[FRONT COVER]





                              RIVER VALLEY BANCORP
                                    and Subsidiary




                        ---------------------------
                        River Valley Financial Bank
                        ---------------------------




                                 1997 Annual Report




                                     [LOGO]




<PAGE>


                              River Valley Bancorp

P.O. Box 1590 * Madison, Indiana 47250-0590 * (812)273-4949 * Fax -(812)273-4944




To Our Shareholders:

It is my pleasure to present to you River Valley  Bancorp's second Annual Report
to Shareholders covering the year ending December 31, 1997.

Net earnings for 1997 totaled a record $1.3 million,  or $1.19 per share, easily
surpassing  the $73,000 of net earnings  recorded in 1996.  The increase in 1997
results of operations  were  primarily  the result of a $2.9  million,  or 116%,
increase  in net  interest  income and a  $556,000,  or 96%,  increase  in other
income. These increases generally reflect the addition of Citizens National Bank
of Madison on our profitability,  as well as the beneficial earnings impact from
the capital raised in our conversion offering.

Most of 1997 was spent developing a strategy to use the strengths of both of our
subsidiary  banks,  Citizens  National and Madison  First  Federal.  The initial
phases of this  process were  completed  on November  20,  1997,  when we merged
Citizens National and Madison First Federal and changed the combined banks' name
to  River  Valley  Financial  Bank.  The  new  name is  more  reflective  of the
broadening  financial  service  products we offer leading into the  twenty-first
century and our commitment to the communities that we serve.

During  the  year we also  initiated  our  capital  management  plans  with  the
declaration of our first dividends  totaling $0.13 per share.  Our  shareholders
also benefited  from the fact that the dividends paid in 1997 were  considered a
100% return of capital and thus no federal taxes were due upon their receipt.

The investment  community has clearly  recognized our position,  as the value of
our common shares has  increased by  approximately  90% since our  conversion to
stock  form.  It is very  unlikely  that this  stellar  stock  performance  will
continue in 1998, however,  your management and Board are optimistic as to River
Valley's continued success. Now that the conversion to one bank is behind us, we
plan, in 1998, to build upon the excellent  foundations  that Citizens  National
and Madison First Federal have provided.

We  extend a special  thanks to all of our  friends  and  shareholders  who have
supported us with their business and referrals.


Sincerely,



/s/ James E. Fritz
James E. Fritz
President



<PAGE>




                              River Valley Bancorp


                            BUSINESS OF RIVER VALLEY


River  Valley  Bancorp  ("River  Valley"  or  the  "Corporation"),   an  Indiana
corporation, was formed in 1996 for the primary purpose of purchasing all of the
issued and  outstanding  common stock of River Valley  Financial  Bank (formerly
Madison First Federal Savings and Loan  Association;  hereinafter  "River Valley
Financial"  or the "Bank") in its  conversion  from  mutual to stock  form.  The
conversion  offering was completed in December 1996,  with the sale of 1,190,250
common  shares at an initial  offering  price of $10.00 per share.  In  December
1996, the Corporation utilized  approximately $3.0 million of the net conversion
proceeds to purchase 95.6% of the outstanding common shares of Citizens National
Bank of Madison  ("Citizens") in a transaction  that was accounted for using the
purchase  method of accounting.  River Valley  Financial and Citizens  merged on
November 20, 1997. Future references to River Valley, River Valley Financial and
Citizens are utilized herein as the context requires.

The activities of River Valley have been limited  primarily to holding the stock
of the Bank.  River Valley Financial was organized in 1875 under the laws of the
United States of America.  River Valley Financial  conducts  operations from its
seven office  locations in Jefferson  County and offers a variety of deposit and
lending  services  to  consumer  and  commercial   customers  in  Jefferson  and
surrounding counties. The Corporation is subject to regulation,  supervision and
examination  by the  Office  of Thrift  Supervision  of the U.S.  Department  of
Treasury  (the  "OTS").   River  Valley  Financial  is  subject  to  regulation,
supervision  and   examination  by  the  OTS,  the  Federal  Deposit   Insurance
Corporation (the "FDIC") and the Indiana  Department of Financial  Institutions.
Deposits in River Valley  Financial are insured up to  applicable  limits by the
FDIC.


                 MARKET PRICE OF THE CORPORATION'S COMMON SHARES
                         AND RELATED SHAREHOLDER MATTERS

There were 1,190,250 common shares of River Valley Bancorp  outstanding at March
9, 1998, held of record by 445 shareholders. The number of shareholders does not
reflect  the  number of  persons  or  entities  who may hold stock in nominee or
"street name." Since December of 1996, the Corporation's common shares have been
listed on The NASDAQ SmallCap Market ("NASDAQ"), under the symbol "RIVR".

Presented  below are the high and low sale prices for the  Corporation's  common
shares,  as well as cash  distributions  paid thereon since December 1996.  Such
sales prices do not include retail financial markups,  markdowns or commissions.
Information relating to sales prices have been obtained from NASDAQ.



<PAGE>




                 MARKET PRICE OF THE CORPORATION'S COMMON SHARES

                   AND RELATED SHAREHOLDER MATTERS (CONTINUED)


Quarter Ended                High        Low        Cash Distributions (1)

1997
  December 31, 1997         $19.00      $16.25                 $0.05
  September 30, 1997        $17.25      $14.75                 $0.04
  June 30, 1997             $15.00      $13.63                 $0.04
  March 31, 1997            $15.50      $13.00                 $  -

1996
  December 31, 1996         $12.50      $10.00                 $  -

--------------
(1)  River  Valley  Financial  had filed a  request  with the  Internal  Revenue
     Service ("IRS") in 1995 to deconsolidate the Bank's  subsidiaries in future
     federal  income tax return  filings.  In  December  1997,  the  Corporation
     received a draft  closing  agreement and  information  request from the IRS
     that,  when  executed,  would  enable  the  Corporation  and  each  of  its
     subsidiaries  to  file  separate   returns.   On  February  27,  1998,  the
     Corporation  complied with such information request and expects to finalize
     the closing  agreement  with the IRS in May or June of 1998. By definition,
     the current year's cash  distributions  will be deemed a tax-free return of
     capital due to the Corporation's  filing of a separate income tax return in
     1997.

The high and low sales prices for River Valley's common shares between  December
31, 1997 and March 9, 1998 were $19.75 and $18.50, respectively.

Under OTS regulations applicable to converted savings associations, River Valley
Financial is not  permitted to pay a cash  dividend on its common  shares if the
regulatory  capital of River Valley  Financial would, as a result of the payment
of such  dividend,  be reduced  below the amount  required  for the  liquidation
account (which was  established  for the purpose of granting a limited  priority
claim on the  assets  of River  Valley  Financial,  in the  event of a  complete
liquidation,  to those members of River Valley  Financial  before the Conversion
who maintain a savings  account at River Valley  Financial after the Conversion)
or applicable regulatory capital requirements prescribed by the OTS.

OTS regulations  applicable to all savings  associations  provide that a savings
association  which  immediately  prior to, and on a pro forma basis after giving
effect to, a proposed  capital  distribution  (including  a dividend)  has total
capital (as  defined by OTS  regulations)  that is equal to or greater  than the
amount of its capital  requirements is generally  permitted without OTS approval
(but  subsequent  to  30  days'  prior  notice  to  the  OTS)  to  make  capital
distributions,  including dividends,  during a calendar year in an amount not to
exceed the greater of (1) 100% of its net  earnings to date during the  calendar
year,  plus an amount equal to one-half the amount by which its total capital to
assets ratio  exceeded its required  capital to assets ratio at the beginning of
the  calendar  year,  or  (2)  75% of its  net  earnings  for  the  most  recent
four-quarter  period.  Savings  associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal  supervision  will be subject to restrictions  on dividends.  A
savings  association that fails to meet current minimum capital  requirements is
prohibited from making any capital  distributions  without prior approval of the
OTS.  River  Valley  Financial  currently  meets all of its  regulatory  capital
requirements  and, unless the OTS determines  that River Valley  Financial is an
institution  requiring more than normal supervision,  River Valley Financial may
pay  dividends  in  accordance   with  the  foregoing   provisions  of  the  OTS
regulations.



<PAGE>




           SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA



The following tables set forth certain  information  concerning the consolidated
financial condition, earnings and other data regarding River Valley at the dates
and for the periods indicated.  All financial  information prior to 1996 relates
to River Valley Financial as a mutual savings association.

<TABLE>
<CAPTION>
Selected consolidated financial condition data:  (1)                               At December 31,
                                                                 1997        1996        1995        1994        1993
Total amount of:                                                                     (In thousands)
<S>                                                            <C>         <C>          <C>         <C>         <C>
  Assets                                                       $137,049    $145,541     $86,604     $87,072     $84,086
  Loans receivable - net                                        112,003     108,994      57,945      56,287      51,970
  Mortgage-backed and related securities                          8,978      12,846       9,917      11,328      13,925
  Cash and cash equivalents (2)                                   5,765       8,785       2,689       2,416       5,803
  Investment securities (3)                                       4,272       8,948      13,018      14,097       9,491
  FHLB advances                                                   2,000       1,100       4,471       4,986          -
  Deposits                                                      114,955     125,656      75,233      75,458      78,081
  Shareholders' equity- net (4)                                  17,989      16,805       6,574       6,304       5,668
</TABLE>

<TABLE>
<CAPTION>
Summary of consolidated earnings data: (1)                                         Year Ended December 31,
                                                                   1997        1996        1995        1994        1993
                                                                             (In thousands, except share data)

<S>                                                             <C>      <C>           <C>         <C>         <C>
Total interest income                                           $10,362  $    5,875    $  5,794    $  5,419    $  5,684
Total interest expense                                            5,049       3,412       3,594       2,854       3,042
                                                                -------   ---------     -------     -------     -------
     Net interest income                                          5,313       2,463       2,200       2,565       2,642
Provision for losses on loans                                       304          22         150          29          55
                                                               -------- -----------    --------   ---------   ---------
     Net interest income after provision for
       losses on loans                                            5,009       2,441       2,050       2,536       2,587
Other income:
  Insurance commissions                                              -          200         175         181         182
  Gain on sale of loans                                             127          -           -           -           -
  Service fees, charges and other operating income                  807         246         187         189         182
  Gain on sale of subsidiary                                         -          141          -           -           -
  Gain on sale of office premises and equipment                     206          -           -           -           -
  Loss on sale of investment, mortgage-backed
    and related securities                                           (6)          (9)        -           -           -
                                                             ---------- ------------    -------     -------     ------
     Total other income                                           1,134         578         362         370         364
General, administrative and other expense:
  Employee compensation and benefits                              2,165       1,203         998         888         869
  Data processing                                                   224         282         237         243         234
  Federal deposit insurance premiums                                 50         684         177         178         117
  Occupancy and equipment                                           527         284         212         193         212
  Other                                                           1,037         417         342         356         370
                                                              ---------  ----------    --------    --------    --------
     Total general, administrative and other expense              4,003       2,870       1,966       1,858       1,802
                                                              ---------   ---------     -------     -------     -------
Earnings before income tax expense and cumulative
  effect of change in accounting method                           2,140         149         446       1,048       1,149
Income tax expense                                                  830          76         188         412         456
Cumulative effect of change in method of
  accounting                                                         -           -           -           -           25
                                                              ---------   ---------     -------     -------   ---------
     Net earnings                                             $   1,310   $      73     $   258     $   636    $    718
                                                              =========   =========     =======     =======    ========

     Basic earnings per share (5)                             $    1.19         N/A         N/A         N/A         N/A
                                                              =========   =========     =======     =======    ========
     Diluted earnings per share (5)                           $    1.18         N/A         N/A         N/A         N/A
                                                              =========   =========     =======     =======    ========
</TABLE>
--------------
(1)  River Valley acquired Citizens as of December 20, 1996. The acquisition was
     accounted  for  using  the  purchase   method  of   accounting.   The  1997
     consolidated  financial  statements reflect the results of operations for a
     full year while the 1996 financial  statements  reflect only eleven days of
     activity with respect to Citizens.

(2)  Includes certificates of deposit in other financial institutions.

(3)  Includes investment securities designated as available for sale.

(4)  Consists  solely of retained  earnings at December 31, 1993  through  1995,
     inclusive.

(5)  Earnings per share for the years ended  December 31, 1996,  1995,  1994 and
     1993 are not applicable as River Valley converted to stock form in 1996.


<PAGE>




                 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND

                             OTHER DATA (CONTINUED)


<TABLE>
<CAPTION>
Selected financial ratios and other data:

                                                                         Year ended December 31,
                                                 1997            1996             1995           1994            1993

<S>                                                <C>            <C>               <C>             <C>            <C>
Interest rate spread during period                 3.64%          2.79%             2.36%           3.00%          3.24%
Net yield on interest-earnings assets (1)          4.00           2.98              2.61            3.15           3.32
Return on assets (2)                               0.99           0.08              0.30            0.74           0.86
Return on equity (3)                               7.53           1.05              4.01           10.62          13.52
Equity to assets (4)                              13.12          11.55               7.59           7.24           6.74
Average interest-earning assets to
  average interest-bearing liabilities           109.56         104.64            105.62          104.43         101.96
Non-performing assets to total assets (4)          0.58           0.56              0.01            0.01           0.01
Allowance for loan losses to total
  loans outstanding (4)                            1.03           0.97              0.70            0.45           0.44
Allowance for loan losses to
  non-performing loans (4)                       161.56         131.14          5,087.50        1,938.46       3,242.86
Net charge-offs to average total
  loans outstanding                                0.20           0.01              0.01            0.01           0.17
General, administrative and other expense
  to average assets (5) (6)                        2.83           3.33              2.26            2.20           2.15
Number of full service offices (4)                    6              6                 3               3              3
</TABLE>
--------------

(1)  Net interest income divided by average interest-earning assets.
(2)  Net earnings divided by average total assets.
(3)  Net earnings divided by average total equity.
(4)  At end of period.
(5)  General, administrative and other expense divided by average total assets.
(6)  Includes a $503,000  charge  (or .94% of  weighted-average  assets) in 1996
     related  to  the   Savings   Association   Insurance   Fund  (the   "SAIF")
     recapitalization assessment.



<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


General

As discussed  previously,  River Valley was incorporated for the primary purpose
of owning all of the outstanding shares of River Valley Financial.  As a result,
the  discussion  that  follows  focuses on River  Valley  Financial's  financial
condition and results of  operations  for the periods  presented.  The following
discussion  and analysis of the financial  condition as of December 31, 1997 and
River  Valley's  results of operations  for periods prior to that date should be
read in conjunction  with the  consolidated  financial  statements and the notes
thereto, included elsewhere in this Annual Report.

In  addition to the  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties. River Valley's operations and River Valley's actual results could
differ  significantly  from those discussed in the  forward-looking  statements.
Some of the  factors  that could cause or  contribute  to such  differences  are
discussed  herein  but also  include,  but are not  limited  to,  changes in the
economy and interest rates in the nation and River Valley's general market area.
The  forward-looking  statements  contained herein include those with respect to
the following matters:

     1.   Management's  determination  as to the amount and adequacy of the loan
          loss allowance;

     2.   The effect of changes in interest  rates on  financial  condition  and
          results of operations;

     3.   The effects of proposed  legislation  that would eliminate the federal
          thrift charter and the separate federal regulation of thrifts.

     4.   Management's   opinion   as  to  the   effect  of  recent   accounting
          pronouncements on River Valley's  consolidated  financial position and
          results of operations.

     5.   Management's  opinion  as to the  effect  of the  Year  2000 on  River
          Valley's information technology systems.

Discussion of Changes in Financial  Condition from December 31, 1996 to December
31, 1997

At December 31, 1997, River Valley's consolidated assets totaled $137.0 million,
representing  a decline of $8.5  million,  or 5.8%,  from the  December 31, 1996
total of $145.5 million. The reduction in asset size was primarily  attributable
to a $10.7 million, or 8.5%, decline in deposits,  which was partially offset by
a $900,000 increase in FHLB advances and  undistributed  period earnings of $1.2
million.

Liquid assets (i.e.,  cash,  federal funds sold,  interest-earning  deposits and
certificates of deposit) decreased by $3.0 million from December 31, 1996 levels
to a total of $5.8 million at December 31, 1997.  Investment  securities totaled
$4.3 million at December 31, 1997, a decrease of $4.7  million,  or 52.3%,  from
December 31, 1996 levels. During the year ended December 31, 1997, maturities of
investment securities totaled $2.0 million, while sales of investment securities
designated  as  available   for  sale  totaled  $2.7  million.   Mortgage-backed
securities  decreased by $3.9 million,  or 30.1%,  to a total of $9.0 million at
December 31, 1997,  primarily  due to principal  repayments  of $3.1 million and
sales of  mortgage-backed  securities  designated  as available for sale of $2.1
million,  partially offset by purchases of mortgage-backed  securities  totaling
$1.4 million.

