THE
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K


(Mark
One)




ý
            
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Actof
      1934 for the Fiscal Year Ended December 31, 2007oro
            
            Transition
      Report Pursuant to Section 13 or 15(d) of the
SecuritiesExchange
      Act of 1934 for the Transition Period from _______ to
    ______





000-21765Commission
      File NumberRIVER
      VALLEY BANCORP(Exact
      name of registrant as specified in its charter)INDIANA
            
            35-1984567(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)430
      Clifty Drive, P.O. Box 1590, Madison, Indiana
            47250-0590(Address
      of principal executive offices)
            (Zip
      Code)(812)
      273-4949(Registrant’s
      telephone number, including area
code)







Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class:
            Name
      of each exchange on which registered:Common
      Stock
            The
      NASDAQ Stock Market LLC







Securities
registered pursuant to Section 12(g) of the Act:




None




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.
            Yes o   No ýIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act.
            Yes o   No ýIndicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.
            Yes ý   No oIndicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K.
            ýIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company. See the definitions of “large accelerated filer,” “accelerated
      filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
      (Check One):Large
      Accelerated Filer o
              Non-Accelerated
      Filer o
              (Do
      not check if a smaller reporting company)
            Accelerated
      Filer o
              Smaller
      Reporting Company ýIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act).
            Yes o   No ý






1




As
      of June 30, 2007, the last day of the Registrant’s most recently completed
      second fiscal quarter, the aggregate market value of the Registrant’s
      Common Stock held by non-affiliates of the Registrant was $25,808,400
      based on the closing sale price as reported on the NASDAQ Capital
      Market.As
      of February 23, 2008, there were issued and outstanding 1,634,931 shares
      of the issuer’s Common Stock.




Documents Incorporated by
Reference




Portions
of the Proxy Statement for the 2008 Annual Meeting of Shareholders to be held on
April 16, 2008 are incorporated in Part III.




2


RIVER
VALLEY BANCORP




FORM
10-K




INDEX




FORWARD-LOOKING
      STATEMENTS
            4PART
      I
            
            4Item
      1.
            Business.
            4Item
      1A.
            Risk
      Factors.
            31Item
      1B.
            Unresolved
      Staff Comments.
            31Item
      2.
            Properties.
            31Item
      3.
            Legal
      Proceedings.
            32Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            33Item
      4.5.
            Executive
      Officers of the Registrant.
            33PART
      II
            
            34Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
            34Item
      6.
            Selected
      Financial Data.
            36Item
      7.
            Management’s  Discussion
      and Analysis of Financial Condition and Results of
    Operation
            37Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            48Item
      8.
            Financial
      Statements and Supplementary Data.
            49Item
      9.
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            78Item
      9A(T).
            Controls
      and Procedures.
            78Item
      9B.
            Other
      Information.
            79PART
      III
            
            79Item
      10.
            Directors,
      Executive Officers and Corporate Governance.
            79Item
      11.
            Executive
      Compensation.
            80Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            80Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.
            80Item
      14.
            Principal
      Accounting Fees and Services.
            80PART
      IV
            
            81Item
      15.
            Exhibits,
      Financial Statement Schedules.
            81








3




FORWARD-LOOKING STATEMENTS




This
Annual Report on Form 10-K (“Form 10-K”) contains
statements which constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements appear in a
number of places in this Form 10-K and include statements regarding the intent,
belief, outlook, estimates or expectations of River Valley Bancorp, its
directors, or its officers primarily with respect to future events and the
future financial performance of the Holding Company. Readers of this Form 10-K
are cautioned that any such forward looking statements are not guarantees of
future events or performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward looking
statements as a result of various factors. The accompanying information
contained in this Form 10-K identifies important factors that could cause such
differences. These factors include, but are not limited to, changes in interest
rates; loss of deposits and loan demand to other savings and financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; regulatory changes; or unanticipated results
in pending legal proceedings.






PART
I


ITEM
1.BUSINESS.


BUSINESS


GENERAL






River
Valley Bancorp (the “Holding
Company” and together with the “Bank,” the “Company”), 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 on
December 20, 1996. On December 23, 1996, the Company 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”), and River Valley
Financial and Citizens merged on November 20, 1997.




