073
Accretion		2			2
Total realized and unrealized gains and losses
Included in net income		-			-
Unrealized gains included in other comprehensive income		15			75
Purchases		-			-
Settlements, including pay downs		(4	)		(4	)
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,221		$	1,146
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	-

There were no realized or unrealized gains or losses of Level 3 securities included in net income for the three-month and six-month periods ended June 30, 2013 and June 30, 2012.

At June 30, 2013, 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. For the past four fiscal years, trading of these types of securities has only been conducted on a distress sale or forced liquidation basis, although some trading activity has occurred in recent months for instruments similar to the instruments held by the Corporation. As a result, the Corporation continues to measure the fair values using discounted cash flow projections and has included the securities in Level 3.

12

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 June 30, 2013 and December 31, 2012.

				June 30, 2013
				Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Unaudited; In Thousands)
Impaired loans		$	1,373		$	-		$	-		$	1,373
Real estate held for sale			200			-			-			200

				December 31, 2012
				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		$	4,363		$	-		$	-		$	4,363
Real estate held for sale			700			-			-			700

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

Impaired Loans (Collateral Dependent)

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

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

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

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

13

Real Estate Held for Sale

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

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

Unobservable (Level 3) Inputs

The following table represents quantitative information about Level 3 fair value measurements:

	Fair Value at June 30, 2013	Valuation Techniques	Unobservable Input	Range
	(Unaudited; In Thousands)
Impaired loans	$1,373	Comparative sales based on independent appraisal	Marketability Discount	18.4%-100	%
Real estate held for sale	$   200	Comparative sales based on independent appraisal	Marketability Discount	41.5	%
Securities available for sale
Corporate	$1,221	Discounted cash flows	*Default probability	.21%-1.73	%
			*Loss, given default	100	%
			*Discount rate	3.32%-9.0	%
			*Recovery rate	0%-15	%
			*Prepayment rate	0%-40	%

	Fair Value at December 31, 2012	Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(Unaudited; In Thousands)
Impaired loans	$4,363	Comparative sales based on independent appraisal	Marketability Discount	10%-20	%
Real estate held for sale	$   700	Comparative sales based on independent appraisal	Marketability Discount	10%-20	%
Securities available for sale
Corporate	$1,197	Discounted cash flows	*Default probability	.21%-1.73	%
			*Loss, given default	100	%
			*Discount rate	3.32%-9.0	%
			*Recovery rate	0%-15	%
			*Prepayment rate	0%-40	%

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Sensitivity of Significant Unobservable Inputs

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

Securities Available for Sale - Pooled Trust Preferred Securities

Pooled trust preferred securities are collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full discounted cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third party specialist with direct industry experience in pooled trust preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled trust preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security, and terms of the security’s structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current/near term operating conditions, prepayment projections, credit loss assumptions, and the impact of macroeconomic and regulatory changes. Where available, actual trades of securities with similar characteristics are used to further support the value. The cumulative probability of default ranges from a low of 0.21% to 1.73%, and the estimates used for loss given default are 100% for the periods ended December 31, 2012 and June 30, 2013.

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

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

Cash and Cash Equivalents - 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.

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.

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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.

The following tables present estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012.

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Unaudited; In Thousands)
June 30, 2013:
Assets
Cash and cash equivalents	$	19,827	$	19,827	$	-	$	-
Investment securities available for sale		126,308		-		125,087		1,221
Loans, held for sale		355		-		355		-
Loans, net of allowance for losses		294,366		-	317,864			-
Federal Home Loan Bank stock		4,595		-		4,595		-
Interest receivable		2,053		-		2,053		-
Liabilities
Deposits		388,618		-	389,795			-
Borrowings		49,717		-	45,025		7,217
Interest payable		319		-		319		-

December 31, 2012:
Assets
Cash and cash equivalents	$	19,152	$	19,152	$	-	$	-
Investment securities available for sale		113,770		-		112,573		1,197
Loans, held for sale		394		-		394		-
Loans, net of allowance for losses		305,518		-		331,543		-
Federal Home Loan Bank stock		4,595		-		4,595		-
Interest receivable		2,292		-		2,292		-
Liabilities
Deposits		384,255		-		386,068		-
Borrowings		49,717		-		45,849		6,898
Interest payable		362		-		362		-

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NOTE 6: INVESTMENT SECURITIES

The amortized cost and approximate fair values of securities as of June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Unaudited; In Thousands)
Available-for-sale Securities
Federal agencies	$	45,536	$	392	$	(988	)	$	44,940
State and municipal		34,920		829		(1,363	)		34,386
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		44,809		405		(950	)		44,264
Corporate		3,163		2		(447	)		2,718
Total investment securities	$	128,428	$	1,628	$	(3,748	)	$	126,308

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	42,581	$	849	$	(21	)	$	43,409
State and municipal		29,331		1,865		(34	)		31,162
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		35,258		774		(10	)		36,022
Corporate		3,652		47		(522	)		3,177
Total investment securities	$	110,822	$	3,535	$	(587	)	$	113,770

The amortized cost and fair value of available-for-sale securities June 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
	(Unaudited; In Thousands)
Within one year	$	5,713	$	5,772
One to five years		21,900		22,160
Five to ten years		34,161		33,421
After ten years		21,845		20,691
		83,619		82,044
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		44,809		44,264
Totals	$	128,428	$	126,308

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No securities were pledged at June 30, 2013 or at December 31, 2012 to secure FHLB advances. Securities with a carrying value of $16,205,000 and $18,826,000 were pledged at June 30, 2013 and December 31, 2012 to secure public deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the six-month periods ended June 30, 2013 and June 30, 2012 were $7,817,000 and $4,821,000. Gross gains of $210,000 and $331,000 resulting from sales and calls of available-for-sale securities were realized for the six-month periods ended June 30, 2013 and June 30, 2012, respectively. Gross losses of $17,000 were realized for the six-month period ended June 30, 2013, and there were no losses for the period ended June 30, 2012.