The  decrease  in liquid  assets,  investments  and  mortgage-backed  securities
primarily  resulted  from  management's  deployment of these assets to fund loan
originations  and the sale of deposits in connection  with the  disposition of a
branch in Hanover, Indiana in February 1997.


<PAGE>

                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Discussion of Changes in Financial  Condition from December 31, 1996 to December
31, 1997 (continued)

Loans  receivable,  including  loans held for sale,  totaled  $112.0  million at
December 31, 1997, an increase of $3.0 million, or 2.8%, over the $109.0 million
total  at  December  31,  1996.  The  increase  resulted   primarily  from  loan
originations  during  1997 of $53.6  million,  which  were  partially  offset by
principal repayments of $43.2 million and sales of $6.9 million.

River Valley's  consolidated  allowance for loan losses totaled $1.2 million and
$1.1  million at December  31, 1997 and 1996,  respectively,  which  represented
1.03% and .97% of total loans at those dates.  Nonperforming  loans  (defined as
loans  delinquent  greater than 90 days and loans on nonaccrual  status) totaled
$718,000  and  $819,000  at  December  31,  1997  and  1996,  respectively.  The
consolidated   allowance   for  loan  losses   represented   162%  and  131%  of
nonperforming loans at December 31, 1997 and 1996, respectively.

Although  management believes that its allowance for loan losses at December 31,
1997 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.

Deposits  decreased by $10.7  million,  or 8.5%, to a total of $115.0 million at
December 31, 1997,  compared to the $125.7  million  total at December 31, 1996.
The decline can be  attributed  primarily  to $6.8  million of deposits  sold in
conjunction with the  aforementioned  sale of River Valley  Financial's  Hanover
branch,  and, to a lesser extent, the shift of consumer preference from deposits
to alternative investment products.

Advances  from the Federal  Home Loan Bank  totaled $2.0 million at December 31,
1997, an increase of $900,000, or 81.8%, over the $1.1 million total at December
31, 1996.  The increase was due to current  period  borrowings  of $7.0 million,
offset by repayments of $6.1 million.  The borrowings were primarily utilized to
fund growth in loans receivable.

Shareholders'  equity totaled $18.0 million at December 31, 1997, an increase of
$1.2 million,  or 7.0%,  over the $16.8 million total at December 31, 1996.  The
increase resulted primarily from undistributed  period earnings of $1.2 million.
River  Valley  Financial  is  required to maintain  minimum  regulatory  capital
pursuant to federal  regulations.  At December 31, 1997,  the Bank's  regulatory
capital exceeded all applicable regulatory capital requirements.


Comparison  of Results of Operations  for the Years Ended  December 31, 1997 and
1996

Increases in the level of income and expenses during the year ended December 31,
1997, as compared to 1996,  are primarily due to River  Valley's  acquisition of
Citizens,  which was  consummated  in December 1996. As stated  previously,  the
business  combination was accounted for using the purchase method of accounting,
which does not provide  for  restatement  of the  financial  statements  to give
effect to the  combination.  Accordingly,  the  statement  of  earnings  and the
statement of cash flows for the year ended December 31, 1996,  were not restated
for the acquisition.


<PAGE>

                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison  of Results of Operations  for the Years Ended  December 31, 1997 and
1996 (continued)

General

River Valley's net earnings for the year ended  December 31, 1997,  totaled $1.3
million,  an increase of $1.2 million over the $73,000 net earnings  reported in
the comparable  1996 period.  The increase in net earnings in the 1997 period is
primarily attributable to an increase in net interest income of $2.9 million and
an  increase  of $556,000 in other  income,  which were  partially  offset by an
increase  in the  provision  for losses on loans of  $282,000,  an  increase  in
general, administrative and other expense of $1.1 million and an increase in the
provision for federal income taxes of $754,000.

Net Interest Income

Total interest  income for the year ended  December 31, 1997,  amounted to $10.4
million, an increase of $4.5 million,  or 76.4%, over the 1996 year,  reflecting
the effects of growth in average  interest-earning  assets outstanding,  coupled
with  an  increase  in  yield   year-to-year.   Interest  income  on  loans  and
mortgage-backed  securities  totaled $9.8 million for 1997,  an increase of $4.6
million,  or 90.5%, over the 1996 year. The increase resulted primarily from the
$53.3  million,  or  77.2%,  increase  in  the  average  balance  of  loans  and
mortgage-backed  securities  outstanding  year-to-year,  coupled with a 56 basis
point increase in yield,  to 7.98% in 1997.  Interest  income on investments and
interest-earning  deposits decreased by $151,000, or 20.1%, due to a decrease in
the  average  balance  outstanding  of  $3.2  million,  partially  offset  by an
approximate 24 basis point increase in yield from the comparable 1996 period.

Interest expense on deposits increased by $1.6 million,  or 46.7%, to a total of
$4.9  million for the year ended  December 31,  1997,  due  primarily to a $41.2
million  increase in the  average  balance of  deposits  outstanding,  which was
partially  offset by an 18 basis point decline in the  weighted-average  cost of
deposits to 4.13% in 1997.  Interest expense on borrowings  totaled $135,000 for
the year ended December 31, 1997, an increase of $72,000,  or 114.3%, over 1996.
The  increase  resulted   primarily  from  an  increase  in  average  borrowings
outstanding year-to-year, coupled with an increase in average cost.

As a result of the foregoing  changes in interest  income and interest  expense,
net interest income increased during 1997 by $2.9 million,  or 115.7%,  compared
to 1996. The interest rate spread increased by approximately 85 basis points for
1997,  to 3.64% from 2.79% in the 1996  period,  while the net  interest  margin
amounted to approximately 4.00% in 1997 and 2.98% in 1996.

Provision for Losses on Loans

A  provision  for  losses on loans is  charged  to  earnings  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 River
Valley  Financial,  the  status of past due  principal  and  interest  payments,
general  economic  conditions,  particularly  as such  conditions  relate to the
primary market area, and other factors related to the collectibility of the loan
portfolio. As a



<PAGE>
                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison  of Results of Operations  for the Years Ended  December 31, 1997 and
1996 (continued)

Provision for Losses on Loans (continued)

result of such analysis,  management recorded a $304,000 provision for losses on
loans in 1997.  The  current  period  provision  generally  reflects  the higher
charge-off  experience  attendant to Citizens'  installment  loan portfolio,  as
compared to the primarily  residential  loan portfolio of River Valley Financial
prior to the  acquisition.  While  management  believes  that the  allowance for
losses on loans is adequate at December 31, 1997, based upon available facts and
circumstances,  there can be no assurance  that the loan loss  allowance will be
adequate to cover losses on nonperforming assets in the future.

Other Income

Other income  increased by $556,000,  or 96.2%,  for the year ended December 31,
1997,  as compared to 1996,  due  primarily to a $206,000 gain on sale of office
premises  and  equipment,  coupled  with a $561,000  increase  in service  fees,
charges and other operating  income and a $127,000 gain on sale of loans,  which
were  partially  offset  by  a  decline  of  $200,000,  or  100%,  in  insurance
commissions  year-to-year.  The gain on sale of office  premises  resulted  from
River  Valley  Financial's  sale  of the  Hanover  branch  facility,  which  was
consummated in accordance with the terms of regulatory  approval of the Citizens
acquisition.  The decline in insurance  commissions  year-to-year  resulted from
River Valley's sale of its insurance agency  subsidiary  during the last quarter
of 1996. The increase in the service fees,  charges and other  operating  income
primarily  reflects the beneficial  effects of Citizen's  operations on the 1997
year.

General, Administrative and Other Expense

General,  administrative and other expense increased by $1.1 million,  or 39.5%,
during 1997, compared to 1996. This increase resulted primarily from a $962,000,
or 80.0%,  increase in employee compensation and benefits, a $243,000, or 85.6%,
increase in occupancy and equipment expense and a $600,000, or 146.3%,  increase
in other operating expense, which were partially offset by a $634,000, or 92.7%,
decrease in federal deposit insurance  premiums.  As previously  discussed,  the
1997  consolidated  statements of  operations  include the accounts of Citizens,
while the 1996  statements  have not been restated to include the acquisition of
Citizens. The increase in general,  administrative and other expense during 1997
is primarily attributable to the Citizens'  acquisition,  offset somewhat by the
absence of the $503,000 SAIF recapitalization assessment recorded in 1996.

Income Taxes

The provision for income taxes increased by $754,000 for the year ended December
31, 1997, as compared to 1996. This increase resulted primarily from an increase
in net earnings  before tax of $2.0 million.  The effective tax rates were 38.8%
and 51.0% for the years ended December 31, 1997 and 1996, respectively.



<PAGE>

                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison  of Results of Operations  for the Years Ended  December 31, 1996 and
1995

General

The  Corporation's  net earnings for the year ended  December 31, 1996,  totaled
$73,000,  a decrease of  $185,000,  or 71.7%,  from the $258,000 in net earnings
recorded for the 1995 period.  The decrease  resulted  primarily from a $904,000
increase in  general,  administrative  and other  expense,  which was  partially
offset by a $263,000 increase in net interest income, a $128,000 decrease in the
provision  for  losses on loans,  a  $216,000  increase  in other  income  and a
$112,000 decrease in the provision for federal income taxes.

Net Interest Income

Total interest income for 1996 amounted to $5.9 million, an increase of $81,000,
or 1.4%,  over the $5.8 million  recorded in 1995.  Interest income on loans and
mortgage-backed  and related  securities  increased  by $215,000,  or 4.4%.  The
increase  resulted  primarily  from  a $1.1  million  increase  in  the  average
portfolio  outstanding,  coupled  with a 20 basis point  increase in the average
yield,  from  7.23%  in 1995 to 7.43% in 1996.  Interest  income  on  investment
securities and interest-bearing  deposits decreased by $134,000,  or 15.2%, to a
total of $750,000 in 1996.  The  decrease  was due  primarily  to a $2.9 million
decrease  in the  average  portfolio  balance  outstanding.  The  decline in the
average  portfolio  balance during the year reflected  management's  decision to
redeploy excess liquidity to partially fund loan originations, thereby obtaining
a more favorable yield.

Interest expense decreased during 1996 by $182,000,  or 5.1%, to a total of $3.4
million,  compared to the $3.6 million total recorded in 1995.  Interest expense
on deposits  decreased by $70,000,  or 2.0%, to a total of $3.3 million in 1996.
The  decrease  resulted  primarily  from a decrease in the average  rate paid on
deposits  of 13 basis  points,  from  4.44% in 1995 to 4.31% in 1996,  which was
partially  offset  by a  $727,000,  or  .9%,  increase  in the  average  balance
outstanding.  Interest expense on borrowings decreased by $112,000, or 64.0%, to
a total of $63,000 in 1996.  The  decrease  was due  primarily to a $1.7 million
decrease in the average  balance of  borrowings  outstanding,  coupled with a 74
basis point  decline in the average  rate paid on such  advances,  from 5.90% in
1995 to 5.16% in 1996.

As a result of the foregoing  changes in interest  income and interest  expense,
net interest income increased by approximately $263,000, or 12.0%, to a total of
$2.5 million for 1996. The net interest rate spread increased by 43 basis points
during  the year,  from 2.36% in 1995 to 2.79% in 1996,  while the net  interest
margin increased by 37 basis points, from 2.61% in 1995 to 2.98% in 1996.



<PAGE>
                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison  of Results of Operations  for the Years Ended  December 31, 1996 and
1995 (continued)

Provision for Losses on Loans

A  provision  for  losses on loans is  charged  to  earnings  to bring the total
allowance for loan losses to a level considered  appropriate by management based
on historical experience,  the volume and type of lending conducted by the Bank,
the  status  of past due  principal  and  interest  payments,  general  economic
conditions,  particularly as such conditions  relate to the primary market areas
and other factors  related to the  collectibility  of the loan  portfolio.  As a
result of such  analysis,  management  recorded a provision  for losses on loans
totaling $22,000 for 1996, a decrease of $128,000,  or 85.3%,  from the $150,000
total recorded in 1995.

Other Income

Other income totaled $578,000 for 1996, an increase of $216,000,  or 59.7%, over
the $362,000  total for 1995.  The increase  resulted  primarily from a $141,000
gain on sale of subsidiary,  a $25,000  increase in insurance  commissions and a
$59,000, or 31.6%, increase in service fees, charges and other operating income.
The gain on sale of subsidiary  resulted from River Valley  Financial's  sale of
its insurance agency subsidiary, McCauley Insurance Agency. The sale of McCauley
was required by the Federal Reserve Bank in connection with regulatory  approval
of the acquisition of Citizens.  The increase in other operating  income was due
primarily to increased service fees and charges on deposit accounts.

General, Administrative and Other Expense

General,  administrative  and other  expense  totaled $2.9 million for 1996,  an
increase of $904,000,  or 46.0%,  over the $2.0 million total  recorded in 1995.
The increase resulted primarily from a $507,000, or 286.4%,  increase in federal
deposit  insurance  premiums,  which  resulted from the  legislation  enacted to
recapitalize the SAIF, coupled with a $205,000,  or 20.5%,  increase in employee
compensation  and  benefits,  a $72,000,  or 34.0%,  increase in  occupancy  and
equipment,  a $45,000,  or 19.0%,  increase in data processing and a $75,000, or
22.4%, increase in other operating expense.

During 1996  legislation  was enacted to  recapitalize  the SAIF which  mandated
payment of a special one-time assessment for all savings associations, including
the Bank. The assessment was computed based upon the Bank's deposits as of March
31, 1995. The assessment rate was finalized at $.657 per every $100 of deposits,
which  resulted  in  a  pre-tax  charge  to  1996  consolidated   operations  of
approximately  $503,000.  The  legislation  reduced  federal  deposit  insurance
premiums from $.23 per $100 in deposits to $.065 per $100 in deposits, effective
January 1, 1997.



<PAGE>

                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison  of Results of Operations  for the Years Ended  December 31, 1996 and
1995 (continued)

General, Administrative and Other Expense (continued)

The increase in employee  compensation  and  benefits  resulted  primarily  from
normal merit increases and increased costs  associated with stock benefit plans.
The  increase  in  data  processing  resulted  primarily  from  increased  costs
associated with automated teller machine transaction processing. The increase in
other  operating  expense was  primarily  attributable  to an increase in office
supplies  as a result  of the  formation  of the  Corporation  and  nonrecurring
consulting fees which were partially offset by a reduction in advertising  costs
year to year.

Income Taxes

The provision for income taxes totaled $76,000 for 1996, a decrease of $112,000,
or 59.6%,  from the  $188,000  total  recorded in 1995.  The  decrease  resulted
primarily from the decrease in net earnings before taxes of $297,000,  or 66.6%.
The  Corporation's  effective tax rates were 51.0% and 42.2% for the years ended
December 31, 1996 and 1995, respectively.





<PAGE>


                  AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA

The following  table  presents  certain  information  relating to River Valley's
average   balance   sheet   information   and  reflects  the  average  yield  on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods  indicated.  Such  yields and costs are  derived by dividing  annual
income or expense by the average monthly balance of  interest-earning  assets or
interest-bearing  liabilities,  respectively,  for the years presented.  Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio.