The
activities of the Holding Company have been limited primarily to holding the
stock of River Valley Financial, which was organized in 1875 under the laws of
the United States of America. River Valley Financial, which provides banking
services in a single significant business segment, conducts operations from its
seven full-service office locations in Jefferson and Clark Counties, Indiana,
and Carroll County, Kentucky, and offers a variety of deposit and lending
services to consumer and commercial customers. The Company 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 and the Federal
Deposit Insurance Corporation (the “FDIC”). Deposits in River
Valley Financial are insured up to applicable limits by the Deposit Insurance
Fund of the FDIC.




The Bank
historically has concentrated its lending activities on the origination of loans
secured by first mortgage liens for the purchase, construction, or refinancing
of one- to four-family residential real property. One to four-family residential
mortgage loans continue to be the major focus of the Bank’s loan origination
activities, representing 44.7% of the Bank’s total loan portfolio at
December 31, 2007. The Bank identified loans totaling $312,000 as held for
sale at December 31, 2007. The Bank also offers multi-family mortgage
loans, non-residential real estate loans, land loans, construction loans,
non-mortgage commercial loans and consumer loans. The Bank’s primary market
areas are Jefferson and




4




Clark
Counties in Southeastern Indiana and adjacent Carroll County in Kentucky. The
Company’s Internet address is www.rvfbank.com, and the Company makes available
all filings with the Securities and Exchange Commission via its internet
website.




Loan Portfolio Data.The
following table sets forth the composition of the Bank’s loan portfolio,
including loans held for sale, as of December 31, 2007, 2006, 2005, 2004
and 2003 by loan type as of the dates indicated, including a reconciliation of
gross loans receivable after consideration of the allowance for loan losses,
deferred loan origination costs and loans in process.




At
      December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
            
            
            Percent
      of Total
            
            
            Amount
            
            
            Percent
      of Total
            
            
            Amount
            
            
            Percent
      of Total
            
            
            Amount
            
            
            Percent
      of Total
            
            
            Amount
            
            
            Percent
      of Total(Dollars
      in thousands)TYPE
      OF LOANResidential
      real estate:One-to-four-family
            
            $
            118,113
            
            
            
            44.7
            %
            
            $
            104,404
            
            
            
            42.2
            %
            
            $
            96,766
            
            
            
            41.0
            %
            
            $
            103,606
            
            
            
            43.0
            %
            
            $
            89,787
            
            
            
            45.6
            %Multi-family
            
            
            10,274
            
            
            
            3.9
            
            
            
            9,613
            
            
            
            3.9
            
            
            
            8,412
            
            
            
            3.6
            
            
            
            8,100
            
            
            
            3.4
            
            
            
            5,009
            
            
            
            2.6Construction
            
            
            14,319
            
            
            
            5.4
            
            
            
            17,993
            
            
            
            7.3
            
            
            
            13,549
            
            
            
            5.7
            
            
            
            20,046
            
            
            
            8.3
            
            
            
            8,689
            
            
            
            4.4Nonresidential
      real estate
            
            
            69,031
            
            
            
            26.1
            
            
            
            64,130
            
            
            
            25.9
            
            
            
            65,310
            
            
            
            27.7
            
            
            
            59,702
            
            
            
            24.8
            
            
            
            50,995
            
            
            
            25.9Land
      loans
            
            
            12,033
            
            
            
            4.6
            
            
            
            15,790
            
            
            
            6.4
            
            
            
            16,744
            
            
            
            7.1
            
            
            
            7,933
            
            
            
            3.3
            
            
            
            5,393
            
            
            
            2.7Consumer
      loans:Automobile
      loans
            
            
            2,686
            
            
            
            1.0
            
            
            
            2,853
            
            
            
            1.1
            
            
            
            3,444
            
            
            
            1.5
            
            
            
            4,675
            
            
            
            1.9
            
            
            
            6,347
            
            
            
            3.2Loans
      secured by deposits
            
            
            632
            
            
            