Proceeds from sales of securities available for sale during the three-month periods ended June 30, 2013 and June 30, 2012 were $5,761,000 and $2,863,000. Gross gains of $131,000 and $197,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended June 30, 2013 and June 30, 2012, respectively. Gross losses of $17,000 were realized for the three-month period ended June 30, 2013, and there were no losses for the period ended June 30, 2012.

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 June 30, 2013 was $78,159,000, which is approximately 61.9% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2012 was $11,879,000, which represented approximately 10.4% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

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

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The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

	June 30, 2013
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Unaudited; In Thousands)
Federal agencies	$	28,492	$	(988	)	$	-	$	-		$	28,492	$	(988	)
State and municipal		16,107		(1,363	)		-		-			16,107		(1,363	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		31,344		(950	)		-		-			31,344		(950	)
Corporate		995		(4	)		1,221		(443	)		2,216		(447	)
Total temporarily impaired securities	$	76,938	$	(3,305	)	$	1,221	$	(443	)	$	78,159	$	(3,748	)
	December 31, 2012
	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	$	3,979	$	(21	)	$	-	$	-		$	3,979	$	(21	)
State and municipal		3,856		(34	)		-		-			3,856		(34	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		2,847		(10	)		-		-			2,847		(10	)
Corporate		-		-			1,197		(522	)		1,197		(522	)
Total temporarily impaired securities	$	10,682	$	(65	)	$	1,197	$	(522	)	$	11,879	$	(587	)

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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 June 30, 2013.

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 June 30, 2013.

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

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost bases over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at June 30, 2013.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at June 30, 2013 of $395,000 and $48,000, respectively. At December 31, 2012, the unrealized losses on these two investments were $465,000 and $56,000, 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 Ba2 and A2, respectively, by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent 1.3% of the book value of the Corporation’s investment portfolio and approximately 1.0% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and the Corporation expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at June 30, 2013.

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NOTE 7: ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

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

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

The carrying amount of those loans included in the balance sheet as loans receivable at June 30, 2013 and December 31, 2012 were:

	June 30, 2013			December 31, 2012
	(Unaudited)
	(In Thousands)
Construction / Land	$	744		$	750
One-to-four family residential		2,055			2,149
Multi-family residential		685			685
Nonresidential and agricultural land		1,151			1,523
Commercial		27			64
Consumer		42			51
Outstanding balance of acquired credit-impaired loans		4,704			5,222
Fair value adjustment for credit-impaired loans		(1,715	)		(2,119	)
Carrying balance of acquired credit-impaired loans	$	2,989		$	3,103

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

	Six Months Ended June 30, 2013			Three Months Ended June 30, 2013
	(Unaudited; In Thousands)			(Unaudited; In Thousands)
Balance at the beginning of the period	$	673		$	554
Additions		-			-
Accretion		(295	)		(171	)
Reclassification from non-accretable difference		197			192
Disposals		-			-
Balance at June 30, 2013	$	575		$	575

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

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

During the three months and six months ended June 30, 2013, the Corporation did not increase the allowance for loan losses by a charge to the income statement for any of the loans acquired with deteriorated credit quality. No allowances for loan losses were reversed in 2013.

NOTE 8: LOANS AND ALLOWANCE

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

Loans

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

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

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

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

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

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

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

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

Allowance for Loan Losses

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

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

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

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

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

The following table presents the breakdown of loans as of June 30, 2013 and December 31, 2012.

	June 30, 2013			December 31, 2012
	(Unaudited)
	(In Thousands)
Construction / Land	$	26,493		$	26,506
One-to-four family residential		144,745			137,402
Multi-family residential		17,828			19,988
Nonresidential and agricultural land		103,640			106,433
Commercial		20,853			19,549
Consumer		4,496			4,906
		318,055			314,784
Unamortized deferred loan costs		493			484
Undisbursed loans in process		(20,146	)		(6,186	)
Allowance for loan losses		(4,036	)		(3,564	)
Total loans	$	294,366		$	305,518

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

Construction/Land

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

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

One-to-Four Family Residential and Consumer

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

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

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

Commercial

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

25

The following tables present the activity in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012 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 June 30, 2013 and December 31, 2012.

	Construction / Land			1-4 Family			Multi-Family		Nonresidential and Agricultural Land			Commercial			Consumer			Total
	(Unaudited; In Thousands)
Three Months Ended June 30, 2013
Balances at beginning of period:	$	757		$	1,534		$	278	$	1,179		$	135		$	1		$	3,884
Provision for losses		(84	)		305			19		(97	)		144			31			318
Loans charged off		-			(21	)		-		-			(138	)		(43	)		(202	)
Recoveries on loans		-			3			-		20			-			13			36
Balances at end of period	$	673		$	1,821		$	297	$	1,102		$	141		$	2		$	4,036
Six Months Ended June 30, 2013
Balances at beginning of period	$	649		$	1,423		$	281	$	1,077		$	132		$	2		$	3,564
Provision for losses		67			482			16		(114	)		146			39			636
Loans charged off		(61	)		(87	)		-		(175	)		(137	)		(74	)		(534	)
Recoveries on loans		18			3			-		314			-			35			370
Balances at end of period	$	673		$	1,821		$	297	$	1,102		$	141		$	2		$	4,036
As of June 30, 2013
Allowance for losses:
Individually evaluated for impairment:	$	196		$	526		$	196	$	97		$	91		$	-		$	1,106
Collectively evaluated for impairment:		477			1,295			101		1,005			50			2			2,930
Loans acquired with a deteriorated credit quality:		-			-			-		-			-			-			-
Balances at end of period		673			1,821			297		1,102			141			2			4,036
Loans:
Individually evaluated for impairment:	$	4,530		$	5,491		$	1,088	$	4,127		$	377		$	11		$	15,624
Collectively evaluated for impairment:		21,625			137,814			16,255		98,814			20,472			4,462			299,442
Loans acquired with a deteriorated credit quality:		338			1,440			485		699			4			23			2,989
Balances at end of period		26,493			144.745			17,828		103,640			20,853			4,496			318,055