<TABLE>
<CAPTION>
                                                                        1997                                  1996
                                                           Average   Interest                    Average   Interest
                                                       outstanding    earned/     Yield/     outstanding    earned/    Yield/
                                                           balance       paid     rate           balance       paid    rate
                                                                                                 (Dollars in thousands)
Interest-earning assets:
<S>                                                     <C>         <C>               <C>       <C>         <C>          <C>
  Interest-earning deposits and other                   $    5,351  $     322         6.02%     $  3,291    $   188      5.71%
  Investment securities (1)                                  5,043        277         5.49        10,295        562      5.46
  Mortgage-backed and related securities (1)                10,874        733         6.74         9,176        574      6.26
  Loans receivable, net (2)                                111,423      9,030         8.10        59,828      4,551      7.61
                                                           -------    -------     --------        ------      -----  --------

         Total interest-earning assets                    $132,691     10,362         7.81       $82,590      5,875      7.11
                                                           =======                                ======

Interest-bearing liabilities:
  Deposits                                                $118,872      4,914         4.13       $77,710      3,349      4.31
  FHLB advances                                              2,244        135         6.02         1,221         63      5.16
                                                         ---------   --------     --------       -------    -------  --------

         Total interest-bearing liabilities               $121,116      5,049         4.17       $78,931      3,412      4.32
                                                           =======    -------     --------        ======      -----  --------

Net interest income                                                  $  5,313                                $2,463
                                                                      =======                                 =====

Interest rate spread (3)                                                              3.64%                              2.79%
                                                                                  ========                           ========

Net yield on weighted average interest-earning
  assets (4)                                                                          4.00%                              2.98%
                                                                                  ========                           ========

Average interest-earning assets to average
  interest-bearing liabilities                                                    109.56%                            104.64%
                                                                                  ======                             ======
</TABLE>

<TABLE>
<CAPTION>
                                                                          1995
                                                              Average   Interest
                                                          outstanding    earned/    Yield/
                                                              balance       paid    rate

Interest-earning assets:
<S>                                                          <C>         <C>            <C>
  Interest-earning deposits and other                        $  2,610    $   107        4.10%
  Investment securities (1)                                    13,925        777        5.58
  Mortgage-backed and related securities (1)                   10,989        670        6.10
  Loans receivable, net (2)                                    56,916      4,240        7.45
                                                               ------      -----    --------

         Total interest-earning assets                        $84,440      5,794        6.86
                                                               ======

Interest-bearing liabilities:
  Deposits                                                    $76,983      3,419        4.44
  FHLB advances                                                 2,967        175        5.90
                                                              -------     ------    --------

         Total interest-bearing liabilities                   $79,950      3,594        4.50
                                                               ======      -----    --------

Net interest income                                                       $2,200
                                                                           =====

Interest rate spread (3)                                                                2.36%
                                                                                    ========

Net yield on weighted average interest-earning
  assets (4)                                                                            2.61%
                                                                                    ========

Average interest-earning assets to average
  interest-bearing liabilities                                                      105.62%
                                                                                    ======

</TABLE>
--------------

(1)  Includes securities  available for sale at amortized cost prior to SFAS No.
     115 adjustments.

(2)  Total loans less loans in process plus loans held for sale.

(3)  Interest rate spread is calculated by subtracting weighted average interest
     rate  cost  from  weighted  average  interest  rate  yield  for the  period
     indicated.

(4)  The net yield on weighted average  interest-earning assets is calculated by
     dividing net interest income by weighted  average  interest-earning  assets
     for the period indicated.



<PAGE>

                              River Valley Bancorp

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Rate/Volume Table

The following  table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected River
Valley's  interest  income  and  expense  during the years  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume  multiplied by prior year rate),  (ii) changes in rate (change in rate
multiplied  by prior year  volume),  and (iii) total changes in rate and volume.
The  combined  effects  of  changes in both  volume  and rate,  which  cannot be
separately identified,  have been allocated proportionately to the change due to
volume and the change due to rate:

<TABLE>
<CAPTION>
                                                                            Year ended December 31,
                                                             1997 vs. 1996                          1996 vs. 1995
                                                          Increase                             Increase
                                                         (decrease)                           (decrease)
                                                           due to                               due to
                                                     Volume       Rate      Total          Volume       Rate      Total
                                                                                 (In thousands)
Interest-earning assets:
<S>                                                 <C>          <C>      <C>               <C>        <C>        <C>
  Interest-earning deposits and other               $   123      $  11    $   134           $  30      $  51      $  81
  Investment securities                                (288)         3       (285)           (198)       (17)      (215)
  Mortgage-backed and related securities                112         47        159             (83)       (13)       (96)
  Loans receivable, net                               4,168        311      4,479             206        105        311
                                                      -----        ---      -----             ---        ---        ---
     Total                                            4,115        372      4,487             (45)       126         81

Interest-bearing liabilities:
  Deposits                                            1,699       (134)     1,565              30       (100)       (70)
  FHLB advances                                          60         12         72             (92)       (20)      (112)
                                                    -------       ----    -------            ----       ----        ---
     Total                                            1,759       (122)     1,637             (62)      (120)      (182)
                                                      -----        ---      -----            ----        ---        ---

Net change in interest income                        $2,356       $494     $2,850           $  17       $246       $263
                                                      =====        ===      =====            ====        ===        ===

</TABLE>



<PAGE>

                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Asset and Liability Management

Like other financial institutions, River Valley Financial is subject to interest
rate risk to the extent that  interest-earning  assets reprice  differently than
interest-bearing  liabilities.  As part of its  effort  to  monitor  and  manage
interest  rate risk,  River Valley  Financial is using the Net  Portfolio  Value
("NPV")  methodology  adopted  by the OTS as part  of its  capital  regulations.
Although  River Valley  Financial is not subject to the NPV  regulation  because
such regulation  does not apply to  institutions  with less than $300 million in
assets and  risk-based  capital  in excess of 12%,  the  application  of the NPV
methodology  can  illustrate  River Valley  Financial's  degree of interest rate
risk.

Presented below is an analysis of River Valley  Financial's  interest rate risk,
using the latest  information  available,  as  measured by changes in NPV for an
instantaneous  and  sustained  parallel  shift of 300  basis  points  in  market
interest rates.

As illustrated in the table,  River Valley  Financial's NPV is more sensitive to
rising  rates than  declining  rates.  Such  difference  in  sensitivity  occurs
principally  because, as rates rise, borrowers do not prepay fixed-rate loans as
quickly as they do when interest rates are declining.  As a result,  in a rising
interest rate  environment,  the amount of interest River Valley Financial would
receive on loans would  increase  relatively  slowly as loans are slowly prepaid
and new loans at higher  rates are made.  Moreover,  the  interest  River Valley
Financial  would pay on  deposits  would  increase  rapidly  because  the Bank's
deposits generally have shorter periods of repricing.


                                          September 30, 1997
Change in interest rate            $ Change              % Change
         (Basis Points)              in NPV                in NPV
                                      (Dollars in thousands)

            +300                    $(2,665)               (13.1)%
              -                          -                      -
            -300                     (1,571)                 (7.7)%



<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Asset and Liability Management (continued)

As with any method of measuring  interest rate risk,  certain  shortcomings  are
inherent  in  the  NPV  approach.  For  example,  although  certain  assets  and
liabilities may have similar maturities or periods of repricing,  they may react
in different  degrees to changes in market  interest  rates.  Also, the interest
rates on certain  types of assets and  liabilities  may  fluctuate in advance of
changes in market  interest  rates,  while interest rates on other types may lag
behind  changes in market rates.  Further,  in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed  securities and
early  withdrawal  levels from  certificates  of deposit  would  likely  deviate
significantly from those assumed in making the risk calculations.

If interest rates rise,  River  Valley's net interest  income will be negatively
affected.  Moreover,  rising interest rates may negatively affect River Valley's
earnings due to diminished loan demand.

Liquidity and Capital Resources

The   Corporation's   principal   sources  of  funds  are  deposits,   loan  and
mortgage-backed securities repayments,  maturities of securities, borrowings and
other funds provided by operations. While scheduled loan repayments and maturing
investments   are   relatively   predictable,   deposit   flows   and  loan  and
mortgage-backed  securities  prepayments  are more influenced by interest rates,
general  economic   conditions  and  competition.   The  Corporation   maintains
investments in liquid assets based upon management's  assessment of (1) the need
for funds,  (2) expected  deposit flows,  (3) the yield  available on short-term
liquid assets and (4) the objectives of the asset/liability management program.

OTS regulations  presently require River Valley Financial to maintain an average
daily  balance  of cash,  investments  in  United  States  Treasury  and  agency
securities  and other  investments  in an amount equal to 4% of the sum of River
Valley Financial's  average daily balance of net withdrawable  deposit accounts.
The liquidity requirement,  which may be changed from time to time by the OTS to
reflect  changing  economic  conditions,  is  intended  to  provide  a source of
relatively  liquid funds upon which River Valley Financial may rely if necessary
to fund deposit  withdrawals or other short-term  funding needs. At December 31,
1997,  River Valley  Financial's  regulatory  liquidity ratio was 19.9%. At such
date,  River Valley  Financial had  commitments to originate loans totaling $4.0
million and, in addition,  had undisbursed  loans in process and unused lines of
credit of $4.1  million.  At December  31,  1997,  River  Valley  Financial  had
$684,000 in commitments to sell loans and no outstanding commitments to purchase
loans. The Corporation  considers River Valley Financial's liquidity and capital
resources sufficient to meet outstanding short- and long-term needs. At December
31, 1997, the Corporation had no material commitments for capital expenditures.




<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Liquidity and Capital Resources (continued)

The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of the funds  provided  by or used in the  Corporation's  operating,
investing and financing  activities.  These  activities are summarized below for
the years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                     1997              1996             1995
                                                                  (In thousands)

<S>                                               <C>             <C>                <C>
Cash flows from operating activities              $ 2,211         $    (194)         $   459

Cash flows from investing activities:
  Investment maturities/sales                       4,698             5,653            1,101
  Mortgage-backed securities purchases             (1,350)             (729)              -
  Mortgage-backed securities repayments             3,072             2,110            1,417
  Net loan originations                            (3,859)             (458)          (1,892)
  Other                                             1,374             2,279              (22)

Cash flows from financing activities:
  Net decrease in deposits                        (10,701)           (6,222)            (224)
  Net increase (decrease) in borrowings               900            (6,371)            (515)
  Net proceeds from issuance of common stock           -             10,221               -
  Other                                              (162)                7               (1)
                                                  -------          --------          -------

Net increase (decrease) in cash and cash
  equivalents                                     $(3,817)         $  6,296          $   323
                                                  =======          ========          =======
</TABLE>

River Valley  Financial is required by  applicable  law and  regulation  to meet
certain minimum capital  standards.  Such capital  standards  include a tangible
capital  requirement,  a core  capital  requirement,  or leverage  ratio,  and a
risk-based capital requirement.

The tangible  capital  requirement  requires  savings  associations  to maintain
"tangible  capital" of not less than 1.5% of the  association's  adjusted  total
assets.  Tangible  capital is defined in OTS  regulations  as core capital minus
intangible assets.  "Core capital" is comprised of common  shareholders'  equity
(including  retained  earnings),   noncumulative  preferred  stock  and  related
surplus,    minority   interests   in   consolidated    subsidiaries,    certain
nonwithdrawable  accounts  and  pledged  deposits  of  mutual  association.  OTS
regulations require savings associations to maintain core capital of at least 3%
of the  association's  adjusted  total assets.  The OTS has proposed to increase
such  requirement  to 4% or 5%, except for those  associations  with the highest
examination rating and acceptable levels of risk.


<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Liquidity and Capital Resources (continued)

OTS regulations require that savings associations  maintain "risk-based capital"
in an amount not less than 8% of "risk-weighted  assets."  Risk-based capital is
defined as core capital plus certain  additional items of capital,  which in the
case of River Valley  Financial  includes a general loan loss  allowance of $1.1
million at December 31, 1997.

River Valley Financial  exceeded all of its regulatory  capital  requirements at
December 31, 1997.  The  following  table  summarizes  River Valley  Financial's
regulatory capital requirements and regulatory capital at December 31, 1997:

<TABLE>
<CAPTION>
                                 OTS Requirement                              Actual Amount
                         Percent of                        Percent of                              Amount
                             Assets         Amount             Assets  (1)       Amount         of Excess
                                                        (Dollars in thousands)

<S>                          <C>            <C>               <C>               <C>               <C>
Tangible capital             1.5%           $2,047            12.9%             $17,566           $15,519
Core capital (2)             3.0             4,095            12.9               17,566            13,471
Risk-based capital           8.0             6,944            20.8               18,703            11,759

</TABLE>
--------------

(1)  Tangible  and core  capital  levels are shown as a  percentage  of adjusted
     total  assets;  risk-based  capital  levels  are shown as a  percentage  of
     risk-weighted assets.

(2)  The OTS has proposed  and is expected to adopt a core  capital  requirement
     for savings associations comparable to that adopted by the OCC for national
     banks.  The  regulation,  as proposed,  would  require at least 3% of total
     adjusted  assets  for  savings   associations  that  received  the  highest
     supervisory  rating for safety  and  soundness,  and 4% to 5% for all other
     savings  associations.  The  final  form  of  such  new  OTS  core  capital
     requirement  may differ  from that which has been  proposed.  River  Valley
     Financial expects to be in compliance with such new requirements.

(3)  River  Valley  Financial's  risk-based  capital  includes  $1.1  million of
     general valuation allowances.


<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Effect of Recent Accounting Pronouncements

In June 1996,  the  Financial  Accounting  Standards  Board (the "FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
that provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities.  SFAS No. 125 introduces an
approach to accounting  for transfers of financial  assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial  interest in the assets,  retains  rights or  obligations,  makes use of
special  purpose  entities  in the  transaction,  or  otherwise  has  continuing
involvement with the transferred assets. The new accounting method,  referred to
as the financial components  approach,  provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values.  SFAS No. 125 provides  criteria for  determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer  does not qualify as a sale,  it is  accounted  for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements,  securitizations of financial
assets,  loan   participations,   factoring   arrangements,   and  transfers  of
receivables with recourse.

An entity that undertakes an obligation to service  financial assets  recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets,  and all the securitized  assets are retained and
classified  as  held-to-maturity).  A  servicing  asset  or  liability  that  is
purchased or assumed is initially recognized at its fair value. Servicing assets
and  liabilities are amortized in proportion to and over the period of estimated
net  servicing  income  or net  servicing  loss and are  subject  to  subsequent
assessments for impairment based on fair value.

SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor  either pays the creditor and is relieved of its  obligation  for the
liability or is legally released from being the primary obligor.

SFAS No. 125 is effective for  transfers  and servicing of financial  assets and
extinguishment  of liabilities  occurring  after December 31, 1997, and is to be
applied  prospectively.  Earlier or  retroactive  application  is not permitted.
Management adopted SFAS No. 125 effective January 1, 1998, as required,  without
material effect on River Valley's consolidated  financial position or results of
operations.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
SFAS No. 130  establishes  standards for reporting and display of  comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of general-purpose  financial  statements.  SFAS No. 130 requires that all items
that are required to be recognized under  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as other  financial  statements.  It does  not  require  a
specific  format for that  financial  statement  but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.





<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Effect of Recent Accounting Pronouncements (continued)

SFAS  No.  130  requires  that  an  enterprise   (a)  classify  items  of  other
comprehensive  income by their nature in a financial  statement  and (b) display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial  position.  SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.  Reclassification of financial statements for earlier periods
provided for comparative  purposes is required.  SFAS No. 130 is not expected to
have a material impact on the Corporation's consolidated financial statements.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information." SFAS No. 131 significantly changes the way
that public business  enterprises report information about operating segments in
annual financial  statements and requires that those enterprises report selected
information  about reportable  segments in interim  financial  reports issued to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management  approach" to disclose  financial and descriptive  information about
the way that management  organizes the segments within the enterprise for making
operating  decisions  and  assessing  performance.  For  many  enterprises,  the
management  approach  will likely  result in more segments  being  reported.  In
addition,  SFAS No. 131 requires  significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements  and also requires that selected  information  be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's consolidated financial statements.

Other Matters

As with all providers of financial  services,  the Bank's operations are heavily
dependent  on  information  technology  systems.  The  Bank  is  addressing  the
potential  problems  associated  with the  possibility  that the computers  that
control or operate the Bank's  information  technology system and infrastructure
may not be  programmed  to read  four-digit  date codes and, upon arrival of the
year 2000,  may  recognize  the  two-digit  code "00" as the year 1900,  causing
systems to fail to function or to generate  erroneous  data. The Bank is working
with the companies that supply or service its information  technology systems to
identify and remedy any year 2000 related problems.

As of the date of this Annual  Report,  the Bank has not identified any specific
expenses  that are  reasonably  likely to be incurred by the Bank in  connection
with this issue and does not expect to incur  significant  expense to  implement
the necessary  corrective  measures.  No assurance can be given,  however,  that
significant  expense will not be incurred in future  periods.  In the event that
the Bank is  ultimately  required  to  purchase  replacement  computer  systems,
programs and equipment,  or incur substantial expense to make the Bank's current
systems, programs and equipment year 2000 compliant, the Bank's net earnings and
financial condition could be adversely affected.





<PAGE>




                              River Valley Bancorp


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Other Matters (continued)

In addition to possible expense related to its own systems, the Bank could incur
losses if loan  payments  are delayed due to year 2000  problems  affecting  any
major  borrowers  in the Bank's  primary  market  area.  Because the Bank's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses  and the Bank's primary  market area is not  significantly  dependent
upon one  employer  or  industry,  the Bank does not expect any  significant  or
prolonged difficulties that will affect net earnings or cash flow.


Impact of Inflation and Changing Prices

The  consolidated  financial  statements and notes thereto  included herein have
been prepared in accordance with generally accepted accounting principles, which
require River Valley to measure financial  position and results of operations in
terms of historical dollars with the exception of investment and mortgage-backed
securities  available-for-sale,  which are carried at fair value. Changes in the
relative  value of  money  due to  inflation  or  recession  are  generally  not
considered.