            .2
            
            
            
            605
            
            
            
            .2
            
            
            
            510
            
            
            
            .2
            
            
            
            553
            
            
            
            .2
            
            
            
            427
            
            
            
            .2Other
            
            
            2,718
            
            
            
            1.0
            
            
            
            2,802
            
            
            
            1.2
            
            
            
            2,986
            
            
            
            1.3
            
            
            
            3,659
            
            
            
            1.5
            
            
            
            3,513
            
            
            
            1.8Commercial
      loans
            
            
            34,649
            
            
            
            13.1
            
            
            
            29,000
            
            
            
            11.8
            
            
            
            28,148
            
            
            
            11.9
            
            
            
            32,582
            
            
            
            13.6
            
            
            
            26,764
            
            
            
            13.6Gross
      loans receivable
            
            
            264,455
            
            
            
            100.0
            
            
            
            247,190
            
            
            
            100.0
            
            
            
            235,869
            
            
            
            100.00
            
            
            
            240,856
            
            
            
            100.00
            
            
            
            196,924
            
            
            
            100.00Add/(Deduct):Deferred
      loan origination costs
            
            
            494
            
            
            
            .2
            
            
            
            487
            
            
            
            .2
            
            
            
            488
            
            
            
            .2
            
            
            
            496
            
            
            
            .2
            
            
            
            461
            
            
            
            .2Undisbursed
      portions of loans in process
            
            
            (4,113
            )
            
            
            (1.6
            )
            
            
            (3,614
            )
            
            
            (1.5
            )
            
            
            (5,152
            )
            
            
            (2.2
            )
            
            
            (8,812
            )
            
            
            (3.7
            )
            
            
            (3,868
            )
            
            
            (2.0
            )Allowance
      for loan losses
            
            
            (2,208
            )
            
            
            (.8
            )
            
            
            (2,176
            )
            
            
            (.9
            )
            
            
            (2,320
            )
            
            
            (1.0
            )
            
            
            (2,364
            )
            
            
            (1.0
            )
            
            
            (2,056
            )
            
            
            (1.1
            )Net
      loans receivable
            
            $
            258,628
            
            
            
            97.8
            %
            
            $
            241,887
            
            
            
            97.8
            %
            
            $
            228,885
            
            
            
            97.0
            %
            
            $
            230,176
            
            
            
            95.6
            %
            
            $
            191,461
            
            
            
            97.2
            %




The
following table sets forth certain information at December 31, 2007,
regarding the dollar amount of loans maturing in the Bank’s loan portfolio based
on the contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity and overdrafts are reported as due
in one year or less. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses. Management expects
prepayments will cause actual maturities to be shorter.




Balance
      Outstanding at
            
            
            Due
      During Years Ended December 31December
      31, 2007
            
            
            2008
            
            
            2009
            
            
            2010
      to 2011
            
            
            2012
      to 2016
            
            
            2017
      to 2021
            
            
            2022
      and following(In
      thousands)Residential
      real estate loans:One-to-four-family
            
            $
            118,113
            
            
            $
            616
            
            
            $
            45
            
            
            $
            770
            
            
            $
            5,494
            
            
            $
            11,941
            
            
            $
            99,247Multi-family
            
            
            10,274
            
            
            
            —
            
            
            
            —
            
            
            
            170
            
            
            
            140
            
            
            
            622
            
            
            
            9,342Construction
            
            
            14,319
            
            
            
            13,520
            
            
            
            799
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Nonresidential
      Real estate loans
            
            
            69,031
            
            
            
            156
            
            
            
            77
            
            
            
            557
            
            
            
            5,741
            
            
            
            5,801
            
            
            
            56,699Land
      loans
            
            
            12,033
            
            
            
            3,436
            
            
            
            124
            
            
            
            17
            
            
            
            877
            
            
            
            578
            
            
            
            7,001Consumer
      loans:Loans
      secured by deposits
            
            
            632
            
            
            
            466
            
            
            
            53
            
            
            
            24
            
            
            
            89
            
            
            
            —
            
            
            
            —Other
      loans
            
            
            5,404
            
            
            