26

	Construction / Land			1-4 Family			Multi-Family		Nonresidential and Agricultural Land			Commercial			Consumer			Total
	(In Thousands)
Three Months Ended June 30, 2012
Balances at beginning of period:	$	430		$	1,472		$	17	$	1,226			6		$	27		$	3,178
Provision for losses		304			(115	)		266		(135	)		2			-			322
Loans charged off		-			(46	)		-		-			-			(19	)		(65	)
Recoveries on loans		-			79			-		-			-			7			86
Balances at end of period	$	734		$	1,390		$	283	$	1,091		$	8		$	15		$	3,521
Six Months Ended
June 30, 2012
Balances at beginning of period:	$	1,016		$	1,986		$	65	$	822			70		$	44		$	4,003
Provision for losses		54			286			218		298			(62	)		2			796
Loans charged off		(340	)		(962	)		-		(29	)		-			(44	)		(1,375	)
Recoveries on loans		4			80			-		-			-			13			97
Balances at end of period	$	734		$	1,390		$	283	$	1,091		$	8		$	15		$	3,521

	Construction / Land		1-4 Family		Multi-Family		Nonresidential and Agricultural Land		Commercial		Consumer		Total
	(In Thousands)
As of December 31, 2012
Allowance for losses:
Individually evaluated for impairment:	$	195	$	310	$	196	$	-	$	93	$	-	$	794
Collectively evaluated for impairment:		453		1,113		85		1,078		40		1		2,770
Loans acquired with a deteriorated credit quality:		-		-		-		-		-		-		-
Balances at end of period	$	648	$	1,423	$	281	$	1,078	$	133	$	1	$	3,564
Loans:
Individually evaluated for impairment:	$	4,752	$	4,517	$	1,104	$	3,278	$	565	$	12	$	14,228
Collectively evaluated for impairment:		21,453		131,465		18,433		102,292		18,946		4,864		297,453
Loans acquired with a deteriorated credit quality:		301		1,420		451		863		38		30		3,103
Balances at end of period	$	26,506	$	137,402	$	19,988	$	106,433	$	19,549	$	4,906	$	314,784

27

The following tables present the credit risk profile of the Corporation’s loan portfolio based on rating category as of June 30, 2013 and December 31, 2012. Loans acquired from Dupont State Bank in the November 2012 acquisition have been adjusted to fair value for the periods ended December 31, 2012 and June 30, 2013.

June 30, 2013	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(Unaudited; In Thousands)
Construction / Land	$	26,493	$	21,739	$	121	$	4,633	$	-
1-4 family residential		144,745		132,333		4,416		7,075		921
Multi-family residential		17,828		16,208		44		1,576		-
Nonresidential and agricultural land		103,640		93,413		4,651		5,024		552
Commercial		20,853		20,031		12		732		78
Consumer		4,496		4,442		2		52		-
Total Loans	$	318,055	$	288,166	$	9,246	$	19,092	$	1,551

December 31, 2012	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction / Land	$	26,506	$	20,952	$	314	$	4,909	$	331
1-4 family residential		137,402		123,705		6,597		5,885		1,215
Multi-family residential		19,988		17,546		186		2,256		-
Nonresidential and agricultural land		106,433		97,307		4,931		2,793		1,402
Commercial		19,549		18,869		15		414		251
Consumer		4,906		4,863		14		29		-
Total Loans	$	314,784	$	283,242	$	12,057	$	16,286	$	3,199

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Credit Quality Indicators

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

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

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

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

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

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

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

· The borrower has filed for bankruptcy protection.

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

· The guarantors have been called upon to make payments.

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

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

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

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

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

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

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

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The following tables present the Corporation’s loan portfolio aging analysis as of June 30, 2013 and December 31, 2012:

June 30, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans Receivable
	(Unaudited; In Thousands)
Construction / Land	$	7	$	85	$	49	$	141	$	26,014	$	338	$	26,493
1-4 family residential		772		602		2,303		3,677		139,628		1,440		144,745
Multi-family residential		-		-		-		-		17,343		485		17,828
Nonresidential and agricultural land		763		71		909		1,743		101,198		699		103,640
Commercial		85		32		470		587		20,262		4		20,853
Consumer		52		10		28		90		4,383		23		4,496
	$	1,679	$	800	$	3,759	$	6,238	$	308,828	$	2,989	$	318,055

December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans Receivable
	(In Thousands)
Construction / Land	$	63	$	-	$	556	$	619	$	25,586	$	301	$	26,506
1-4 family residential		1,347		768		1,408		3,523		132,459		1,420		137,402
Multi-family residential		-		-		-		-		19,537		451		19,988
Nonresidential and agricultural land		276		-		753		1,029		104,541		863		106,433
Commercial		100		-		251		351		19,160		38		19,549
Consumer		36		-		2		38		4,838		30		4,906
	$	1,822	$	768	$	2,970	$	5,560	$	306,121	$	3,103	$	314,784

At June 30, 2013 and December 31, 2012, there were no loans past due 90 days or more and accruing.

The following table presents the Corporation’s nonaccrual loans as of June 30, 2013 and December 31, 2012, which includes both non-performing troubled debt restructured and loans contractually delinquent 90 days or more.

	June 30, 2013			December 31, 2012
	(Unaudited)
	(In Thousands)
Construction / Land	$	4,492		$	4,798
One-to-four family residential		3,257			2,687
Multi-family residential		1,088			1,104
Nonresidential and agricultural land		2,419			1,678
Commercial		379			567
Consumer		28			16
Total nonaccrual loans	$	11,663		$	10,850
Nonaccrual loans as a percent of total loans		3.67	%		3.45	%

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

The following tables present information pertaining to the principal balances and specific valuation allocations for impaired loans, as of June 30, 2013 (unaudited; in thousands):

Impaired loans without a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction / Land	$	2,653	$	2,842	$	-
1-4 family residential		3,897		3,969		-
Multi-family residential		52		54		-
Nonresidential and agricultural land		3,213		3,740		-
Commercial		199		370		-
Consumer		11		11		-
	$	10,025	$	10,986	$	-

Impaired loans with a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction / Land	$	1,877	$	1,891	$	196
1-4 family residential		1,594		1,612		526
Multi-family residential		1,036		1,052		196
Nonresidential and agricultural land		914		914		97
Commercial		178		186		91
Consumer		-		-		-
	$	5,599	$	5,655	$	1,106

Total impaired loans:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction / Land	$	4,530	$	4,733	$	196
1-4 family residential		5,491		5,581		526
Multi-family residential		1,088		1,106		196
Nonresidential and agricultural land		4,127		4,654		97
Commercial		377		556		91
Consumer		11		11		-
	$	15,624	$	16,641	$	1,106

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The following is a summary by class of information related to the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2013 and 2012.