In  management's  opinion,  changes  in  interest  rates  affect  the  financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation,  they do not change at the same rate or in the same magnitude
as the rate of inflation.  Rather,  interest rate volatility is based on changes
in the  expected  rate of  inflation,  as well as changes in monetary and fiscal
policies.


<PAGE>











                          PAGE LEFT BLANK INTENTIONALLY


<PAGE>

                          [GRANT THORNTON LETTERHEAD]

               Report of Independent Certified Public Accountants

Board of Directors
River Valley Bancorp

We have audited the accompanying  consolidated statements of financial condition
of River  Valley  Bancorp as of  December  31,  1997 and 1996,  and the  related
consolidated  statements of earnings,  shareholders'  equity, and cash flows for
each  of  the  three  years  in  the  period  ended  December  31,  1997.  These
consolidated  financial  statements are the  responsibility of the Corporation's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position of River Valley
Bancorp as of December 31, 1997 and 1996,  and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1997, in conformity with generally accepted accounting principles.






/s/ Grant Thornton LLP
Cincinnati, Ohio
March 12, 1998








<PAGE>




                              River Valley Bancorp


                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                  December 31,
                        (In thousands, except share data)


<TABLE>
<CAPTION>
         ASSETS                                                                              1997                1996

<S>                                                                                      <C>                 <C>
Cash and due from banks                                                                  $    3,542          $    4,209
Federal funds sold                                                                              300                  -
Interest-earning deposits in other financial institutions                                     1,026               4,476
                                                                                          ---------           ---------
         Cash and cash equivalents                                                            4,868               8,685

Certificates of deposit in other financial institutions                                         897                 100
Investment securities designated as available for sale - at market                              772               3,448
Investment securities - at amortized cost, approximate market value of
  $3,444 and $5,434 as of December 31, 1997 and 1996                                          3,500               5,500
Mortgage-backed and related securities designated as available
  for sale - at market                                                                        3,604               5,041
Mortgage-backed and related securities - at cost, approximate market
  value of $5,432 and $7,794 as of December 31, 1997 and 1996                                 5,374               7,805
Loans receivable - net                                                                      111,319             107,918
Loans held for sale - at lower of cost or market                                                684               1,076
Real estate acquired through foreclosure                                                         82                  -
Office premises and equipment - at depreciated cost                                           2,065               2,057
Federal Home Loan Bank stock - at cost                                                          943                 943
Federal Reserve Bank stock - at cost                                                             -                   80
Accrued interest receivable on loans                                                            916                 819
Accrued interest receivable on mortgage-backed and related securities                           117                  78
Accrued interest receivable on investments and interest-earning deposits                         65                 171
Goodwill - net of accumulated amortization                                                      245                 272
Cash surrender value of life insurance                                                          776                 747
Prepaid expenses and other assets                                                               141                 169
Prepaid federal income taxes                                                                     -                    4
Deferred tax asset                                                                              681                 628
                                                                                           --------            --------

         Total assets                                                                      $137,049            $145,541
                                                                                            =======             =======
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
         LIABILITIES AND SHAREHOLDERS' EQUITY                                                1997                1996

<S>                                                                                        <C>                 <C>
Deposits                                                                                   $114,955            $125,656
Advances from the Federal Home Loan Bank                                                      2,000               1,100
Advances by borrowers for taxes and insurance                                                    53                  70
Accrued interest payable                                                                        463                 279
Other liabilities                                                                             1,524               1,422
Dividends payable                                                                                60                  -
Minority interest in consolidated subsidiary                                                     -                  209
Accrued federal income taxes                                                                      5                  -
                                                                                       ------------           --------
         Total liabilities                                                                  119,060             128,736



Commitments                                                                                      -                   -



Shareholders' equity
  Preferred stock - 2,000,000 shares without par value
    authorized; no shares issued                                                                 -                   -
  Common stock - 5,000,000 shares without par value authorized;
    1,190,250 shares issued and outstanding                                                      -                   -
  Additional paid in capital                                                                 11,229              11,173
  Retained earnings - substantially restricted                                                7,797               6,635
  Shares acquired by stock benefit plans                                                     (1,005)               (952)
  Unrealized losses on securities designated as available for sale,
    net of related tax effects                                                                  (32)                (51)
                                                                                        -----------         -----------
         Total shareholders' equity                                                          17,989              16,805
                                                                                           --------            --------

         Total liabilities and shareholders' equity                                        $137,049            $145,541
                                                                                            =======             =======

</TABLE>



The accompanying notes are an integral part of these statements.



<PAGE>

                              River Valley Bancorp

                       CONSOLIDATED STATEMENTS OF EARNINGS

                             Year ended December 31,
                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                                                                    1997            1996           1995
Interest income
<S>                                                                               <C>               <C>            <C>
  Loans                                                                           $  9,030          $4,551         $4,240
  Mortgage-backed and related securities                                               733             574            670
  Investment securities                                                                277             562            777
  Interest-earning deposits and other                                                  322             188            107
                                                                                  --------          ------         ------
         Total interest income                                                      10,362           5,875          5,794

Interest expense
  Deposits                                                                           4,914           3,349          3,419
  Borrowings                                                                           135              63            175
                                                                                  --------         -------         ------
         Total interest expense                                                      5,049           3,412          3,594
                                                                                   -------           -----          -----

         Net interest income                                                         5,313           2,463          2,200

Provision for losses on loans                                                          304              22            150
                                                                                  --------         -------         ------

         Net interest income after provision for losses on loans                     5,009           2,441          2,050

Other income
  Insurance commissions                                                                 -              200            175
  Gain on sale of loans                                                                127              -              -
  Gain on sale of Hanover branch and related deposits                                  206              -              -
  Loss on sale of investment, mortgage-backed and related securities                    (6)             (9)            -
  Gain on sale of subsidiary                                                            -              141             -
  Service fees, charges and other operating                                            807             246            187
                                                                                  --------          ------         ------
         Total other income                                                          1,134             578            362

General, administrative and other expense
  Employee compensation and benefits                                                 2,165           1,203            998
  Occupancy and equipment                                                              527             284            212
  Federal deposit insurance premiums                                                    50             684            177
  Amortization of goodwill                                                              27               7              7
  Data processing                                                                      224             282            237
  Other operating                                                                    1,010             410            335
                                                                                   -------          ------         ------
         Total general, administrative and other expense                             4,003           2,870          1,966
                                                                                   -------           -----          -----

         Earnings before income taxes                                                2,140             149            446

Income taxes
  Current                                                                              893             124            245
  Deferred                                                                             (63)            (48)           (57)
                                                                                 ---------         -------        -------
         Total income taxes                                                            830              76            188
                                                                                  --------         -------         ------

         NET EARNINGS                                                             $  1,310        $     73        $   258
                                                                                   =======         =======         ======

         EARNINGS PER SHARE
           Basic                                                                     $1.19             N/A            N/A
                                                                                   =======         =======         ======

           Diluted                                                                   $1.18             N/A            N/A
                                                                                   =======         =======         ======
</TABLE>

The accompanying notes are an integral part of these statements.


<PAGE>


                              River Valley Bancorp

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  Years ended December 31, 1997, 1996 and 1995
                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                                                                              Unrealized
                                                                                 Shares   gains (losses)
                                                                               acquired    on securities
                                                                 Additional    by stock       designated
                                                      Common        paid-in     benefit     as available   Retained
                                                       stock        capital       plans         for sale   earnings       Total

<S>                                                     <C>        <C>          <C>                 <C>      <C>       <C>
Balance at January 1, 1995                              $ -        $     -      $    -              $ -      $6,304    $  6,304

Net earnings for the year ended December 31, 1995         -              -           -                -         258         258
Unrealized gains on securities designated as
  available for sale, net of related tax effects          -              -           -                12         -           12
                                                         ---        -------      ------            -----      -----   ---------

Balance at December 31, 1995                              -              -           -                12      6,562       6,574

Reorganization to common stock form and
  issuance of shares in connection therewith - net        -          11,173        (952)              -          -       10,221
Net earnings for the year ended December 31, 1996         -              -           -                -          73          73
Unrealized losses on securities designated as
  available for sale, net of related tax effects          -              -           -               (63)        -          (63)
                                                         ---        -------      ------            -----      -----   ---------

Balance at December 31, 1996                              -          11,173        (952)             (51)     6,635      16,805

Purchase of shares for stock benefit plans                -              -         (174)              -          -         (174)
Amortization expense related to stock benefit plans       -              56         121               -           7         184
Cash dividends of $0.13 per common share                  -              -           -                -        (155)       (155)
Net earnings for the year ended December 31, 1997         -              -           -                -       1,310       1,310
Unrealized gains on securities designated as
  available for sale, net of related tax effects          -              -           -                19         -           19
                                                         ---        -------      ------             ----      -----   ---------

Balance at December 31, 1997                            $ -         $11,229     $(1,005)           $ (32)    $7,797     $17,989
                                                         ===         ======      ======             ====      =====      ======

</TABLE>

The accompanying notes are an integral part of these statements.



<PAGE>


                              River Valley Bancorp
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         For the year ended December 31,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                    1997            1996           1995
<S>                                                                             <C>           <C>             <C>
Cash flows from operating activities:
  Net earnings for the year                                                     $  1,310      $       73      $     258
  Adjustments to reconcile net earnings to net cash provided
  by (used in) operating activities:
    Amortization (accretion) of premiums  and discounts on
      investments, mortgage-backed and related securities - net                        1               2             (9)
    Loss on sale of investment, mortgage-backed and related securities
      designated as available for sale                                                 6               9             -
    Gain on sale of Hanover branch and related deposits                             (206)             -              -
    Loans originated for sale in the secondary market                             (6,538)         (1,076)            -
    Proceeds from sale of loans in the secondary market                            6,996              -              -
    Gain on sale of loans in the secondary market                                    (66)             -              -
    Amortization of deferred loan origination costs                                   73              83             85
    Provision for losses on loans                                                    304              22            150
    Depreciation and amortization                                                    223              91             68
    Amortization of goodwill                                                          27               7              7
    Amortization expense of stock benefit plans                                      184              -              -
    Gain on sale of subsidiary                                                        -             (141)            -
    Increase  (decrease) in cash, net of acquisition of Citizens  National Bank,
      due to changes in:
      Accrued interest receivable on loans                                           (97)             29            (67)
      Accrued interest receivable on mortgage-backed and related securities          (39)             (1)             7
      Accrued interest receivable on investments and interest-earning deposits       106             100             (4)
      Prepaid expenses and other assets                                               28             262             (6)
      Accrued interest payable                                                       184             (41)             6
      Other liabilities                                                              (47)            413             26
      Income taxes
        Current                                                                        9              22             (5)
        Deferred                                                                     (63)            (48)           (57)
                                                                               ---------       ---------      ---------
         Net cash provided by (used in) operating activities                       2,395            (194)           459

Cash flows provided by (used in) investing activities:
  Proceeds from maturity of investment securities                                  2,000           3,500          1,000
  Proceeds from sale of investment securities designated as available for sale     2,698           2,153            101
  Purchase of mortgage-backed and related securities designated as available
    for sale                                                                      (1,350)           (729)            -
  Principal repayments on mortgage-backed and related securities                   3,072           2,110          1,417
  Proceeds from sale of mortgage-backed and related securities
    designated as available for sale                                               2,146              -              -
  Loan principal repayments                                                       43,220          17,114         13,708
  Loan disbursements                                                             (47,079)        (17,572)       (15,600)
  Additions to real estate acquired through foreclosure                               (1)             -              -
  Proceeds from sale of office premises and equipment                                405              -              -
  Purchase of office premises and equipment                                         (430)             (9)           (46)
  (Increase) decrease in certificates of deposit in
     other financial institutions - net                                             (797)            200             50
  Purchase of Federal Reserve Bank stock                                             (64)             -              -
  Proceeds from sale of Federal Reserve Bank stock                                   144              -              -
  Purchase of single premium life insurance                                           -             (188)            -
  Increase in cash surrender value of life insurance                                 (29)            (24)           (26)
  Proceeds from sale of subsidiary - net                                              -              282             -
  Acquisition of Citizens National Bank common stock - net                            -            2,018             -
                                                                                 -------         -------        ------
         Net cash provided by investing activities                                 3,935           8,855            604
                                                                                 -------         -------       --------

         Net cash provided by operating and investing
           activities (subtotal carried forward)                                   6,330           8,661          1,063
                                                                                 -------         -------        -------
</TABLE>

<PAGE>



                              River Valley Bancorp
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                             Year ended December 31,
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                          1997          1996          1995
<S>                                                                    <C>           <C>           <C>
         Net cash provided by operating and investing
           activities (subtotal brought forward)                       $  6,330      $  8,661      $  1,063

Cash flows provided by (used in) financing activities:
  Decrease in deposit accounts                                           (3,913)       (6,222)         (224)
  Decrease in deposit accounts due to the sale of a branch               (6,788)           --            --
  Proceeds from Federal Home Loan Bank advances                           7,000            --         2,000
  Repayment of Federal Home Loan Bank advances                           (6,100)       (6,371)       (2,515)
  Advances by borrowers for taxes and insurance                             (17)            7            (1)
  Proceeds from issuance of common stock                                     --        11,173            --
  Acquisition of common stock for stock benefit plans                      (174)         (952)           --
  Dividends on common stock                                                (155)           --            --
                                                                       --------      --------      --------
         Net cash used in financing activities                          (10,147)       (2,365)         (740)
                                                                       --------      --------      --------

Net increase (decrease) in cash and cash equivalents                     (3,817)        6,296           323

Cash and cash equivalents at beginning of year                            8,685         2,389         2,066
                                                                       --------      --------      --------

Cash and cash equivalents at end of year                               $  4,868      $  8,685      $  2,389
                                                                       ========      ========      ========


Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Federal income taxes                                               $    618      $     84      $    191
                                                                       ========      ========      ========

    Interest on deposits and borrowings                                $  4,865      $  3,201      $  3,588
                                                                       ========      ========      ========


Supplemental disclosure of noncash investing activities:
  Transfers from loans to real estate acquired through foreclosure     $     81      $     --      $     --
                                                                       ========      ========      ========

  Transfer of investment securities to an available for sale
    classification in accordance with SFAS No. 115                     $     --      $     --      $  5,000
                                                                       ========      ========      ========

  Unrealized gains (losses) on securities designated as available
    for sale, net of related tax effects                               $     19      $    (63)     $     12
                                                                       ========      ========      ========

  Recognition of mortgage servicing rights in accordance with
    SFAS No. 122                                                       $     61      $     --      $     --
                                                                       ========      ========      ========

  Liabilities assumed and cash paid in acquisition of
    Citizens National Bank                                             $     --      $ 64,055      $     --

  Less:  Fair value of assets received                                       --        63,783            --
                                                                       --------      --------      --------

  Amount assigned to goodwill                                          $     --      $    272      $     --
                                                                       ========      ========      ========
</TABLE>


The accompanying notes are an integral part of these statements.



<PAGE>




                              River Valley Bancorp


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    On March 5, 1996,  the Board of  Directors of River  Valley  Financial  Bank
    (formerly  Madison First Federal Savings and Loan  Association;  hereinafter
    "River  Valley  Financial"  or  the  "Bank")  adopted  an  overall  plan  of
    conversion and reorganization (the "Plan") whereby the Bank would convert to
    the stock form of  ownership,  followed by the issuance of all of the Bank's
    outstanding  stock to a newly formed holding  company,  River Valley Bancorp
    (the "Corporation").  Pursuant to the Plan, the Corporation offered for sale
    up to 1,190,250 common shares to certain  depositors of the Bank and members
    of the  community.  The  conversion  was completed on December 20, 1996, and
    resulted  in the  issuance of  1,190,250  common  shares of the  Corporation
    which,  after  consideration of offering and acquisition  expenses  totaling
    approximately  $730,000, and shares purchased by the ESOP totaling $952,000,
    resulted in net capital  proceeds of $10.2  million.  In December  1996, the
    Corporation  utilized  approximately  $3.0  million  of the  net  conversion
    proceeds to purchase  Citizens  National Bank of Madison  ("Citizens')  in a
    transaction  accounted  for using the  purchase  method  of  accounting.  On
    November 20, 1997,  Citizens and River Valley  Financial  merged.  Condensed
    financial statements of the Corporation are presented in Note L.

    The Corporation is a financial  institution holding company whose activities
    are primarily  limited to holding the stock of River Valley  Financial.  The
    Bank  conducts a general  banking  business in  southeastern  Indiana  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 Financial'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.