            1,208
            
            
            
            752
            
            
            
            2,151
            
            
            
            1,248
            
            
            
            45
            
            
            
            —Commercial
      loans
            
            
            34,649
            
            
            
            24,103
            
            
            
            4,524
            
            
            
            1,710
            
            
            
            3,876
            
            
            
            436
            
            
            
            —Total
            
            $
            264,455
            
            
            $
            43,505
            
            
            $
            6,374
            
            
            $
            5,399
            
            
            $
            17,465
            
            
            $
            19,423
            
            
            $
            172,289









The
following table sets forth, as of December 31, 2007, the dollar amount of
all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.


5







Due
      After December 31, 2008Fixed Rates
            
            
            Variable Rates
            
            
            Total(In
      thousands)Residential
      real estate loans:One-to-four-family
            
            $
            20,770
            
            
            $
            96,727
            
            
            $
            117,497Multi-family
            
            
            413
            
            
            
            9,861
            
            
            
            10,274Construction
            
            
            0
            
            
            
            799
            
            
            
            799Non-residential
      real estate loans
            
            
            5,256
            
            
            
            63,619
            
            
            
            68,875Land
      loans
            
            
            134
            
            
            
            8,463
            
            
            
            8,597Consumer
      loans:Loans
      secured by deposits
            
            
            166
            
            
            
            0
            
            
            
            166Other
      loans
            
            
            4,123
            
            
            
            73
            
            
            
            4,196Commercial
      loans
            
            
            5,875
            
            
            
            4,671
            
            
            
            10,546Total
            
            $
            36,737
            
            
            $
            184,213
            
            
            $
            220,950




Residential Loans.
Residential loans consist primarily of one- to four-family loans. Approximately
$118.1 million, or 44.7% of the Bank’s portfolio of loans, at December 31,
2007, consisted of one- to four-family residential loans, of which approximately
81.7% had adjustable rates.




The Bank
currently offers adjustable rate one- to four-family residential mortgage loans
(“ARMs”) which adjust
annually and are indexed to the one-year U.S. Treasury securities yields
adjusted to a constant maturity, although until late 1995, the Bank’s ARMs were
indexed to the 11th District Cost of Funds. Some of the Bank’s residential ARMs
are originated at a discount or “teaser” rate which is generally 150 to 175
basis points below the “fully indexed” rate. These ARMs then adjust annually to
maintain a margin above the applicable index, subject to maximum rate
adjustments discussed below.  However, no “teaser” rates were
currently being offered at December 31, 2007. The Bank’s ARMs have a current
margin above such index of 3% for owner-occupied properties and 3.5% for
non-owner-occupied properties. A substantial portion of the ARMs in the Bank’s
portfolio at December 31, 2007 provide for maximum rate adjustments per
year and over the life of the loan of 2% and 6%, respectively, although the Bank
also originates residential ARMs which provide for maximum rate adjustments per
year and over the life of the loan of 1% and 4%, respectively. The Bank’s ARMs
generally provide for interest rate minimums equal to the origination rate. The
Bank’s residential ARMs are amortized for terms up to 30 years.




Adjustable
rate loans decrease the risk associated with changes in interest rates but
involve other risks, primarily because as interest rates rise, the payments by
the borrowers may rise to the extent permitted by the terms of the loan, thereby
increasing the potential for default. Also, adjustable rate loans have features
which restrict changes in interest rates on a short-term basis and over the life
of the loan. At the same time, the market value of the underlying property may
be adversely affected by higher interest rates.




The Bank
currently offers fixed rate one- to four-family residential mortgage loans which
provide for the payment of principal and interest over periods of 10 to 30
years. At December 31, 2007, approximately 18.3% of the Bank’s one- to
four-family residential mortgage loans had fixed rates. The Bank currently
underwrites a portion of its fixed-rate residential mortgage loans for potential
sale to the Federal Home Loan Mortgage Corporation (the “FHLMC”). The Bank retains all
servicing rights on the residential mortgage loans sold to the FHLMC. At
December 31, 2007, the Bank had approximately $78.0 million of fixed rate
residential mortgage loans which were sold to the FHLMC and for which the Bank
provides servicing.