	Six Months Ended June 30, 2013				Six Months Ended June 30, 2012
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
	(Unaudited; In Thousands)
Construction / Land	$	4,597	$	72	$	4,604	$	1
1-4 family residential		4,770		90		4,825		52
Multi-family residential		1,090		13		2,534		50
Nonresidential and agricultural land		3,745		136		3,703		33
Commercial		480		20		456		17
Consumer		11		1		16		-
	$	14,693	$	332	$	16,138	$	153

	Three Months Ended June 30, 2013				Three Months Ended June 30, 2012
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
	(Unaudited; In Thousands)
Construction / Land	$	4,834	$	67	$	4,627	$	1
1-4 family residential		5,243		58		3,793		31
Multi-family residential		1,088		13		3,086		27
Nonresidential and agricultural land		4,726		120		3,741		15
Commercial		417		20		515		9
Consumer		11		-		15		-
	$	16,319	$	278	$	15,777	$	83

For the three and six months ended June 30, 2013, interest income recognized on a cash basis included above was $149,000 and $216,000, respectively. For the three and six months ended June 30, 2012, interest income recognized on a cash basis included above was immaterial.

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The following tables present information pertaining to the principal balances and specific valuation allocations for impaired loans, as of December 31, 2012:

Impaired loans without a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction / Land	$	2,870	$	3,379	$	-
1-4 family residential		3,562		3,612		-
Multi-family residential		53		54		-
Nonresidential and agricultural land		3,278		4,439		-
Commercial		386		418		-
Consumer		12		12		-
	$	10,161	$	11,914	$	-

Impaired loans with a specific allowance:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction / Land	$	1,882	$	1,882	$	195
1-4 family residential		955		957		310
Multi-family residential		1,051		1,061		196
Nonresidential and agricultural land		-		-		-
Commercial		179		186		93
Consumer		-		-		-
	$	4,067	$	4,086	$	794

Total impaired loans:	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Construction / Land	$	4,752	$	5,261	$	195
1-4 family residential		4,517		4,569		310
Multi-family residential		1,104		1,115		196
Nonresidential and agricultural land		3,278		4,439		-
Commercial		565		604		93
Consumer		12		12		-
	$	14,228	$	16,000	$	794

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Troubled Debt Restructurings

In the course of working with borrowers, the Corporation may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Corporation attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Corporation to identify if a troubled debt restructuring (“TDR”) has occurred. A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Corporation grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Corporation do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Corporation may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

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

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

The balance of nonaccrual restructured loans, which is included in total nonaccrual loans, was $8.1 million at June 30, 2013. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $4.0 million at June 30, 2013. Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter. All TDRs are considered impaired by the Corporation, unless it is determined that the borrower has met the six month satisfactory performance period under the modified terms. On at least a quarterly basis, the Corporation reviews all TDR loans to determine if the loan meets this criterion.

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

At June 30, 2013, the Corporation had a number of loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following:  an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

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The following tables present information regarding troubled debt restructurings by class for the three-month and six-month periods ended June 30, 2013 and June 30, 2012:

	For the Six-Month Period Ended  June 30, 2013						For the Six-Month Period Ended  June 30, 2012
	# of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance		# of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
	(Unaudited; Dollars In Thousands)
Construction / Land		3	$	103	$	272		-	$	-	$	-
One-to-four family residential		8		416		434		6		1,103		1,169
Multi-family residential		-		-		-		1		1,068		1,083
Nonresidential and agricultural land		2		935		935		1		40		40
Commercial		4		37		98		3		169		174
Consumer		-		-		-		-		-		-
		17	$	1,491	$	1,739		11	$	2,380	$	2,466

	For the Three-Month Period Ended  June 30, 2013						For the Three-Month Period Ended  June 30, 2012
	# of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance		# of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
	(Unaudited;DollarsInThousands)
Construction / Land		1	$	103	$	101		-	$	-	$	-
One-to-four family residential		2		176		190		2		63		71
Multi-family residential		-		-		-		-		-		-
Nonresidential and agricultural land		-		-		-		-		-		-
Commercial		-		-		-		1		104		104
Consumer		-		-		-		-		-		-
		3	$	279	$	291		3	$	167	$	175

35

The following tables present information regarding newly restructured troubled debt by type of modification as of June 30, 2013 and 2012.

June 30, 2013	Interest Only		Term		Combination		Total Modifications
Construction / Land	$	-	$	101	$	171	$	272
One-to-four family residential		-		204		230		434
Multi-family residential		-		-		-		-
Nonresidential and agricultural land		-		-		935		935
Commercial		-		-		98		98
Consumer		-		-		-		-
	$	-	$	305	$	1,434	$	1,739

June 30, 2012	Interest Only		Term		Combination		Total Modifications
Construction / Land	$	-	$	-	$	-	$	-
One-to-four family residential		-		529		559		1,088
Multi-family residential		-		1,075		-		1,075
Nonresidential and agricultural land		-		-		-		-
Commercial		-		-		135		135
Consumer		-		-		-		-
	$	-	$	1,604	$	694	$	2,298

One loan totaling $79,000, classified and reported as a troubled debt restructuring within the twelve months prior to June 30, 2013, defaulted during the six-month period ended June 30, 2013. The loan was reported as one-to-four family residential real estate. No loans classified as troubled debt restructuring during the twelve-month period prior to June 30, 2012 defaulted during the six months ended June 30, 2012. The Corporation defines default in this instance as being either past due 90 days or more at the end of the quarter or in the legal process of foreclosure.