    The consolidated financial information presented herein has been prepared in
    accordance  with  generally  accepted  accounting  principles  ("GAAP")  and
    general  accounting  practices within the financial  services  industry.  In
    preparing  financial  statements  in  accordance  with GAAP,  management  is
    required to make estimates and assumptions  that affect the reported amounts
    of assets  and  liabilities  and the  disclosure  of  contingent  assets and
    liabilities  at the  date  of the  financial  statements  and  revenues  and
    expenses during the reporting period.  Actual results could differ from such
    estimates.

    The following is a summary of significant  accounting  policies which,  with
    the exception of the policy  described in Note A-3,  have been  consistently
    applied  in the  preparation  of  the  accompanying  consolidated  financial
    statements.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    1.  Principles of Consolidation

    The  consolidated   financial   statements   include  the  accounts  of  the
    Corporation and its subsidiary,  the Bank and its subsidiary,  Madison First
    Service Corporation ("First Service"). All significant intercompany balances
    and  transactions  have been  eliminated  in the  accompanying  consolidated
    financial statements.

    2.  Investment Securities and Mortgage-Backed and Related Securities

    The Corporation  accounts for investment  securities and mortgage-backed and
    related  securities in  accordance  with  Statement of Financial  Accounting
    Standards ("SFAS") No. 115,  "Accounting for Certain Investments in Debt and
    Equity Securities". SFAS No. 115 requires that investments be categorized as
    held-to-maturity,  trading, or available for sale.  Securities classified as
    held-to-maturity  are  carried  at  cost  only  if the  Corporation  has the
    positive  intent and ability to hold these  securities to maturity.  Trading
    securities  and  securities  available  for sale are carried at market value
    with  resulting  unrealized  gains  or  losses  recorded  to  operations  or
    shareholders'  equity,   respectively.   In  November  1995,  the  Financial
    Accounting  Standards  Board (the  "FASB")  issued a "Special  Report on the
    Implementation  of SFAS No. 115",  which permitted the  reclassification  of
    securities between  held-to-maturity  and available for sale without calling
    into question management's prior intent with respect to such securities. The
    Bank  transferred   approximately  $5.0  million  of  investment  securities
    previously   identified  as   held-to-maturity  to  an  available  for  sale
    classification.   At  December   31,  1997  and  1996,   the   Corporation's
    shareholders' equity included unrealized losses on securities  designated as
    available  for sale,  net of related tax  effects,  of $32,000 and  $51,000,
    respectively.  Realized  gains  and  losses  on the sale of  investment  and
    mortgage-backed  and related  securities are  recognized  using the specific
    identification method.

    3.  Loans Receivable

    Loans held in  portfolio  are stated at the  principal  amount  outstanding,
    adjusted  for  unamortized  yield   adjustments,   including  deferred  loan
    origination  costs  and  capitalized  mortgage  servicing  rights,  and  the
    allowance for loan losses.  The yield adjustments are amortized and accreted
    to  operations  using  the  interest  method  over the  average  life of the
    underlying loans.

    Interest is accrued as earned  unless the  collectibility  of the loan is in
    doubt.  Uncollectible  interest on loans that are contractually  past due is
    charged off, or an allowance is established  based on management's  periodic
    evaluation.  The  allowance is  established  by a charge to interest  income
    equal  to all  interest  previously  accrued,  and  income  is  subsequently
    recognized  only to the extent that cash  payments  are received  until,  in
    management's  judgment, the borrower's ability to make periodic interest and
    principal  payments  has  returned  to  normal,  in  which  case the loan is
    returned to accrual status.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    3.  Loans Receivable (continued)

    Loans  held for sale are  carried  at the lower of  acquisition  cost  (less
    principal payments received) or fair value (market value),  calculated on an
    aggregate  basis.  At December  31, 1997 and 1996,  loans held for sale were
    carried at cost, which approximated fair value.

    At December 31, 1997 and 1996,  the Bank was servicing  approximately  $28.6
    million and $26.5  million,  respectively,  of mortgage loans that have been
    sold to the Federal Home Loan Mortgage Corporation.

    The  Corporation  retains the servicing on loans sold and agrees to remit to
    the investor loan principal and interest at agreed-upon rates. In June 1994,
    the FASB issued SFAS No. 122,  "Accounting for Mortgage  Servicing  Rights,"
    which requires that the Corporation  recognize as separate assets, rights to
    service mortgage loans for others,  regardless of how those servicing rights
    are acquired. An institution that acquires mortgage servicing rights through
    either the purchase or  origination  of mortgage loans and sells those loans
    with servicing  rights retained would allocate some of the cost of the loans
    to the mortgage servicing rights.

    SFAS No. 122 requires that  securitizations  of mortgage  loans be accounted
    for  as  sales  of  mortgage  loans  and  acquisitions  of   mortgage-backed
    securities.  Additionally,  SFAS No. 122 requires that capitalized  mortgage
    servicing rights and capitalized  excess  servicing  receivables be assessed
    for impairment. Impairment is measured based on fair value.

    SFAS No. 122 was effective  for fiscal years  beginning  after  December 15,
    1995,  (January 1, 1996, as to the  Corporation) to transactions in which an
    entity acquires mortgage  servicing rights and to impairment  evaluations of
    all capitalized  mortgage  servicing rights and capitalized excess servicing
    receivables whenever acquired.  Retroactive application was prohibited,  and
    earlier  adoption  was  encouraged.  Management  adopted  SFAS No. 122 as of
    January 1, 1996,  without material effect on the Corporation's  consolidated
    financial condition or results of operations.

    The mortgage servicing rights recorded by the Bank, calculated in accordance
    with  the  provisions  of SFAS No.  122,  were  segregated  into  pools  for
    valuation purposes, using as pooling criteria the loan term and coupon rate.
    Once pooled,  each grouping of loans was evaluated on a discounted  earnings
    basis to determine  the present  value of future  earnings  that a purchaser
    could expect to realize from each portfolio.  Earnings were projected from a
    variety of sources including loan servicing fees,  interest earned on float,
    net interest earned on escrows,  miscellaneous  income, and costs to service
    the loans.  The present value of future earnings is the "economic" value for
    the pool,  i.e.,  the net  realizable  present  value to an  acquirer of the
    acquired servicing.

    The Bank recorded amortization related to mortgage servicing rights totaling
    approximately  $18,000 for the year ended December 31, 1997. At December 31,
    1997 and 1996, the fair value of the Corporation's mortgage servicing rights
    totaled approximately $113,000 and $72,000, respectively.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    4.  Loan Origination Fees and Costs

    The Corporation  accounts for loan  origination fees and costs in accordance
    with SFAS No. 91,  "Accounting for  Nonrefundable  Fees and Costs Associated
    with  Originating  or Acquiring  Loans and Initial  Direct Costs of Leases".
    Pursuant to the  provisions of SFAS No. 91, all  origination  fees received,
    net of certain  direct  origination  costs,  are deferred on a  loan-by-loan
    basis and  amortized to interest  income using the interest  method,  giving
    effect to  actual  loan  prepayments.  Additionally,  SFAS No. 91  generally
    limits  the  definition  of  loan  origination  costs  to the  direct  costs
    attributable  to  originating a loan,  i.e.,  principally  actual  personnel
    costs.

    Fees received for loan commitments that are expected to be drawn upon, based
    on the Corporation's  experience with similar commitments,  are deferred and
    amortized over the life of the related loan using the interest method.  Fees
    for  other  loan  commitments  are  deferred  and  amortized  over  the loan
    commitment period on a straight-line basis.

    5.  Allowance for Losses on Loans

    It is the Corporation's policy to provide valuation allowances for estimated
    losses  on loans  based on past  loss  experience,  trends  in the  level of
    delinquent  and  specific  problem  loans,  loan  concentrations  to  single
    borrowers,  changes  in the  composition  of  the  loan  portfolio,  adverse
    situations  that may affect the borrower's  ability to repay,  the estimated
    value of any  underlying  collateral  and current and  anticipated  economic
    conditions  in its primary  lending  areas.  When the  collection  of a loan
    becomes doubtful, or otherwise troubled, the Corporation records a loan loss
    provision  equal to the  difference  between the fair value of the  property
    securing the loan and the loan's  carrying  value.  Such  provision is based
    upon management's  estimate of the fair value of the underlying  collateral,
    taking  into  consideration  the current and  currently  anticipated  future
    operating or sales conditions.  As a result, such estimates are particularly
    susceptible to changes that could result in a material adjustment to results
    of operations in the near term.

    The Corporation accounts for impaired loans in accordance with SFAS No. 114,
    "Accounting  by Creditors for  Impairment of a Loan".  SFAS No. 114 requires
    that  impaired  loans be measured  based upon the present  value of expected
    future cash flows discounted at the loan's effective interest rate or, as an
    alternative,  at the  loans  observable  market  price or fair  value of the
    collateral.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    5.  Allowance for Losses on Loans (continued)

    Under SFAS No.  114, a loan is defined as  impaired  when,  based on current
    information  and events,  it is probable  that a creditor  will be unable to
    collect all  amounts  due  according  to the  contractual  terms of the loan
    agreement.  In applying  the  provisions  of SFAS No. 114,  the  Corporation
    considers  its  investment  in  one-to-four  family  residential  loans  and
    consumer  installment  loans to be homogeneous  and therefore  excluded from
    separate  identification  for evaluation of impairment.  With respect to the
    Corporation's  investment in  nonresidential,  commercial,  and  multifamily
    residential  real estate loans,  and its  evaluation of impairment  thereof,
    such loans are generally  collateral dependent and, as a result, are carried
    as a practical expedient at the lower of cost or fair value.

    It is generally the  Corporation's  policy to charge off  unsecured  credits
    that are more than ninety days delinquent.  Similarly,  collateral dependent
    loans  which  are  more  than  ninety  days  delinquent  are  considered  to
    constitute  more than a minimum  delay in repayment  and are  evaluated  for
    impairment under SFAS No. 114 at that time.

    At December 31, 1997 and 1996,  the  Corporation  had no loans that would be
    defined as impaired under SFAS No. 114.

    6.  Real Estate Acquired through Foreclosure

    Real  estate  acquired  through  foreclosure  is carried at the lower of the
    loan's unpaid principal  balance (cost) or fair value less estimated selling
    expenses  at the  date of  acquisition.  Real  estate  loss  provisions  are
    recorded if the property's fair value subsequently  declines below the value
    determined at the recording  date. In determining  the lower of cost or fair
    value at  acquisition,  costs  relating to  development  and  improvement of
    property are  considered.  Costs  relating to holding  real estate  acquired
    through  foreclosure,  net of rental income, are charged against earnings as
    incurred.

    7.  Office Premises and Equipment

    Depreciation  of  office  premises  and  equipment  is  computed  using  the
    straight-line  method  over  the  estimated  useful  lives  of  the  assets,
    estimated to be thirty to forty-five years for buildings, three to ten years
    for furniture and equipment, and three years for automobiles.

    8.  Amortization of Goodwill

    Amortization  of goodwill  arising  from the  Corporation's  acquisition  of
    Citizens is provided using the  straight-line  method over an estimated life
    of ten years.

    Management  periodically  evaluates the carrying  value of these  intangible
    assets in  relation to the  continuing  earnings  capacity  of the  acquired
    assets and assumed liabilities.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    8.  Amortization of Goodwill (continued)

    In March 1995, the FASB issued SFAS No. 121,  "Accounting for the Impairment
    of Long-Lived  Assets and for Long-Lived Assets to be Disposed Of." SFAS No.
    121  provides  guidance on when to recognize  and how to measure  impairment
    losses of long-lived assets and certain identifiable  intangibles and how to
    value long-lived assets to be disposed of. The Corporation  adopted SFAS No.
    121  effective  January 1, 1996,  as required,  without  material  effect on
    consolidated financial condition or results of operations.

    9.  Income Taxes

    The  Corporation  accounts  for  income  taxes  pursuant  to SFAS  No.  109,
    "Accounting for Income Taxes". Pursuant to the provisions of SFAS No. 109, a
    deferred  tax  liability  or deferred  tax asset is computed by applying the
    current  statutory  tax  rates  to  net  taxable  or  deductible   temporary
    differences  between the tax basis of an asset or liability and its reported
    amount in the  consolidated  financial  statements  that will  result in net
    taxable or  deductible  amounts in future  periods.  Deferred tax assets are
    recorded  only to the  extent  that the amount of net  deductible  temporary
    differences  or  carryforward  attributes  may be utilized  against  current
    period earnings,  carried back against prior years' earnings, offset against
    taxable temporary  differences  reversing in future periods,  or utilized to
    the extent of management's  estimate of future taxable  income.  A valuation
    allowance  is provided  for deferred tax assets to the extent that the value
    of net deductible temporary differences and carryforward  attributes exceeds
    management's  estimates of taxes payable on future taxable income.  Deferred
    tax   liabilities  are  provided  on  the  total  amount  of  net  temporary
    differences taxable in the future.

    The Corporation's  principal temporary  differences between pretax financial
    income  and  taxable  income  result  primarily  from  different  methods of
    accounting for deferred loan origination  costs, the allowance for valuation
    decline on mortgage-related securities, the general loan loss allowance, the
    percentage  of  earnings  bad  debt  deduction  and  certain  components  of
    retirement   expense.   A  temporary   difference  is  also  recognized  for
    depreciation  expense computed using accelerated  methods for federal income
    tax purposes.

    10.  Retirement and Incentive Plans

    Qualified  employees of Madison First Federal are covered by noncontributory
    retirement  plans.  There  were no  unfunded  past  service  liabilities  at
    December 31, 1997 and 1996. First Service has no qualified employees.

    Employees  of Madison  First  Federal  are  covered by the  Pentegra  Group,
    previously the Financial Institutions Retirement Fund (the "Fund"), which is
    a  defined  benefit  pension  plan to which  contributions  are made for the
    benefit of the employees.  Contributions  are determined to cover the normal
    cost of pension benefits,  the one-year cost of the pre-retirement death and
    disability   benefits  and  the   amortization   of  any  unfunded   accrued
    liabilities.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    10.  Retirement and Incentive Plans (continued)

    The Fund had  previously  advised the Bank that the  pension  plan meets the
    criteria  of a  multi-employer  pension  plan as  defined  in SFAS  No.  87,
    "Employers'  Accounting for Pensions".  In accordance  with SFAS No. 87, net
    pension cost is recognized for any required  contribution  for the period. A
    liability is recognized for any contributions due and unpaid. Because of the
    continuing  overfunded status of the Fund, no contributions were made to the
    pension plan during the years ended  December 31, 1997,  1996 and 1995.  The
    provision for pension expense was computed by the Fund's actuaries utilizing
    the  projected  unit credit  cost method and  assuming a 7.5% return on Fund
    assets.

    In   addition  to   providing   Madison   First   Federal   employees   with
    noncontributory  retirement  plans,  the Bank has a supplemental  retirement
    plan,  which  provides  retirement  benefits  to all  directors.  The Bank's
    obligations under the plan have been funded via the purchase of key man life
    insurance  policies,  of  which  the Bank is the  beneficiary.  Costs of the
    purchase of the single premium life insurance policies amounted to $668,000.
    Expense under the supplemental  retirement plan totaled approximately $3,000
    for each of the years ended December 31, 1997, 1996 and 1995.

    In  conjunction  with its  reorganization  to stock  form,  the  Corporation
    implemented  an Employee Stock  Ownership  Plan ("ESOP").  The ESOP provides
    retirement  benefits for  substantially all employees who have completed one
    year of service and have  attained the age of 21. The  Corporation  accounts
    for  the  ESOP  in  accordance   with  Statement  of  Position  (SOP)  93-6,
    "Employers'  Accounting  for  Employee  Stock  Ownership  Plans."  SOP  93-6
    requires the measure of compensation  expense recorded by employers to equal
    the fair value of ESOP shares  allocated  to  participants  during the year.
    Expense  recognized related to the ESOP totaled  approximately  $200,000 and
    $65,000 for the years ended December 31, 1997 and 1996, respectively.

    During 1997, the Corporation implemented a contributory 401(k) plan covering
    all employees who have attained the age of 21 and have completed one year of
    service. Contributions to the plan are voluntary and are subject to matching
    by the employer.  The Bank's contributions to the plan totaled approximately
    $48,000 for the year ended December 31, 1997.

    11.  Earnings Per Share

    Basic earnings per share is computed based upon the weighted-average  shares
    outstanding during the period,  less shares in the ESOP that are unallocated
    and  not   committed  to  be  released.   Weighted-average   common   shares
    outstanding,  which gives effect to 95,220 unallocated ESOP shares,  totaled
    1,095,030 for the year ended December 31, 1997.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    11.  Earnings Per Share (continued)

    Diluted  earnings  per share is computed  taking into  consideration  common
    shares  outstanding and dilutive  potential common shares to be issued under
    the Corporation's stock option plan.  Weighted-average  common shares deemed
    outstanding  for purposes of computing  diluted  earnings per share  totaled
    1,106,858  for  the  year  ended  December  31,  1997.   There  were  11,828
    incremental shares related to the assumed exercise of stock options included
    in the computation of diluted earnings per share for the year ended December
    31, 1997.