The Bank
generally does not originate one- to four-family residential mortgage loans if
the ratio of the loan amount to the lesser of the current cost or appraised
value of the property (the “Loan-to-Value Ratio”) exceeds
95% and generally does not originate one- to four-family residential ARMs if the
Loan-to-Value Ratio exceeds 90%. The Bank generally requires private mortgage
insurance on all fixed rate conventional one- to four-family residential real
estate mortgage loans with Loan-to-Value Ratios in




6




excess of
80%. The cost of such insurance is factored into the annual percentage yield on
such loans, and is not automatically eliminated when the principal balance is
reduced over the term of the loan.  During 2007 the Bank originated
and retained $8.7 million of fixed rate one- to four-family residential mortgage
loans that typically would be sold to the secondary market, but were held by the
Bank for investment purposes.




Substantially
all of the one- to four-family residential mortgage loans that the Bank
originates include “due-on-sale” clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.




At
December 31, 2007, the Bank had outstanding approximately $9.9 million of
home equity loans, with unused lines of credit totaling approximately $14.3
million. Two home equity loans were included in non-performing assets on that
date in the amount of $13,000. The Bank’s home equity lines of credit are
adjustable rate lines of credit tied to the prime rate and are amortized based
on a 10- to 20-year maturity. The Bank generally allows a maximum 90%
Loan-to-Value Ratio for its home equity loans (taking into account any other
mortgages on the property). Payments on such home equity loans are equal to 1.5%
of the outstanding principal balance per month, or on newer home equity loans,
to the interest accrued at the end of the period.




The Bank
also offers standard second mortgage loans, which are adjustable rate loans tied
to the U.S. Treasury securities yields adjusted to a constant maturity with a
current margin above such index of 3.5%. The Bank’s second mortgage loans have
maximum rate adjustments per year and over the terms of the loans equal to 2%
and 6%, respectively. The Bank’s second mortgage loans have terms of up to 30
years.




At
December 31, 2007, $657,000 of one- to four-family residential mortgage
loans, or .25% of total loans, were included in the Bank’s non-performing
assets.




Construction Loans. The Bank
offers construction loans with respect to residential and nonresidential real
estate and, in certain cases, to builders or developers constructing such
properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer).




Generally,
construction loans are written as 12-month loans, either fixed or adjustable,
with interest calculated on the amount disbursed under the loan and payable on a
semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value
Ratio for its construction loans, although the Bank may permit an 85%
Loan-to-Value Ratio for one- to four-family residential construction loans.
Inspections are generally made prior to any disbursement under a construction
loan, and the Bank does not charge commitment fees for its construction
loans.




At
December 31, 2007, $14.3 million, or 5.4% of the Bank’s total loan
portfolio, consisted of construction loans. The largest construction loan at
December 31, 2007 totaled $1.2 million. There were no non-performing
construction loans at December 31, 2007.




While
providing the Bank with a comparable, and in some cases higher, yield than a
conventional mortgage loan, construction loans involve a higher level of risk.
For example, if a project is not completed and the borrower defaults, the Bank
may have to hire another contractor to complete the project at a higher cost.
Also, a project may be completed, but may not be saleable, resulting in the
borrower defaulting and the Bank taking title to the project.




Nonresidential Real Estate
Loans. At December 31, 2007, $69.0 million, or 26.1% of the Bank’s
portfolio, consisted of nonresidential real estate loans. Nonresidential real
estate loans are primarily




7




secured
by real estate such as churches, farms and small business properties. The Bank
generally originates nonresidential real estate, adjustable rate loans of
varying rates with lock in terms of up to 10 years indexed to the one-year U.S.
Treasury securities yields adjusted to a constant maturity, written for maximum
terms of 30 years. The Bank’s adjustable rate nonresidential real estate loans
have maximum adjustments per year and over the life of the loan of 2% and 6%,
respectively, and interest rate minimums of 1% below the origination rate. The
Bank generally requires a Loan-to-Value Ratio of up to 80%, depending on the
nature of the real estate collateral.