Financial impact of these restructurings was immaterial to the financials of the Corporation at December 31, 2012.

NOTE 9: RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued ASU 2013-02 to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income.

The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that the ASU requires is already required to be disclosed elsewhere in the financial statements under U.S. Generally Accepted Accounting Principles (U.S. GAAP).

The new amendments will require an organization to: (i) Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income–but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and (ii) Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income

36

in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual).

The amendments were effective for reporting periods beginning after December 15, 2012, for public companies. The adoption of this ASU did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The Update clarifies the scope of transactions that are subject to the disclosures about offsetting.

The ASU clarifies that ordinary trade receivables and receivables are not in the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, Update 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement.

Issued in December 2011, Update 2011-11 was the result of a joint project with the International Accounting Standards Board. Its objective was to improve transparency and comparability between U.S. GAAP and International Financial Reporting Standards by requiring enhanced disclosures about financial instruments and derivative instruments that are either (1) offset on the statement of financial position or (2) subject to an enforceable master netting arrangement or similar agreement.

The Board undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users.

The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. Required disclosures should be provided retrospectively for all comparative periods presented. The adoption of this ASU did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2012-04, Technical Corrections and Improvements

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements. The amendments in this ASU make technical corrections, clarifications and limited-scope improvements to various Topics throughout the Codification.

This ASU is effective for public entities for fiscal periods beginning after December 15, 2012. Management does not anticipate the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2011-11, Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities

The eligibility criteria for offsetting are different in international financial reporting standards (IFRS) and U.S. generally accepted accounting principles (GAAP). Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRS, U.S. GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy.

To address these differences between IFRS and U.S. GAAP, in January 2011 the FASB and the IASB (the Boards) issued an exposure draft that proposed new criteria for netting, which were narrower than

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the current conditions in U.S. GAAP. Nevertheless, in response to feedback from their respective stakeholders, the Boards decided to retain their existing offsetting models. Instead, the Boards have issued common disclosure requirements related to offsetting arrangements to allow investors to better compare financial statements prepared in accordance with IFRS or U.S. GAAP.

The amendments to the FASB Accounting Standards Codification in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Coinciding with the release of ASU No. 2011-11, the IASB has issued Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). This amendment requires disclosures about the offsetting of financial assets and financial liabilities common to those in ASU No. 2011-11.

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. If applicable the Corporation will provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of this ASU did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

The amendments included in this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The application of fair value measurements are not changed as a result of this amendment. Some of the amendments provide clarification of existing fair value measurements requirements while other amendments change a particular principal or requirement for measuring fair value or disclosing information about fair value measurements. The amendments in this ASU are effective for annual periods beginning after December 31, 2012.

NOTE 10:  RECLASSIFICATIONS

Certain reclassifications have been made to the 2012 consolidated condensed financial statements to conform to the June 30, 2013 presentation.

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

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The Current Economic Environment. We continue to operate in a challenging and uncertain economic environment, including generally uncertain national conditions and local conditions in our markets. Overall economic growth continues to be slow and national and regional unemployment rates remain at elevated levels. The risks associated with our business become more acute in periods of a slow economic growth and high unemployment. Many financial institutions continue to be affected by an uncertain real estate market. While we continue to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

Our loan portfolio includes commercial real estate loans, residential mortgage loans, and construction and land development loans. Declines in real estate values, 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, the current level of low economic growth on a national scale, the occurrence of another national recession, or a deterioration in local economic conditions in our markets could drive losses beyond that which is provided for in our allowance for loan losses and result in the following other consequences: increases in loan delinquencies, problem assets and foreclosures 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. Over the last four and one-half years, Congress and the Treasury Department have adopted legislation and taken actions to address the disruptions in the financial system, declines in the housing market and the overall regulation of financial institutions and the financial system. See Part I, Item 1 – Regulation and Supervision – Dodd-Frank Act in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012 for a description of recent significant legislation and regulatory actions affecting the financial industry. The Dodd-Frank Act is expected to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The Corporation’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of the Corporation. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Corporation in particular, continues to be uncertain.

New Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The FDIC and the OCC have subsequently approved these final rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

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

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

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

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

Changes 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. Further increases in premium assessments are also possible and would increase the Corporation’s expenses. Effective with the June 2011 reporting period, the FDIC changed the assessment from a deposit-based assessment to an asset-based assessment, and reevaluated the base rate assessed to financial institutions. As a result of these changes, the Corporation experienced a decrease in premiums. Also, in the quarter ended June 30, 2013, the Corporation received a refund of unused prepaid assessment credits as the prepayment assessment credit program ended with the final credit application on the March 29, 2013 quarterly deposit insurance invoice. However, increased assessment rates and special assessments could have a material impact on the Corporation’s results of operations.

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

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Difficult Market Conditions Have Adversely Affected Our Industry. We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past five years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and securities and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have continued to observe tight lending standards, including with respect to other financial institutions, although there have been signs that lending is increasing. These market conditions have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence and increased market volatility. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Corporation and others in the financial institutions industry. In particular, the Corporation may face the following risks in connection with these events:

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

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

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

· 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.

In addition, the Federal Reserve Bank has been injecting vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve’s activities or capacity could reduce liquidity in the markets, thereby increasing funding costs to the Corporation or reducing the availability of funds to the Corporation to finance its existing operations.

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.

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

Critical Accounting Policies

Note 1 to the consolidated financial statements presented on pages 54 through 58 of the Annual Report on Form 10-K for the year ended December 31, 2012 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.

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

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measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral. The Corporation evaluates the collectibility of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

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

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

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

The Corporation’s primary market area for lending has been comprised of Clark, Floyd and Jefferson Counties in southeastern Indiana and portions of northeastern Kentucky adjacent to that market. With the 2012 acquisition, the Corporation’s market area will include Jackson and Jennings Counties in Indiana. 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 by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies or government-sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of review of the issuer’s financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. The Corporation ‘s consolidated statement of income would reflect the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For securities that management has no intent to sell, and it is not more likely than not that the Corporation will be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the noncredit loss would be recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. The Corporation did not record any other-than-temporary impairment during the three-month or six-month periods ended June 30, 2013.