    The  provisions of SFAS No. 128,  "Earnings Per Share," were not  applicable
    for the years ended December 31, 1996 and 1995, as the Corporation completed
    its conversion to stock form in December 1996.

    12.  Cash and Cash Equivalents

    For purposes of reporting  cash flows,  cash and cash  equivalents  includes
    cash and due from banks and  interest-earning  deposits  in other  financial
    institutions with original maturities of less than ninety days.

    13.  Reclassifications

    Certain  prior year  amounts have been  reclassified  to conform to the 1997
    consolidated financial statement presentation.

    14.  Fair Value of Financial Instruments

    SFAS No.  107,  "Disclosures  About  Fair Value of  Financial  Instruments",
    requires disclosure of the fair value of financial instruments,  both assets
    and liabilities  whether or not recognized in the consolidated  statement of
    financial condition,  for which it is practicable to estimate that value. In
    cases where quoted market prices are not available, fair values are based on
    estimates  using  present  value  or  other  valuation   techniques.   Those
    techniques are significantly affected by the assumptions used, including the
    discount  rate and  estimates  of future cash  flows.  In that  regard,  the
    derived  fair value  estimates  cannot be  substantiated  by  comparison  to
    independent  markets and, in many cases,  could not be realized in immediate
    settlement  of the  instrument.  SFAS No.  107  excludes  certain  financial
    instruments   and  all   non-financial   instruments   from  the  disclosure
    requirements. Accordingly, the aggregate fair value amounts presented do not
    represent the underlying value of the Corporation.

    The  following  methods  and  assumptions  were used by the  Corporation  in
    estimating its fair value disclosures for financial instruments.  The use of
    different market  assumptions  and/or  estimation  methodologies  may have a
    material effect on the estimated fair value amounts.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    14.  Fair Value of Financial Instruments (continued)


        Cash and cash equivalents and certificates of deposit in other financial
        institutions:   The  carrying  amounts  presented  in  the  consolidated
        statements  of financial  condition  for cash and cash  equivalents  and
        certificates  of deposit in other financial  institutions  are deemed to
        approximate fair value.

        Investment and mortgage-backed  and related securities:  Fair values for
        investment  and  mortgage-backed  and  related  securities  are based on
        quoted market prices and dealer quotes.

        Loans receivable: The loan portfolio has been segregated into categories
        with similar  characteristics,  such as one-to-four family  residential,
        multi-family   residential  and   nonresidential   real  estate.   These
        categories were further  delineated into fixed-rate and  adjustable-rate
        loans.  The fair values for the resultant  categories  were computed via
        discounted cash flow analysis,  using current interest rates offered for
        loans with similar  terms to borrowers of similar  credit  quality.  For
        loans on deposit  accounts,  and consumer  and other loans,  fair values
        were deemed to equal the historic carrying values.

        Federal  Home Loan Bank stock:  The  carrying  amount  presented  in the
        consolidated  statements of financial condition is deemed to approximate
        fair value.

        Federal  Reserve  Bank  stock:  The  carrying  amount  presented  in the
        consolidated  statements of financial condition is deemed to approximate
        fair value.

        Deposits:  The fair values of deposits with no stated maturity,  such as
        NOW and super NOW  accounts,  passbook  accounts and money market demand
        accounts are deemed to  approximate  the amount  payable on demand as of
        December 31, 1997 and 1996. The fair values for fixed-rate  certificates
        of deposit is based on the discounted  value of contractual  cash flows.
        The discount  rate is estimated  using the rates  currently  offered for
        deposits of similar remaining maturities.

        Advances from Federal Home Loan Bank:  The fair value of these  advances
        is estimated using the rates currently  offered for similar  advances of
        similar remaining maturities or, when available, quoted market prices.

        Advances by borrowers for taxes and  insurance:  The carrying  amount of
        advances by borrowers for taxes and  insurance is deemed to  approximate
        fair value.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    14.  Fair Value of Financial Instruments (continued)

        Commitments to extend credit:  For fixed-rate and  adjustable-rate  loan
        commitments,  the fair value estimate  considers the difference  between
        current  levels of interest  rates and committed  rates.  The difference
        between  the  fair  value  and  notional  amount  of  outstanding   loan
        commitments at December 31, 1997 and 1996, was not material.

Based on the  foregoing  methods and  assumptions,  the carrying  value and fair
value of the Corporation's financial instruments are as follows at December 31:

<TABLE>
<CAPTION>
                                                                          1997                              1996
                                                               Carrying           Fair            Carrying         Fair
                                                                  value          value               value        value
                                                                                      (In thousands)
<S>                                                            <C>          <C>                 <C>          <C>
    Financial assets
      Cash and cash equivalents                                $  4,868     $    4,868          $    8,685   $    8,685
      Certificates of deposit in other financial institutions       897            897                 100          100
      Investment securities designated as available for sale        772            772               3,448        3,448
      Investment securities                                       3,500          3,444               5,500        5,434
      Mortgage-backed and related securities designated
        as available for sale                                     3,604          3,604               5,041        5,041
      Mortgage-backed and related securities - at cost            5,374          5,432               7,805        7,794
      Loans receivable - net                                    112,003        114,676             108,994      108,775
      Federal Home Loan Bank stock                                  943            943                 943          943
      Federal Reserve Bank stock                                     -              -                   80           80
                                                              ---------      ---------         -----------  -----------

                                                               $131,961       $134,636            $140,596     $140,300
                                                                =======        =======             =======      =======

    Financial liabilities
      Deposits                                                 $114,955       $113,974            $125,656     $123,716
      Advances from the Federal Home Loan Bank                    2,000          2,000               1,100        1,099
      Advances by borrowers for taxes and insurance                  53             53                  70           70
                                                              ---------      ---------         -----------  -----------

                                                               $117,008       $116,027            $126,826     $124,885
                                                                =======        =======             =======      =======
</TABLE>


<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES

Amortized cost and estimated fair values of investment securities at December 31
are summarized as follows:

<TABLE>
<CAPTION>
                                                              1997                             1996
                                                                    Estimated                        Estimated
                                                     Amortized           fair         Amortized           fair
                                                          cost          value              cost          value
                                                                            (In thousands)
<S>                                                     <C>            <C>               <C>            <C>
    Held to maturity:
      U.S. Government agency obligations                $3,500         $3,444            $5,500         $5,434

    Available for sale:
      U.S. Government agency obligations                   498            494             2,997          2,980
      Municipal obligations                                276            278               474            468
                                                        ------         ------            ------         ------
                                                           774            772             3,471          3,448
                                                        ------         ------             -----          -----

         Total investment securities                    $4,274         $4,216            $8,971         $8,882
                                                         =====          =====             =====          =====
</TABLE>


At December  31, 1997 and 1996,  the cost  carrying  value of the  Corporation's
investment  securities  held to  maturity  exceeded  fair value by  $56,000  and
$66,000, respectively, comprised solely of gross unrealized losses.

The  amortized  cost  and  estimated  fair  value  of U.  S.  Government  agency
obligations  designated  as held to  maturity at December 31 by term to maturity
are shown  below.  Maturity  dates do not  reflect  effects  of call  provisions
inherent in the bonds' contractual terms.

<TABLE>
<CAPTION>

                                                            1997                               1996
                                                                  Estimated                          Estimated
                                                   Amortized           fair           Amortized           fair
                                                        cost          value                cost          value
                                                                           (In thousands)

<S>                                                   <C>            <C>                 <C>            <C>
    Due in one year or less                           $2,500         $2,492              $2,000         $1,998
    Due in one to three years                          1,000            952               2,500          2,474
    Due in three to five years                            -              -                1,000            962
                                                       -----          -----               -----         ------

                                                      $3,500         $3,444              $5,500         $5,434
                                                       =====          =====               =====          =====
</TABLE>


<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

    The  amortized  cost and  estimated  fair  value of U.S.  Government  agency
    obligations  and municipal  obligations  designated as available for sale at
    December 31, 1997 and 1996, by term to maturity are shown below.

<TABLE>
<CAPTION>

                                               1997                                1996
                                                    Estimated                            Estimated
                                    Amortized            fair             Amortized           fair
                                         cost           value                  cost          value
                                                            (In thousands)

<S>                                      <C>             <C>                <C>            <C>
    Due in one to three years            $ -             $ -                 $2,000         $1,999
    Due in three to five years            498             494                   997            981
    Due in five to ten years              276             278                   474            468
                                          ---             ---                ------         ------

                                         $774            $772                $3,471         $3,448
                                          ===             ===                 =====          =====
</TABLE>

    The amortized cost, gross  unrealized  gains,  gross  unrealized  losses and
    estimated fair values of mortgage-backed  and related securities  designated
    as held to maturity at December 31, 1997 and 1996 are shown below.

<TABLE>
<CAPTION>

                                                                                            1997
                                                                                   Gross           Gross      Estimated
                                                                Amortized     unrealized      unrealized           fair
                                                                     cost          gains          losses          value
                                                                                       (In thousands)
<S>                                                                <C>            <C>              <C>           <C>
    Federal Home Loan Mortgage Corporation
      participation certificates                                   $2,448         $    6           $ (17)        $2,437
    Government National Mortgage Association
      participation certificates                                    1,935             46              -           1,981
    Federal National Mortgage Association
      participation certificates                                      973             23              -             996
      Interest-only certificates                                       18             -               -              18
                                                                  -------             --              --        -------

                                                                   $5,374          $  75           $ (17)        $5,432
                                                                    =====           ====            ====          =====
</TABLE>

<TABLE>
<CAPTION>

                                                                                           1996
                                                                                   Gross           Gross      Estimated
                                                                Amortized     unrealized      unrealized           fair
                                                                     cost          gains          losses          value
                                                                                     (In thousands)
<S>                                                                <C>            <C>              <C>           <C>
    Federal Home Loan Mortgage Corporation
      participation certificates                                   $4,852         $    3           $ (32)        $4,823
    Government National Mortgage Association
      participation certificates                                    1,805             24              (8)         1,821
    Federal National Mortgage Association
      participation certificates                                    1,116              2              -           1,118
      Interest-only certificates                                       32             -               -              32
                                                                  -------             --              --        -------

                                                                   $7,805          $  29           $ (40)        $7,794
                                                                    =====           ====            ====          =====
</TABLE>


<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

    The  amortized  cost  of  mortgage-backed  and  related  securities  held to
    maturity at December 31, 1997,  by  contractual  terms to maturity are shown
    below.  Expected maturities will differ from contractual  maturities because
    borrowers may generally prepay obligations without prepayment penalties.

                                                  Amortized cost
                                                  (In thousands)

    Due within one year                                  $   981
    Due after one to three years                           2,260
    Due after three to five years                             48
    Due after ten to twenty years                             86
    Due after twenty years                                 1,999
                                                           -----
                                                          $5,374
                                                          ======

    The amortized cost, gross  unrealized  gains,  gross  unrealized  losses and
    estimated fair values of mortgage-backed  and related securities  designated
    as available for sale at December 31, 1997 and 1996 are shown below.

<TABLE>
<CAPTION>
                                                                                 1997
                                                                           Gross          Gross      Estimated
                                                       Amortized      unrealized     unrealized           fair
                                                            cost           gains         losses          value
                                                                             (In thousands)
<S>                                                      <C>               <C>            <C>          <C>
    Federal Home Loan Mortgage Corporation
      participation certificates                         $   915           $  11          $  (1)       $   925
    Government National Mortgage Association
      participation certificates                             451              -              (1)           450
    Federal National Mortgage Association
      participation certificates                           1,657               4            (44)         1,617
    Collateralized mortgage obligations                      627              -             (15)           612
                                                          ------           -----           ----         ------

                                                          $3,650           $  15           $(61)        $3,604
                                                          ======           =====           ====         ======
</TABLE>

<TABLE>
<CAPTION>
                                                                                1996
                                                                           Gross          Gross      Estimated
                                                       Amortized      unrealized     unrealized           fair
                                                            cost           gains         losses          value
                                                                            (In thousands)
<S>                                                      <C>               <C>            <C>          <C>
    Federal Home Loan Mortgage Corporation
      participation certificates                         $   988           $  11          $  (1)       $   998
    Government National Mortgage Association
      participation certificates                           1,368               4             -           1,372
    Federal National Mortgage Association
      participation certificates                           2,110               1            (42)         2,069
    Collateralized mortgage obligations                      628              -             (26)           602
                                                          ------           -----           ----         ------

                                                          $5,094           $  16           $(69)        $5,041
                                                          ======           =====           ====         ======
</TABLE>


<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

    The amortized cost of mortgage-backed  and related securities  designated as
    available  for sale at December 31, 1997, by  contractual  terms to maturity
    are shown below. Expected maturities will differ from contractual maturities
    because  borrowers  may  generally  prepay  obligations  without  prepayment
    penalties.
                                            Amortized cost
                                            (In thousands)

    Due within three years                      $     14
    Due after three to five years                    551
    Due after five to ten years                       61
    Due after ten to twenty years                    924
    Due after twenty years                         2,097
                                                   -----
                                                  $3,647
                                                  ======

NOTE C - LOANS RECEIVABLE

    The composition of the loan portfolio at December 31 is as follows:

                                                        1997           1996
                                                             (In thousands)
    Residential real estate
      One-to-four family residential                 $  71,388      $  67,417
      Multi-family residential                           2,781          3,416
      Construction                                       3,652          4,895
    Nonresidential real estate and land                 14,703         14,960
    Consumer and other                                  19,852         19,781
    Deferred loan origination costs                        202            226
                                                    ----------     ----------
                                                       112,578        110,695
    Less:
      Undisbursed portion of loans in process               99          1,703
      Allowance for loan losses                          1,160          1,074
                                                     ---------      ---------

                                                      $111,319       $107,918
                                                      ========       ========

    As depicted above, the Bank's lending efforts have  historically  focused on
    one-to-four family residential real estate loans,  multi-family  residential
    real  estate  loans and  construction  real  estate  loans,  which  comprise
    approximately $77.8 million, or 69%, of the total loan portfolio at December
    31,  1997  and  approximately  $75.7  million,  or 68%,  of the  total  loan
    portfolio at December 31, 1996. Generally, such loans have been underwritten
    on  the  basis  of no  more  than  an 80%  loan-to-value  ratio,  which  has
    historically  provided  the Bank with  adequate  collateral  coverage in the
    event of default.  Nevertheless,  the Bank, as with any lending institution,
    is subject to the risk that residential real estate values could deteriorate
    in its  primary  lending  areas of  southeastern  Indiana  and  northwestern
    Kentucky, thereby impairing collateral values. However, management is of the
    belief that  residential  real estate values in the Bank's  primary  lending
    areas are presently stable.



<PAGE>
                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE C - LOANS RECEIVABLE (continued)

    In the ordinary  course of business,  the Bank has granted  loans to some of
    its officers,  directors and their related business interests. Related party
    loans are made on the same terms,  including  interest rates and collateral,
    as those prevailing at the time for comparable  transactions  with unrelated
    persons and do not involve more than the normal risk of collectibility.  The
    aggregate  dollar  amount  of  loans  outstanding  to  related  parties  was
    approximately   $462,000  and  $541,000  at  December  31,  1997  and  1996,
    respectively.


NOTE D - ALLOWANCE FOR LOAN LOSSES

    The activity in the  allowance  for loan losses is summarized as follows for
    the years ended December 31:

<TABLE>
<CAPTION>
                                                   1997           1996           1995
                                                            (In thousands)

<S>                                              <C>           <C>               <C>
    Balance at beginning of year                 $1,074        $   407           $252
    Provision for losses on loans                   304             22            150
    Allowance for loan losses of Citizens            -             648             -
    Charge-offs of loans                           (269)            (3)            -
    Recoveries of loan losses                        51             -               5
                                                -------          -----          -----

    Balance at end of year                       $1,160         $1,074           $407
                                                  =====          =====            ===
</TABLE>

    As of December 31, 1997,  the  Corporation's  allowance  for loan losses was
    comprised of a general loan loss  allowance of  approximately  $1.1 million,
    which is includible as a component of regulatory  risk-based capital,  and a
    specific loan loss allowance of approximately $23,000.

    The  Corporation had  nonperforming  loans totaling  $718,000,  $819,000 and
    $8,000 at December 31, 1997, 1996 and 1995, respectively.