The Bank
underwrites its nonresidential real estate loans on a case-by-case basis and, in
addition to its normal underwriting criteria, evaluates the borrower’s ability
to service the debt from the net operating income of the property. As of
December 31, 2007, the Bank’s largest nonresidential real estate loan was
$3.8 million. Nonresidential real estate loans in the amount of $568,000, or
..22% of total loans, were included in non-performing assets at December 31,
2007.




Loans
secured by nonresidential real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.




Multi-family Loans. At
December 31, 2007, approximately $10.3 million, or 3.9% of the Bank’s total
loan portfolio, consisted of mortgage loans secured by multi-family dwellings
(those consisting of more than four units). The Bank writes multi-family loans
on terms and conditions similar to its nonresidential real estate loans. The
largest multi-family loan in the Bank’s portfolio as of December 31, 2007
was $1.2 million and was secured by a 46-unit apartment complex in Hanover,
Indiana. No multi-family loans were included in non-performing assets as of
December 31, 2007.




Multi-family
loans, like nonresidential real estate loans, involve a greater risk than
residential loans. See “Nonresidential Real Estate Loans” above. Also, the
loan-to-one borrower limitations restrict the ability of the Bank to make loans
to developers of apartment complexes and other multi-family units.




Land Loans. At
December 31, 2007, approximately $12.0 million, or 4.6% of the Bank’s total
loan portfolio, consisted of mortgage loans secured by undeveloped real estate.
The Bank’s land loans are generally written on terms and conditions similar to
its nonresidential real estate loans. Some of the Bank’s land loans are land
development loans;  i.e., the proceeds of the
loans are used for improvements to the real estate such as streets and sewers.
At December 31, 2007, the Bank’s largest land loan totaled $2.5
million.  $225,000 of land loans, or .09% of total loans, were
included in non-performing assets as of December 31, 2007.




Land
loans are more risky than conventional loans since land development borrowers
who are over budget may divert the loan funds to cover cost over-runs rather
than direct them toward the purpose for which such loans were made. In addition,
those loans are more difficult to monitor than conventional mortgage loans. As
such, a defaulting borrower could cause the Bank to take title to partially
improved land that is unmarketable without further capital
investment.




Commercial Loans. At
December 31, 2007, $34.6 million, or 13.1% of the Bank’s total loan
portfolio, consisted of non-mortgage commercial loans. The Bank’s commercial
loans are written on either a fixed rate or an adjustable rate basis with terms
that vary depending on the type of security, if any. At December 31,
2007, approximately $28.9 million, or 83.3%, of the Bank’s commercial loans were
secured by collateral, such as equipment, inventory and crops. The Bank’s
adjustable rate commercial




8




loans are
generally indexed to the prime rate with varying margins and terms depending on
the type of collateral securing the loans and the credit quality of the
borrowers. At December 31, 2007, the largest commercial loan was $2.5
million. As of the same date, commercial loans totaling $373,000 were included
in non-performing assets.




Commercial
loans tend to bear somewhat greater risk than residential mortgage loans,
depending on the ability of the underlying enterprise to repay the loan.
Further, they are frequently larger in amount than the Bank’s average
residential mortgage loans.




Consumer Loans. The Bank’s
consumer loans, consisting primarily of auto loans, home improvement loans,
unsecured installment loans, loans secured by deposits and mobile home loans,
aggregated approximately $6.0 million at December 31, 2007, or 2.2% of the
Bank’s total loan portfolio. The Bank consistently originates consumer loans to
meet the needs of its customers and to assist in meeting its asset/liability
management goals. All of the Bank’s consumer loans, except loans secured by
deposits, are fixed rate loans with terms that vary from six months (for
unsecured installment loans) to 66 months (for home improvement loans and loans
secured by new automobiles). At December 31, 2007, 96.6% of the Bank’s
consumer loans were secured by collateral.




The
Bank’s loans secured by deposits are made in amounts up to 90% of the current
account balance and accrue at a rate of 2% over the underlying passbook or
certificate of deposit rate.