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Acquired Impaired Loans

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

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

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

Financial Condition

At June 30, 2013, the Corporation’s consolidated assets totaled $475.7 million, an increase of $2.8 million, or 0.6%, from the December 31, 2012 total. The change was the result of a $12.5 million increase in investment securities available for sale period to period, an overall increase of 10.9% from $113.8 million at December 31, 2012 to $126.3 million as of June 30, 2013, offset by decreased loan levels. Lacking loan demand for funds generated by deposit growth, the Corporation placed excess funds in available-for-sale investments.

The difficult lending environment continued to challenge loan production for the Corporation as consumers many times switched lenders to take advantage of the competitive rate environment. Net loans, including loans held for sale at June 30, 2013, decreased $11.2 million, or 3.7%, from $305.9 million at December 31, 2012 to $294.7 million at June 30, 2013.  During the six-month period, $839,000 in non-performing loans moved from the portfolio into real estate held for sale. Sales of conventional mortgages into the secondary market remained strong. Proceeds from sales to the Federal Home Loan Mortgage Corporation (Freddie Mac) for the six months ended June 30, 2013 were $15.3 million. These sales compare to $15.2 million in sales for the six months ended June 30, 2012. Sales into the secondary market, primarily to Freddie Mac, are a significant source of noninterest income for the Corporation.

The Corporation’s consolidated allowance for loan losses totaled $4.0 million at June 30, 2013, an increase of 11.1% from the $3.6 million total at December 31, 2012. The increase was primarily due to the provision for loan losses. For the six-month period ended June 30, 2013, $636,000 was expensed and placed in the reserve as compared to $796,000 for the same period in 2012. Charge offs for the six-month period ended June 30, 2013 of $534,000 were partially offset by recoveries of $370,000. This compares to charge offs and recoveries for the six-month period ended June 30, 2012 of $1.4 million and $97,000, respectively.

The total allowance represented 1.35% of total loans as of June 30, 2013, as compared to 1.15% as of December 31, 2012. Specific valuation allowances established for problem loans totaled $1.1 million at June 30, 2013 as compared to $794,000 at December 31, 2012.

Loans past due 30 days or more as of June 30, 2013, excluding purchased credit-impaired loans, were $6.2 million, or 1.98% of total loans, as compared to $5.6 million, or 1.78%, at December 31, 2012.

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Non-performing loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status, excluding purchased credit-impaired loans) as of June 30, 2013 were $11.7 million, as compared to $10.9 million at December 31, 2012. Troubled debt restructured (TDR) loans that were less than 90 days past due included in total non-performing loans were $7.2 million as of June 30, 2013, as compared to $6.9 million as of December 31, 2012. Non-performing loans as a percent of gross loans were 3.67% and 3.45%, respectively, for those periods.

Although management believes that its allowance for loan losses at June 30, 2013 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation’s results of operations. Management is diligent in monitoring delinquent loans and in the analysis of the factors affecting the allowance.

Deposits totaled $388.6 million at June 30, 2013, an increase of $4.3 million, or 1.1%, from total deposits of $384.3 million at December 31, 2012. During the six-month period, noninterest-bearing deposit accounts increased by 13.4%, or $5.4 million, while interest-bearing deposits decreased 0.3%, or $1.1 million. The fluctuations were distributed across all deposit types, with the greatest increases being the increases in noninterest checking accounts of $5.6 million and savings accounts of $5.2 million. NOW accounts increased slightly, $3.0 million period to period. Money Market accounts and Vantage checking accounts increased slightly by $1.3 million and $747,000, respectively, period to period. The largest decrease, period to period, was in certificate of deposit accounts, which decreased $12.5 million. In the current rate environment, borrowers still appear to be trading minimal differences in interest rates for accessibility to their funds in selecting the transactional accounts over the non-transactional.

Borrowings by the Corporation remained constant period to period at $49.7 million as of December 31, 2012 and June 30, 2013.

Other liabilities totaled $3.4 million at June 30, 2013, an increase of $453,000 from the December 31, 2012 balance of $2.9 million, primarily due to changes in escrowed balances, accrued expenses, and increased tax liabilities.

Stockholders’ equity totaled $33.7 million at June 30, 2013, a decrease of $1.9 million, or 5.3%, from the $35.6 million at December 31, 2012. The decrease was primarily due to the fluctuation in unrealized gains on available-for-sale securities from an unrealized gain of $1.9 million at December 31, 2012 to an unrealized loss of $1.4 million at June 30, 2013. The fluctuation in unrealized gains/losses on available-for-sale securities was partially offset by net income of $2.2 million offset by dividends paid to common and preferred shareholders of $822,000. Dividends to common shareholders for the six-month period were $.42 per share.

The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At June 30, 2013, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

General

The Corporation’s net income for the six months ended June 30, 2013 totaled $2.2 million, an increase of $910,000, or 70.0%, from the net income of $1.3 million reported for the period ended June 30, 2012. The increase in net income for the 2013 period as compared to 2012 was attributable to a combination of factors. Net interest income increased $1.5 million, or 25.0%, from $6.0 million for the period ended June 30, 2012 to $7.5 million for the same period in 2013, a result of both changing interest rates and increased average balances. The increase in average balances year to year was primarily due to the acquisition of Dupont State Bank in November of 2012. Provision expense decreased $160,000 period to period, or 20.1%, from $796,000 for the six months ended June 30, 2012 to $636,000 for the six months ended June 30, 2013, as delinquency stabilized and charge off activity decreased. Other income increased $475,000, primarily the result of an increase in service fee income and a decline in losses on disposal of foreclosed real estate. These increases were offset with an increase in other expenses of $726,000, from $5.6 million for the period ended June 30, 2012 to $6.4 million as of June 30, 2013, primarily due to costs associated with the addition of the acquired branches and personnel.