    The  Corporation  had no material  loss of interest  income  related to such
    nonperforming loans during the years ended December 31, 1997, 1996 and 1995.


NOTE E - OFFICE PREMISES AND EQUIPMENT

    Office premises and equipment at December 31 are comprised of the following:


                                              1997                1996
                                                    (In thousands)

    Land and improvements                  $   662             $   718
    Office buildings and improvements        1,750               2,107
    Leasehold improvements                     115                 115
    Furniture, fixtures and equipment        1,943               1,742
    Automobiles                                 32                  16
                                           -------             -------
                                             4,502               4,698
    Less accumulated depreciation            2,437               2,641
                                             -----               -----

                                            $2,065              $2,057
                                             =====               =====


<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE F - DEPOSITS

    Deposits consist of the following major classifications at December 31:

<TABLE>
<CAPTION>
    Deposit type and                                    1997                      1996
    weighted-average interest rate             Amount        %             Amount         %
                                                        (Dollars in thousands)

<S>                                        <C>                 <C>      <C>                  <C>
    Non-interest bearing accounts          $    5,628          4.9      $    5,951           4.7
    NOW accounts
      1997 - 2.57%                             15,424         13.4
      1996 - 2.56%                                                          21,089          16.8
    Money market demand accounts
      1997 - 2.93%                              8,257          7.2
      1996 - 2.94%                                                           9,623           7.7
    Passbook accounts
      1997 - 3.42%                             21,411         18.7
      1996 - 3.36%                                                          21,718          17.3
                                             --------       -----         --------        ------
    Total demand, transaction and
      passbook deposits                        50,720         44.2          58,381          46.5

    Certificates of deposit
      4.00 - 4.99%
        4.82% in 1997                          13,016         11.3
        4.80% in 1996                                                      11,647            9.3
      5.00 - 5.99%
        5.40% in 1997                          36,010         31.3
        5.41% in 1996                                                      41,560           33.1
      6.00 - 6.99%
        6.22% in 1997                          12,312         10.7
        6.28% in 1996                                                      11,144            8.9
      7.00 - 7.99%
        7.50% in 1997                           2,896          2.5
        7.49% in 1996                                                       2,923            2.3
      8.00 - 8.99%
        8.25% in 1997                               1            -
        8.25% in 1996                                                           1             -
                                             --------       -----         --------        ------

    Total certificates of deposit              64,235         55.8          67,275          53.5
                                             --------       -----         --------        ------

    Total deposit accounts                   $114,955       100.0         $125,656         100.0
                                             ========       =====         ========        ======

</TABLE>

    The aggregate amount of certificates of deposit with a minimum  denomination
    of $100,000 totaled  approximately $7.8 million and $9.7 million at December
    31, 1997 and 1996, respectively.



<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE F - DEPOSITS (continued)

    Interest  expense on deposits for the years ended  December 31 is summarized
as follows:

                                          1997           1996           1995
                                                   (In thousands)

    Passbook                           $   708        $   539        $   524
    NOW accounts                           435            206            176
    Money market deposit accounts          480            234            243
    Certificates of deposit              3,291          2,370          2,476
                                         -----          -----          -----

                                        $4,914         $3,349         $3,419
                                         =====          =====          =====

    Maturities of outstanding  certificates of deposit are summarized as follows
    at December 31:

                                            1997             1996
                                                 (In thousands)

    Less than one year                   $45,842          $47,948
    One year to three years               16,970           16,563
    More than three years                  1,423            2,764
                                         -------          -------

                                         $64,235          $67,275
                                          ======           ======

    As a  result  of the  Corporation's  acquisition  of  Citizen's,  regulatory
    authorities  required  the  sale of one of the  Bank's  retail  branches.  A
    definitive  agreement was reached in 1996,  which provided for the purchaser
    to acquire the branch facility for a price  approximating  book value, while
    assuming the branch deposits,  which totaled $6.8 million,  for a premium on
    core deposits.  The  transaction  was consummated in 1997 and resulted in an
    after-tax gain of $125,000.


NOTE G - ADVANCES FROM FEDERAL HOME LOAN BANK

    Federal Home Loan Bank  advances,  collateralized  at December 31, 1997,  by
    certain  residential  mortgage  loans  totaling  $3.2 million and the Bank's
    investment in Federal Home Loan Bank stock, are shown below:

    Interest         Maturing year
       rate            ending in           1997                1996
                                                 (In thousands)

    7.35%                 1997         $   -                 $1,100
    6.12%                 1998           2,000                   -
                                         -----                ----

                                       $2,000                $1,100
                                        =====                 =====



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE H - INCOME TAXES

    The provision for income taxes on earnings differs from that computed at the
expected statutory corporate tax rate at December 31 as follows:

<TABLE>
<CAPTION>
                                                          1997         1996         1995
                                                                 (In thousands)
<S>                                                       <C>           <C>         <C>
    Federal income taxes computed at
      expected statutory rate                             $728          $51         $152
    State taxes, net of federal benefits                   125            9           39
    Increase (decrease) in taxes resulting from:
      Amortization of goodwill                               9            2            2
      Other (primarily nontaxable income in 1997)          (32)          14           (5)
                                                          ----           --        -----
    Income tax provision per consolidated
      financial statements                                $830          $76         $188
                                                           ===           ==          ===

    Effective tax rate                                    38.8%        51.0%        42.2%
                                                          ====         ====         ====
</TABLE>

    The composition of the  Corporation's  net deferred tax asset at December 31
    is as follows:

<TABLE>
<CAPTION>
    Taxes (payable) refundable on temporary                     1997           1996
    differences at statutory rate:                                (In thousands)
<S>                                                         <C>               <C>
    Deferred tax liabilities:
      Deferred loan origination costs                       $    (69)         $ (77)
      Difference between book and tax depreciation               (63)           (71)
      Percentage of earnings bad debt deduction                 (202)          (121)
      Mortgage servicing rights                                  (38)            -
                                                             -------             -
         Total deferred tax liabilities                         (372)          (269)

    Deferred tax assets:
      Deferred compensation                                       59             42
      Allowance for valuation decline on
        mortgage-related securities                               90             90
      General loan loss allowance                                447            282
      Benefit plan expense                                        62             -
      Unrealized loss on securities designated as
        available for sale                                        16             25
      Purchase accounting adjustments related to asset
        valuation adjustments                                    378            458
      Other                                                        1             -
                                                            --------             -
         Total deferred tax assets                             1,053            897
                                                               -----            ---

         Net deferred tax asset                              $   681           $628
                                                              ======            ===
</TABLE>


<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE H - INCOME TAXES (continued)

    Madison  First Federal was allowed a special bad debt  deduction  based on a
    percentage of earnings  generally  limited to 8% of otherwise taxable income
    or the amount of qualifying and nonqualifying loans outstanding, and subject
    to certain limitations based on aggregate loans and savings account balances
    at the end of the year.  Retained  earnings  at December  31, 1997  includes
    approximately  $2.4  million for which  federal  income  taxes have not been
    provided.  If the amounts that qualify as deductions  for federal income tax
    purposes  are  later  used for  purposes  other  than  for bad debt  losses,
    including  distributions in liquidation,  such distributions will be subject
    to federal income taxes at the then current  corporate  income tax rate. The
    approximate  amount of unrecognized  deferred tax liability  relating to the
    cumulative  bad debt  deduction was  approximately  $705,000 at December 31,
    1997. See Note N for additional  information  regarding future percentage of
    earnings bad debt deductions.


NOTE I - COMMITMENTS AND CONTINGENCIES

    The Bank is a party to financial instruments with  off-balance-sheet risk in
    the normal course of business to meet the  financing  needs of its customers
    including commitments to extend credit. Such commitments involve, to varying
    degrees,  elements of credit and interest-rate  risk in excess of the amount
    recognized in the consolidated statements of financial condition.

    The Bank's  exposure  to credit loss in the event of  nonperformance  by the
    other party to the financial  instrument for commitments to extend credit is
    represented by the  contractual  notional amount of those  instruments.  The
    Bank uses the same credit  policies in making  commitments  and  conditional
    obligations as those utilized for on-balance-sheet instruments.

    At December 31, 1997, the Bank had outstanding  commitments of approximately
    $3.4 million to originate residential  one-to-four family real estate loans,
    of which $2.4 million were comprised of 6.75% to 8.50%  fixed-rate loans and
    $1.0  million  were  comprised  of  7.00%  to  8.50%  variable  rate  loans.
    Additionally,  the Bank had  commitments to originate loans secured by other
    real  estate  and  non-mortgage   loans  totaling   $507,000  and  $120,000,
    respectively,  as of December  31,  1997.  The Bank also had unused lines of
    credit under home equity loans and commercial  loans of  approximately  $1.4
    million and $2.6 million, respectively, at December 31, 1997, and commercial
    letters  of  credit  totaling  $47,000  at  that  date.  In the  opinion  of
    management,  all loan  commitments  equaled  or  exceeded  prevalent  market
    interest  rates as of December  31,  1997,  and such  commitments  have been
    underwritten  on the same  basis  as that of the  existing  loan  portfolio.
    Management  believes that all loan commitments are able to be funded through
    cash flows from operations and existing excess  liquidity.  Fees received in
    connection with these commitments have not been recognized in earnings.



<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE I - COMMITMENTS AND CONTINGENCIES (continued)

    Commitments to extend credit are agreements to lend to a customer as long as
    there  is no  violation  of  any  condition  established  in  the  contract.
    Commitments  generally  have  fixed  expiration  dates or other  termination
    clauses and may require  payment of a fee. Since many of the commitments may
    expire  without  being  drawn  upon,  the total  commitment  amounts  do not
    necessarily  represent  future cash  requirements.  The Bank  evaluates each
    customer's   creditworthiness   on  a  case-by-case  basis.  The  amount  of
    collateral  obtained,  if it is deemed necessary by the Bank, upon extension
    of credit,  is based on management's  credit evaluation of the counterparty.
    Collateral  on  loans  may  vary  but the  preponderance  of  loans  granted
    generally include a mortgage interest in real estate as security.


NOTE J - LEASES

    In connection with the acquisition of the Citizens,  the Corporation assumed
    leases of branch banking  facilities.  For the lease of the banking facility
    in the Wal-Mart  Supercenter in Madison, the Corporation is to make payments
    of  approximately  $23,000 and $17,000 in 1998 and 1999,  respectively.  The
    original  lease  expires in September  1999,  but does contain two renewable
    five year options at a maximum  lease payment of  approximately  $29,000 per
    year.  The Bank also  leases  its  downtown  office  with  estimated  annual
    payments of $6,000 for 1998 under a year-to-year lease agreement.


NOTE K - STOCK OPTION PLAN

    In June  1997,  the  Corporation  adopted  the 1997 Stock  Option  Plan that
    provides  for the  issuance of 119,025  shares of common  stock.  Options to
    purchase  117,648 shares were granted during 1997 at an exercise price equal
    to the fair value at the date of grant.

    In 1996, the Corporation  adopted SFAS No. 123,  "Accounting for Stock-Based
    Compensation,"   which  contains  a  fair  value-based  method  for  valuing
    stock-based  compensation that entities may use, which measures compensation
    cost at the grant date based on the fair value of the award. Compensation is
    then  recognized  over the  service  period,  which is usually  the  vesting
    period. Alternatively,  SFAS No. 123 permits entities to continue to account
    for stock options and similar equity instruments under Accounting Principles
    Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees."
    Entities that continue to account for stock options using APB Opinion No. 25
    are required to make pro forma  disclosures of net earnings and earnings per
    share, as if the fair value-based  method of accounting  defined in SFAS No.
    123 had been applied.



<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE K - STOCK OPTION PLAN (continued)

    The  Corporation  applies  Accounting  Principles  Board  Opinion No. 25 and
    related   Interpretations   in   accounting   for  its  stock  option  plan.
    Accordingly,  no  compensation  cost has been  recognized  for the plan. Had
    compensation  cost for the  Corporation's  stock option plan been determined
    based on the  fair  value at the  grant  dates  for  awards  under  the plan
    consistent  with  the  accounting  method  utilized  in SFAS  No.  123,  the
    Corporation's net earnings and earnings per share would have been reduced to
    the pro forma amounts indicated below:

                                                          1997

    Net earnings (in thousands)    As reported           $1,310
                                                         ======

                                     Pro-forma           $1,269
                                                         ======

    Earnings per share
      Basic                        As reported            $1.19
                                                         ======

                                     Pro-forma            $1.16
                                                         ======

      Diluted                      As reported            $1.18
                                                         ======

                                     Pro-forma            $1.15
                                                         ======

    The fair value of each option  grant is estimated on the date of grant using
    the  modified   Black-Scholes   options-pricing  model  with  the  following
    weighted-average  assumptions used for grants in fiscal 1997: dividend yield
    of 1.013%,  expected  volatility of 10.0%, a risk-free interest rate of 5.5%
    and expected lives of seven years.

    A  summary  of the  status  of the  Corporation's  stock  option  plan as of
    December  31,  1997,  and changes  during the period then ended is presented
    below:

                                                                  Weighted-
                                                                    average
                                                                   exercise
                                                     Shares           price

    Outstanding at beginning of year                     -       $    -
    Granted                                         117,648           14.81
    Exercised                                            -            -
    Forfeited                                        12,499           14.81
                                                   --------           -----

    Outstanding at end of year                      105,149          $14.81
                                                    =======           =====

    Options exercisable at year-end                      -
                                                    =======
    Weighted-average fair value of
      options granted during the year                 $4.74
                                                    =======



<PAGE>
                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE K - STOCK OPTION PLAN (continued)

    The following  information  applies to options  outstanding  at December 31,
1997:

    Number outstanding                                                105,149
    Range of exercise prices                                 $14.78 - $17.875
    Weighted-average exercise price                                    $14.81
    Weighted-average remaining contractual life                     9.5 years


NOTE L - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP

    The  following  condensed  financial   statements  summarize  the  financial
    position  of River  Valley  Bancorp at December  31, 1997 and 1996,  and the
    results of its  operations and its cash flows for the periods ended December
    31, 1997 and 1996.

                              River Valley Bancorp
                        STATEMENTS OF FINANCIAL CONDITION
                                  December 31,
                                 (In thousands)

<TABLE>
<CAPTION>
         ASSETS                                                1997              1996

<S>                                                         <C>               <C>
    Cash and interest-earning deposits                        $   374         $     655
    Investment in subsidiaries                                 17,744            16,453
    Prepaid expenses and other assets                              65                -
                                                               ------            ------

         Total assets                                         $18,183           $17,108
                                                               ======            ======

         LIABILITIES AND SHAREHOLDERS' EQUITY

    Other liabilities                                       $     194        $       94
    Minority interest in consolidated subsidiary                   -                209
                                                               ------            ------
                                                                  194               303

    Shareholders' equity
      Preferred stock                                              -                 -
      Common stock                                                 -                 -
      Additional paid in capital                               11,229            11,173
      Retained earnings                                         7,797             6,635
      Shares acquired by stock benefit plans                   (1,005)             (952)
      Unrealized losses on securities
        designated as available
        for sale, net of related tax effects                      (32)              (51)
                                                               ------            ------
             Total shareholders' equity                        17,989            16,805
                                                               ------            ------

             Total liabilities and shareholders' equity       $18,183           $17,108
                                                               ======            ======
</TABLE>


<PAGE>
                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE L - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP (continued)

                              River Valley Bancorp
                             STATEMENTS OF EARNINGS
                           Periods ended December 31,
                                 (In thousands)

                                                   1997             1996
    Revenue
      Interest income                             $   81           $    -
      Equity in earnings of subsidiaries           1,390                2
                                                  ------           ------
                                                   1,471                2

    General, administrative and other expense        243                -
                                                  ------           ------

         Earnings before income tax credits        1,228                2

    Income tax credits                                82                -
                                                  ------           ------

         NET EARNINGS                             $1,310           $    2
                                                  ======           ======


                              River Valley Bancorp
                            STATEMENTS OF CASH FLOWS
                           Periods ended December 31,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  1997             1996
    Cash flows from operating activities:
<S>                                                              <C>            <C>
      Net earnings for the year                                  $1,310         $      2
      Increase (decrease) in cash due to changes in:
        Prepaid expenses and other assets                           (65)              -
        Other liabilities                                          (109)              94
        Undistributed net earnings of subsidiary                 (1,390)              (2)
        Amortization expense of stock benefit plans                 128               -
                                                                 ------         --------
                                                                   (126)              94

    Cash flows from financing activities:
      Proceeds from issuance of common stock                         -            11,173
      Acquisition of stock by stock benefit plans                    -              (952)
      Acquisition of Citizens National Bank                          -            (4,588)
      Purchase of shares in River Valley Financial                   -            (5,072)
      Dividends on common stock                                    (155)              -
                                                                 ------         --------
                                                                   (155)             561
                                                                 ------         --------

    Net increase (decrease) in cash and cash equivalents           (281)             655

    Cash and cash equivalents at beginning of year                  655               -
                                                                 ------         --------

    Cash and cash equivalents at end of year                     $  374         $    655
                                                                 ======         ========
</TABLE>


<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE M - REGULATORY CAPITAL

    The Bank is subject to minimum regulatory  capital standards  promulgated by
    the  Office of Thrift  Supervision  (the  "OTS").  Failure  to meet  minimum
    capital   requirements  can  initiate  certain  mandatory  --  and  possibly
    additional discretionary -- actions by regulators that, if undertaken, could
    have a direct  material  effect on the Bank's  financial  statements.  Under
    capital  adequacy  guidelines  and  the  regulatory   framework  for  prompt
    corrective  action,   financial  institutions  must  meet  specific  capital
    guidelines that involve quantitative  measures of assets,  liabilities,  and
    certain  off-balance-sheet  items as calculated under regulatory  accounting
    practices. The Bank's capital amounts and classification are also subject to
    qualitative  judgments by the regulators about components,  risk weightings,
    and other factors. The OTS's minimum capital standards generally require the
    maintenance  of regulatory  capital  sufficient to meet each of three tests,
    hereinafter described as the tangible capital requirement,  the core capital
    requirement and the risk-based  capital  requirement.  The tangible  capital
    requirement  provides for minimum tangible capital (defined as shareholders'
    equity less all  intangible  assets) equal to 1.5% of adjusted total assets.
    The core capital  requirement  provides  for minimum core capital  (tangible
    capital  plus certain  forms of  supervisory  goodwill and other  qualifying
    intangible  assets) equal to 3.0% of adjusted total assets. An OTS proposal,
    if adopted in present form, would increase the core capital requirement to a
    range of 4.0% - 5.0% of adjusted total assets for  substantially all savings
    associations. Management anticipates no material change to the Bank's excess
    regulatory  capital  position  as a result  of this  proposed  change in the
    regulatory capital requirement. The risk-based capital requirement currently
    provides for the  maintenance  of core capital plus general loss  allowances
    equal to 8.0% of risk-weighted  assets. In computing  risk-weighted  assets,
    the Bank  multiplies  the value of each asset on its  statement of financial
    condition  by a defined  risk-weighting  factor,  e.g.,  one-to-four  family
    residential loans carry a risk-weighted factor of 50%.