The Bank
offers both direct and indirect automobile loans. Under the Bank’s indirect
automobile program, participating automobile dealers receive loan applications
from prospective purchasers of automobiles at the point of sale and deliver them
to the Bank for processing. The dealer receives a portion of the interest
payable on approved loans.




Consumer
loans may entail greater risk than residential mortgage loans, particularly in
the case of consumer loans which are unsecured or are secured by rapidly
depreciable assets, such as automobiles. Further, any repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. In addition, consumer loan collections depend upon the
borrower’s continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. At December 31,
2007, consumer loans amounting to $2,000 were included in non-performing
assets.




Origination, Purchase and Sale of
Loans. The Bank historically originated its ARMs pursuant to its own
underwriting standards.   In 1996, the Bank began underwriting
fixed rate residential mortgage loans for potential sale to the FHLMC on a
servicing-retained basis. Loans originated for sale to the FHLMC in the
secondary market are originated in accordance with the guidelines established by
the FHLMC and are sold promptly after they are originated. The Bank receives a
servicing fee of one-fourth of 1% of the principal balance of all loans
serviced. At December 31, 2007, the Bank serviced $78.0 million in loans
sold to the FHLMC.




The Bank
confines its loan origination activities primarily to Jefferson, Clark and Floyd
Counties in Indiana and Trimble, Carroll, and Jefferson Counties in Kentucky,
with some activity in the areas adjacent to these counties. At December 31,
2007, the Bank held loans totaling approximately $55.5 million that were secured
by property located outside of Indiana. The Bank’s loan originations are
generated from referrals from existing customers, real estate brokers and
newspaper and periodical advertising. Loan applications are taken at any of the
Bank’s seven full-service offices.




9




The
Bank’s loan approval processes are intended to assess the borrower’s ability to
repay the loan, the viability of the loan and the adequacy of the value of the
property that will secure the loan. To assess the borrower’s ability to repay,
the Bank evaluates the employment and credit history and information on the
historical and projected income and expenses of its borrowers.




Under the
Bank’s lending policy, a loan officer may approve mortgage loans up to $150,000,
a Senior Loan Officer may approve mortgage loans up to $417,000 and the
President may approve mortgage loans up to $417,000. All other mortgage loans
must be approved by at least four members of the Bank’s Board of Directors. The
lending policy further provides that loans secured by readily marketable
collateral, such as stock, bonds and certificates of deposit may be approved by
a Loan Officer for up to $150,000, by a Senior Loan Officer for up to $417,000
and by the President up to $417,000. Loans secured by other non-real estate
collateral may be approved by a Loan Officer for up to $50,000, by a Senior Loan
Officer up to $100,000 and by the President up to $200,000. Finally, the lending
policy provides that unsecured loans may be approved by a Loan Officer up to
$15,000 or up to $25,000 by a Senior Loan Officer or up to $50,000 by the
President. All other unsecured loans or loans secured by non-real estate
collateral must be approved by at least four members of the Bank’s Board of
Directors.




The Bank
generally requires appraisals on all real property securing its loans and
requires an attorney’s opinion or title insurance and a valid lien on the
mortgaged real estate. Appraisals for all real property securing mortgage loans
are performed by independent appraisers who are state-licensed. The Bank
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also requires flood insurance to protect the
property securing the loan if the property is in a flood plain. The Bank also
generally requires private mortgage insurance only on fixed rate residential
mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does not
require escrow accounts for insurance premiums or taxes.




The
Bank’s underwriting standards for consumer and commercial loans are intended to
protect against some of the risks inherent in making such loans. Borrower
character, paying habits and financial strengths are important
considerations.




The Bank
occasionally purchases and sells participations in commercial loans,
non-residential real estate and multi-family loans to or from other financial
institutions. At December 31, 2007, the Bank held in its loan portfolio
participations in these types of loans aggregating approximately $4.7 million
that it had purchased or sold.




The
following table shows loan disbursement and repayment activity for the Bank
during the periods indicated.