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Net Interest Income

Total interest income for the six months ended June 30, 2013 increased $1.1 million, or 12.7%, from $8.6 million at June 30, 2012 to $9.7 million at June 30, 2013. The increase was due primarily to a combination of increased 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 $422,000, or 16.2%, from the $2.6 million reported for the six months ended June 30, 2012 to $2.2 million for the six months ended June 30, 2013. For the six months ended June 30, 2013, interest expense from deposits totaled $1.2 million, as compared to $1.4 million for the same period in 2012. The decrease was primarily attributable to interest expense on fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates, but also due somewhat to the changes in the composition of the deposit base mentioned above, as depositors moved from maturity and interest-bearing accounts to transactional and noninterest-bearing accounts. The cost of borrowings, $947,000 for the six-month period ending June 30, 2013 as compared to $1.2 million for the same period in 2012, decreased $228,000, or 19.4%, period to period, as a result of the decrease in the average balance of borrowings, $65.2 million for the six-month period ending June 30, 2012 as compared to $49.7 million for the same period in 2013.The average rate paid for borrowing from the Federal Home Loan Bank (FHLB) increased period to period, 3.55% for the 2012 period as compared to 3.83% in 2013.

Net interest income was $7.5 million for the six-month period ended June 30, 2013 compared to $6.0 million for the same period in 2012, an increase of $1.5 million, or 25.1%, period to period, as increases in interest income were supplemented by reduced interest expense period to period.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectability of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $636,000 provision for losses on loans for the six months ended June 30, 2013, $160,000 lower than the amount expensed for the same period in 2012. The decrease in the provision expense period to period was reflective of declining charge off trends and improvement in delinquency, with delinquency 30 days or more past due, as a percentage of gross loans, for the comparative periods at 2.10% as of June 30, 2013 versus 2.42% at the same point in 2012.

While management believes that the allowance for losses on loans is adequate at June 30, 2013, 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 $475,000, or 24.0%, during the six months ended June 30, 2013 to $2.5 million, as compared to the $2.0 million reported for the same period in 2012. The increase was due primarily to a decrease in losses on real estate held for sale, with $202,000 in losses for the six-month period ended June 30, 2013 compared to $394,000 for the same period in 2012. Service fees and charges increased to $1.3 million for the six-month period ended June 30, 2013 from $998,000 for the comparable period in 2012, an increase of $269,000. The increase in service fees and charges from period to period was primarily due to increased income from insufficient fund service charges, merchant services, and ATM-related fees and reflects the impact of the added customer base from the Dupont State Bank acquisition. Income from the sale of loans into the secondary market was constant, period to period. Gains on sales to the Federal Home Loan Mortgage Corporation (Freddie Mac) for the six months ending June 30, 2013 totaled $553,000, an increase of $44,000 over the $509,000 recorded for the same period ended June 30, 2012. Gains on the sale of available-for-sale investments decreased from $331,000 for the six-month period ended June 30, 2012 to $193,000 for the same period in 2013. Unlike interest income, “other income” is not always readily predictable and is subject to variations depending on outside influences.

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Other Expenses

Total other expenses increased period to period, with a net increase of $726,000, or 12.8%, from June 30, 2012 to June 30, 2013. The most significant financial statement changes were:

· Salaries and employee benefits, a 15.7% increase period to period, reflective of increased salary costs directly related to the acquisition of Dupont State Bank in the fourth quarter of 2012, and increases in group insurance and retirement plan costs.

· Increased occupancy and equipment expense of $241,000, from $710,000 for the period ended June 30, 2012 as compared to $951,000 for the same period in 2013, primarily due to the additional branches obtained in the acquisition of Dupont State Bank. These expenses include depreciation, property taxes, utilities, custodial services, repair and maintenance, and grounds care.

· Increases in business services, increased amortization on core deposit intangibles, and insurance, most of which relate to the acquisition of Dupont State Bank in the fourth quarter of 2012.

Notable decreases in other expenses for the period included a decrease in loan-related expenses relative to the improved delinquency and foreclosure trends, 2013 over 2012. During 2012, there were large payments made for property taxes and forced placed insurance on behalf of delinquent borrowers. These borrowers, and the associated debts, have since resulted in foreclosure and the properties have been moved into other real estate owned or sold. These expenses decreased $69,000 from $322,000 for the six-month period ended June 30, 2012 to $253,000 for the same period in 2013. In addition, acquisition expenses decreased $106,000, directly relative to the 2012 activity surrounding the acquisition of Dupont State Bank.

Income Taxes

Tax expense of $808,000 was recorded for the six-month period ended June 30, 2013 as compared to $293,000 for the comparable period in 2012. For the 2013 period, the Corporation had pre-tax income of $3.0 million as compared to $1.6 million for the 2012 period. The effective tax rate was 26.9% for the six-month period ended June 30, 2013 as compared to 18.5% for the same period in 2012. The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012

General

The Corporation’s net income for the three months ended June 30, 2013 totaled $1,188,000, an increase of $496,000, or 71.7%, from the net income of $692,000 reported for the period ended June 30, 2012. The increase in net income for the 2013 period as compared to 2012 was attributable to a combination of factors. Net interest income increased $885,000, or 29.5%, from $3.0 million for the period ended June 30, 2012 to $3.9 million for the same period in 2013, a result of both changing interest rates and increased average balances. The increase in average balances year to year was primarily due to the acquisition of Dupont State Bank in November of 2012. Provision expense decreased $4,000 period to period, or 1.2%, from $322,000 for the three months ended June 30, 2012 to $318,000 for the three months ended June 30, 2013, as delinquency percentages and charge off activity decreased. Other income increased $186,000, primarily the result of an increase in service fee income and a decline in losses on disposal of foreclosed real estate. These increases were partially offset with an increase in other expenses of $309,000, from $2.9 million for the period ended June 30, 2012 to $3.2 million as of June 30, 2013, primarily due to costs associated with the addition of the acquired branches and personnel.