    At December  31, 1997 and 1996,  management  believes  that the Bank met all
    capital adequacy requirements to which it is subject.

<TABLE>
<CAPTION>
    1997:                                                                                        To be "well-
                                                           For capital               prompt corrective
                                   Actual                adequacy purposes          action provisions
                               Amount    Ratio           Amount    Ratio             Amount     Ratio
                                                        (Dollars in thousands)

<S>                           <C>        <C>             <C>         <C>             <C>            <C>
    Tangible capital          $17,566    12.9%          *$2,047     *1.5%           *$6,824      *  5.0%

    Core capital              $17,566    12.9%          *$4,095     *3.0%           *$8,189      *  6.0%

    Risk-based capital        $18,703    20.8%          *$6,944     *8.0%           *$8,680      *10.0%
</TABLE>
--------------
*  Equal to or greater than


<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE M - REGULATORY CAPITAL (continued)


<TABLE>
<CAPTION>
    1996:                                                                                        To be "well-
                                                                                              capitalized" under
                                                                     For capital               prompt corrective
                                             Actual                adequacy purposes          action provisions
                                         Amount    Ratio           Amount    Ratio             Amount     Ratio
                                                                  (Dollars in thousands)

<S>                                     <C>        <C>             <C>         <C>             <C>            <C>
    Tangible capital                    $11,713    14.0%          *$1,252     *1.5%           *$4,173      *  5.0%

    Core capital                        $11,713    14.0%          *$2,503     *3.0%           *$5,006      *  6.0%

    Risk-based capital                  $12,136    27.6%          *$3,515     *8.0%           *$4,394      *10.0%
</TABLE>
--------------
*  Equal to or greater than

    At  December  31,  1997,  the  Bank  met  all  regulatory  requirements  for
    classification as a  "well-capitalized"  institution.  A  "well-capitalized"
    institution must have risk-based capital of 10.0%, and core capital of 5.0%.
    The Bank's capital exceeded the minimum required amounts for  classification
    as a  "well-capitalized"  institution  by $10.0  million and $10.7  million,
    respectively.

    The FDIC has adopted  risk-based  capital ratio guidelines to which Citizens
    was subject. The guidelines establish a systematic analytical framework that
    makes regulatory capital  requirements more sensitive to differences in risk
    profiles  among  banking   organizations.   Risk-based  capital  ratios  are
    determined by allocating assets and specified  off-balance sheet commitments
    to four  risk-weighting  categories,  with  higher  levels of capital  being
    required for categories perceived as representing greater risk.

    These  guidelines  divide the capital into two tiers.  The first tier ("Tier
    1") includes common equity, certain non-cumulative perpetual preferred stock
    (excluding auction rate issues) and minority interests in equity accounts of
    consolidated subsidiaries, less goodwill and certain other intangible assets
    (except mortgage  servicing rights and purchased credit card  relationships,
    subject to certain limitations). Supplementary ("Tier II") capital includes,
    among other items, cumulative perpetual and long-term limited-life preferred
    stock, mandatory convertible securities, certain hybrid capital instruments,
    term subordinated debt and the allowance for loan losses, subject to certain
    limitations,  less  required  deductions.  Banks are  required to maintain a
    total  risk-based  capital  ratio of 8%, of which 4% must be Tier 1 capital.
    The FDIC may,  however,  set higher  capital  requirements  when  particular
    circumstances warrant. Banks experiencing or anticipating significant growth
    are  expected  to  maintain  capital  ratios,   including  tangible  capital
    positions, well above the minimum levels.

    In addition,  the FDIC established  guidelines  prescribing a minimum Tier 1
    leverage  ratio (Tier 1 capital to adjusted total assets as specified in the
    guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
    3% for banks that meet certain specified criteria,  including that they have
    the  highest  regulatory  rating and are not  experiencing  or  anticipating
    significant  growth.  All other  banks are  required  to  maintain  a Tier 1
    leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
    points.



<PAGE>

                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE M - REGULATORY CAPITAL (continued)

    Management  believes that Citizens met all capital adequacy  requirements to
which it was subject as of December 31, 1996.

<TABLE>
<CAPTION>
                                                                     For capital               prompt corrective
                                             Actual                adequacy purposes          action provisions
                                         Amount    Ratio           Amount    Ratio             Amount     Ratio
                                                                  (Dollars in thousands)

<S>                                      <C>         <C>           <C>         <C>             <C>            <C>
    Tier I leverage                      $4,512      7.2%         *$3,122     *4.0%           *$3,903      *  5.0%

    Tier I capital (to risk-
      weighted assets)                   $4,512      9.9%         *$1,818     *4.0%           *$2,727      *  6.0%

    Total capital (to risk-
      weighted assets)                   $5,160    11.4%          *$3,635     *8.0%           *$4,544      *10.0%
--------------
*  Equal to or greater than

</TABLE>

    The Bank is subject  to  limitations  on the  payment  of  dividends  by the
    banking regulatory authorities. Under OTS regulations, a savings association
    that, immediately prior to, and on a pro forma basis after giving effect to,
    a  proposed  capital  distribution,  has total  capital  (as  defined by OTS
    regulation)  that is  equal  to or  greater  than the  amount  of its  fully
    phased-in  capital  requirement is generally  permitted without OTS approval
    (but subsequent to 30 days prior notice to the OTS of the planned  dividend)
    to make  capital  distributions  during a calendar  year in an amount not to
    exceed the greater of (i) up to 100% of its net  earnings to date during the
    year  plus an  amount  equal to  one-half  of the  amount by which its total
    capital to assets ratio exceeded its fully phased-in capital to assets ratio
    at the  beginning of the year,  or (ii) 75% of its net earnings for the most
    recent four quarters.  Pursuant to such OTS dividend  regulations,  the Bank
    had the  ability  to pay  dividends  of  approximately  $4.3  million to the
    Corporation at December 31, 1997.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE N - LEGISLATIVE DEVELOPMENTS

    The  deposit  accounts  of the Bank and of other  savings  associations  are
    insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
    The  reserves of the SAIF were below the level  required  by law,  because a
    significant  portion of the assessments  paid into the fund were used to pay
    the cost of prior thrift failures.  The deposit accounts of commercial banks
    are insured by the FDIC through the Bank Insurance  Fund ("BIF"),  except to
    the extent such banks have acquired SAIF  deposits.  The reserves of the BIF
    met the level  required  by law in May 1995.  As a result of the  respective
    reserve levels of the funds,  deposit insurance  assessments paid by healthy
    savings  associations  exceeded  those paid by healthy  commercial  banks by
    approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments
    were required for healthy commercial banks except for a $2,000 minimum fee.

    Legislation was enacted to recapitalize the SAIF that provided for a special
    assessment  totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
    in order to increase  SAIF  reserves to the level  required by law. The Bank
    had $76.6 million in deposits at March 31, 1995,  resulting in an assessment
    of  approximately  $503,000,  or  $289,000  after tax,  which was charged to
    operations in 1996.

    A component of the recapitalization plan provides for the merger of the SAIF
    and BIF on January 1, 2000. However, the SAIF  recapitalization  legislation
    currently  provides  for an  elimination  of the  thrift  charter  or of the
    separate  federal  regulation  of thrifts prior to the merger of the deposit
    insurance  funds.  As a result,  the Bank would be regulated as a bank under
    federal laws which would subject it to the more restrictive  activity limits
    imposed  on  national  banks.  Under  separate  legislation  related  to the
    recapitalization  plan,  the Bank is required to recapture as taxable income
    approximately  $360,000  of its  bad  debt  reserve,  which  represents  the
    post-1987  additions  to the  reserve,  and will be  unable to  utilize  the
    percentage of earnings method to compute the reserve in the future. The Bank
    has  provided  deferred  taxes  for this  amount  and will be  permitted  to
    amortize the recapture of the bad debt reserve over six years.


NOTE O - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION

    On March 5, 1996,  the Bank's Board of Directors  adopted an overall plan of
    conversion and reorganization (the "Plan") whereby the Bank would convert to
    the stock form of  ownership,  followed by the issuance of all of the Bank's
    outstanding  stock to a newly formed holding company,  River Valley Bancorp.
    Pursuant  to the Plan,  the Bank  offered  for sale up to  1,190,250  common
    shares to its  depositors  and members of the  community.  The  offering was
    completed  in December  1996,  resulting  in net  capital  proceeds of $10.2
    million.

    At the date of the conversion, the Bank established a liquidation account in
    an amount equal to retained earnings reflected in the statement of financial
    condition used in the conversion offering circular.  The liquidation account
    will be maintained for the benefit of eligible  deposit  account holders who
    maintained deposit accounts in the Bank after conversion.



<PAGE>




                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE O - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION (continued)

    In the  event of a  complete  liquidation  (and  only in such  event),  each
    eligible  deposit  account  holder will be entitled to receive a liquidation
    distribution from the liquidation  account in the amount of the then current
    adjusted   balance  of  deposit   accounts  held,   before  any  liquidation
    distribution  may be made with respect to the common shares.  Except for the
    repurchase  of stock and payment of dividends by the Bank,  the existence of
    the liquidation  account will not restrict the use or further application of
    such retained earnings.

    The Bank may not declare or pay a cash dividend on, or repurchase any of its
    common  shares if the effect  thereof  would cause the Bank's  shareholders'
    equity to be reduced  below either the amount  required for the  liquidation
    account or the regulatory capital requirements for insured institutions.

    In 1995, the Bank had entered into a purchase  agreement  (the  "Agreement")
    with the majority  shareholder of Citizens.  The Agreement,  as subsequently
    amended,  stated that the Corporation would purchase  approximately  120,000
    shares,  representing 95.6% of Citizen's outstanding common stock, for total
    cash  consideration  of  approximately  $3.0 million.  The  acquisition  was
    consummated  in 1996,  and was  accounted  for using the purchase  method of
    accounting.

    Presented below are pro-forma condensed consolidated  statements of earnings
    which have been prepared as if the  acquisition  had been  consummated as of
    the beginning of each of the years ended December 31, 1996 and 1995.

                                                    1996            1995
                                                        (In thousands)
                                                         (Unaudited)

    Total interest income                          $10,211         $9,489
    Total interest expense                           5,640          5,414
                                                   -------          -----
         Net interest income                         4,571          4,075

    Provision for losses on loans                      252            254
    Other income                                     1,164            925
    General, administrative and other expense        5,049          3,451
                                                   -------          -----

         Earnings before income taxes                  434          1,295

    Federal income taxes                               150            443
                                                  --------         ------

         Net earnings                            $     284        $   852
                                                  ========         ======



<PAGE>
                              River Valley Bancorp


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE O - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION (continued)

    The Bank owns 100% of the  outstanding  capital stock of First Service which
    owned 100% of the  outstanding  capital stock of McCauley  Insurance  Agency
    ("McCauley").

    As mandated by the regulatory authorities during the approval process of the
    Plan,  First  Service had to divest its  interest in  McCauley.  The sale of
    McCauley  was  consummated  in 1996,  resulting  in a gain on sale  totaling
    $141,000.



<PAGE>
                                     NOTES
================================================================================



<PAGE>

                      GENERAL INFORMATION FOR SHAREHOLDERS

<TABLE>
<CAPTION>

<S>                                             <C>
Transfer Agent and Registrar:                   Shareholder and General Inquiries:

Corporate Trust Services                        River Valley Bancorp
Fifth Third Center                              Attn:  James E. Fritz
38 Fountain Square Plaza                        303 Clifty Drive, P.O. Box 1590
Cincinnati, Ohio  45263                         Madison, Indiana  47250
Tel: (513)579-5417   Fax: (513)744-6785         Tel: (812)273-4949   Fax: (812)273-4944


Corporate Counsel:                              Special Counsel:

Lonnie D. Collins, Attorney                     Barnes & Thornburg
426 E. Main Street                              11 S. Meridian Street
Madison, Indiana  47250                         Indianapolis, Indiana  46204
Tel: (812)265-3616   Fax: (812)273-3143         Tel: (317)638-1313   Fax: (317)231-7433
</TABLE>


Annual and Other Reports:

Additional  copies of this Annual Report to Shareholders  and copies of the most
recent Form 10-K may be obtained without charge by contacting the Corporation.


Offices of River Valley Financial Bank:

Hilltop:          303 Clifty Drive
                  430 Clifty Drive
Downtown:         233 East Main Street
                  307 East Main Street
Drive thru:       401 East Main Street
Wal-Mart:         567 Ivy Tech Drive
Hanover:          10 Medical Plaza


Annual Meeting:

The Annual Meeting of Shareholders of River Valley Bancorp will be held on April
27, 1998, at 3:00 PM, at the office of River Valley  Bancorp,  303 Clifty Drive,
Madison, IN 47250.



<PAGE>


                               BOARD OF DIRECTORS


Fred W. Koehler

Chairman

Cecil L. Dorten
Vice Chairman

Earl W. Johann
Director

Michael J. Hensley
Director

Jonnie L. Davis
Director

James E. Fritz
Director & President

Robert W. Anger
Director & Loan Officer


********************

Lonnie D. Collins
Secretary


<PAGE>

              EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK

James E. Fritz

Director & President

Robert D. Hoban
Executive Vice President -
Business Development &
Marketing

Mark A. Goley
Vice President - Senior Loan Officer

Robyne J. Hart
Vice President - Operations Officer

Larry C. Fouse
Controller

Robert W. Anger
Director & Loan Officer


<PAGE>
                     OFFICERS OF RIVER VALLEY FINANCIAL BANK

Angela D. Adams
Branch Manager

James B. Allen
Branch Manager

Jerry D. Allen
Loan Officer

Isa K. Center
Training Coordinator

Kenneth L. Cull
Loan Officer

Barbara J. Eades
Customer Service Manager

V. Kay Kimmel
Loan Officer

Deanna J. Liter
Data Processing Officer

Linda L. Ralston
Customer Service Manager

Stephanie J. Rickerson
Customer Service Manager

Robert J. Schoenstein Jr.
Loan Officer

Patric W. Shimfessel
Loan Officer

Loy M. Skirvin
Human Resources Manager

Sandra S. Stretton
Loan Officer


<PAGE>

                             ADVISORY BOARD MEMBERS

Burton P. Chambers
Advisory Director

Van E. Shelton
Advisory Director

Ralph E. Storm
Advisory Director
<PAGE>


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