Net Interest Income

Total interest income for the three months ended June 30, 2013 increased $683,000, or 16.2%, from $4.2 million at June 30, 2012 to $4.9 million at June 30, 2013. The increase was due primarily to a combination of increased 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 $202,000, or 15.5%, from the $1.3 million reported for the three months ended June 30, 2012 to $1.1 million for the three months ended June 30, 2013. For the three months ended June 30, 2013, interest expense from deposits totaled $591,000, as compared to $679,000

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for the same period in 2012. The decrease was primarily attributable to interest expense on fixed-maturity deposits, as repricing of these deposits was done at constantly lowering rates, but also due somewhat to the changes in the composition of the deposit base mentioned above, as depositors moved from maturity and interest-bearing accounts to transactional and noninterest-bearing accounts. The cost of borrowings decreased $114,000, period to period, as the result of the decrease in the average balance of borrowings, $65.2 million for the three-month period ending June 30, 2012 as compared to $49.7 million for the same period in 2013. The average rate paid for borrowing from the Federal Home Loan Bank (FHLB) was 3.55% for the 2012 period as compared to 3.83% in 2013.

Net interest income was $3.9 million for the three-month period ended June 30, 2013 compared to $3.0 million for the same period in 2012, an increase of $885,000, or 29.5%, period to period, as increases in interest income were supplemented by reduced interest expense period to period.

Provision for Losses on Loans

A provision for losses on loans is charged to income to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by the Corporation, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Corporation’s market area, and other factors related to the collectability of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $318,000 provision for losses on loans for the three months ended June 30, 2013, $4,000 lower than the amount expensed for the same period in 2012. The level of the provision expense period to period was reflective of  slight improvement in delinquency trends, with delinquency 30 days or more past due, as a percentage of gross loans, for the comparative periods at 2.10% as of June 30, 2013 versus 2.42% at the same point in 2012.

While management believes that the allowance for losses on loans is adequate at June 30, 2013, 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 $186,000, or 16.9%, during the three months ended June 30, 2013 to $1.3 million, as compared to the $1.1 million reported for the same period in 2012. The increase was due primarily to a decrease in losses on real estate held for sale, with $59,000 in losses for the three-month period ended June 30, 2013 compared to $102,000 for the same period in 2012. Service fees and charges increased to $673,000 for the three-month period ended June 30, 2013 from $501,000 for the comparable period in 2012, an increase of $172,000. The increase in service fees and charges from period to period was primarily due to increased income from insufficient fund service charges. The increase is primarily a result of the added customer base from the Dupont State Bank acquisition. Unlike interest income, “other income” is not always readily predictable and is subject to variations depending on outside influences.

Other Expenses

Total other expenses increased period to period, with a net increase of $309,000, or 10.7%, from June 30, 2012 to June 30, 2013. The most significant financial statement changes were:

· Salaries and employee benefits, a 17.2% increase period to period, reflective of increased salary costs directly related to the acquisition of Dupont State Bank in the fourth quarter of 2012, and increases in group insurance and retirement plan costs.

· Increased occupancy and equipment expense of $124,000, from $351,000 for the period ended June 30, 2012 as compared to $475,000 for the same period in 2013, primarily due to the additional branches obtained in the acquisition of Dupont State Bank. These expenses include depreciation, property taxes, utilities, custodial services, repair and maintenance, and grounds care.

Notable decreases in other expenses for the period included a decrease in acquisition-related expense, $72,000 period to period. Other expenses decreased $101,000 period to period, primarily a result of decreased regulatory fees from the Bank’s conversion to a state-chartered commercial bank.

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Income Taxes

Tax expense of $441,000 was recorded for the three-month period ended June 30, 2013 as compared to $171,000 for the comparable period in 2012. For the 2013 period, the Corporation had pre-tax income of $1.6 million as compared to $863,000 for the 2012 period. The effective tax rate was 27.1% for the three-month period ended June 30, 2013 as compared to 19.8% for the same period in 2012. The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance, partially offset by the effect of nondeductible expenses.

Other

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

Liquidity Resources

Historically, the Corporation has maintained its liquid assets at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Cash for these purposes is generated through loan sales and repayments, increases in deposits, and through the sale or maturity of investment securities. 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 June 30, 2013, the Bank had $42.5 million in such borrowings, with a $10.0 million overdraft line of credit immediately available. An additional $49.5 million in borrowing capacity, beyond the current fixed rate advances and line of credit was available, previously approved by the Bank’s board of directors. Based on collateral, an additional $59.9 million could be available, if the board of directors determines the need. The FHLB is the Bank’s primary source of wholesale funding. During the first half of 2011, the Bank entered into an agreement with Promontory Inter-financial Network to participate in the Certificate of Deposit Account Registry Service (CDARS) as a customer service product (reciprocal deposits) and as a supplemental source of wholesale liquidity using the CDARS one-way buy program. The Bank also has the ability to borrow from the Federal Reserve Bank Discount Window, an additional source of wholesale funding. At June 30, 2013, the Bank had commitments to fund loan originations of $20.1 million, unused home equity lines of credit of $23.7 million and unused commercial lines of credit of $21.5 million. Commitments to sell loans as of that date were $2.6 million. Generally, a significant portion of amounts available in lines of credit will not be drawn.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for Smaller Reporting Companies.

ITEM 4. CONTROLS AND PROCEDURES

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

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

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PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	XBRL Interactive Data Files, including the following materials from the Corporation’s Report on Form 10-Q for the quarter ended June 30, 2013: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, with detailed tagging of notes and financial statement schedules.*

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

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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: August 14, 2013	By:	/s/ Matthew P. Forrester
		Matthew P. Forrester
		President and Chief Executive Officer
Date: August 14, 2013	By:	/s/ Vickie L. Grimes
		Vickie L. Grimes
		Vice President of Finance

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EXHIBIT INDEX

No.	Description	Location
31(1)	CEO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
31(2)	CFO Certification required by 17 C.F.R. Section 240.13a-14(a)	Attached
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached
101	XBRL Interactive Data Files, including the following materials from the Corporation’s Report on Form 10-Q for the quarter ended June 30, 2013: (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Income; (iii) Consolidated Condensed Statements of Comprehensive Income; (iv) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, with detailed tagging of notes and financial statement schedules.*	Attached

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

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