Year
      Ended December 312007
            
            
            2006
            
            
            2005(In
      thousands)Loans
      Disbursed:Residential
      real estate loans (1)
            
            $
            46,496
            
            
            $
            42,320
            
            
            $
            45,163Multi-family
      loans
            
            
            2,351
            
            
            
            1,770
            
            
            
            923Construction
      loans
            
            
            10,708
            
            
            
            19,107
            
            
            
            18,958Non-residential
      real estate loans
            
            
            8,488
            
            
            
            10,042
            
            
            
            12,549Land
      loans
            
            
            8,963
            
            
            
            5,761
            
            
            
            9,728Consumer
      and other loans
            
            
            4,037
            
            
            
            4,260
            
            
            
            4,244Commercial
      loans
            
            
            28,835
            
            
            
            21,034
            
            
            
            26,400Total
      loans disbursed
            
            
            109,878
            
            
            
            104,294
            
            
            
            117,965Reductions:Sales
            
            
            6,514
            
            
            
            5,501
            
            
            
            13,902Principal
      loan repayments and other (2)
            
            
            86,623
            
            
            
            85,791
            
            
            
            105,354Total
      reductions
            
            
            93,137
            
            
            
            91,292
            
            
            
            119,256Net
      Increase (decrease)
            
            $
            16,741
            
            
            $
            13,002
            
            
            $
            (1,291
            )





10





(1)
            Includes
      loans originated for sale in the secondary
  market.


(2)
            Other
      items consist of amortization of deferred loan origination costs, the
      provision for losses on loans and net charges to the allowance for loan
      losses.




Origination and Other Fees.
The Bank realizes income from loan origination fees, loan servicing fees, late
charges, checking account service charges and fees for other miscellaneous
services. Late charges are generally assessed if payment is not received within
a specified number of days after it is due. The grace period depends on the
individual loan documents.






NON-PERFORMING
AND PROBLEM ASSETS




Mortgage
loans are reviewed by the Bank on a regular basis and are placed on a
non-accrual status when management determines that the collectibility of the
interest is less than probable or collection of any amount of principal is in
doubt. Generally, when loans are placed on non-accrual status, unpaid accrued
interest is written off, and further income is recognized only to the extent
received. The Bank delivers delinquency notices with respect to all mortgage
loans contractually past due 5 to 10 days. When loans are 30 days in default,
personal contact is made with the borrower to establish an acceptable repayment
schedule. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.




Commercial
and consumer loans are treated similarly. Interest income on consumer,
commercial and other non-mortgage loans is accrued over the term of the loan
except when serious doubt exists as to the collectibility of a loan, in which
case accrual of interest is discontinued and the loan is written-off, or written
down to the fair value of the collateral securing the loan. It is the Bank’s
policy to recognize losses on these loans as soon as they become
apparent.




Non-performing Assets. At
December 31, 2007, $1.8 million, or .52% of consolidated total assets, were
non-performing loans compared to $1.1 million, or .33% of consolidated total
assets, at December 31, 2006. The Bank had $184,000 of REO at
December 31, 2007.




The table
below sets forth the amounts and categories of the Bank’s non-performing assets
(non-performing loans, foreclosed real estate and troubled debt restructurings)
for the last three years. It is the policy of the Bank that all earned but
uncollected interest on all loans be reviewed monthly to determine if any
portion thereof should be classified as uncollectible for any loan past due in
excess of 90 days.




At
      December 312007
            
            
            2006
            
            
            2005(In
      thousands)Non-performing
      assets:Non-performing
      loans
            
            $
            1,825
            
            
            $
            1,114
            
            
            $
            1,747Foreclosed
      real estate
            
            
            184
            
            
            
            —
            
            
            
            271Total
      non-performing assets
            
            $
            2,009
            
            
            $
            1,114
            
            
            $
            2,018Total
      non-performing loans to total loans
            
            
            0.71
            %
            
            
            0.46
            %
            
            
            0.76
            %Total
      non-performing assets to total assets
            
            
            0.57
            %
            
            
            0.33
            %
            
            
            0.61
            %




At
December 31, 2007, the Bank held loans delinquent from 30 to 89 days
totaling $2.0 million. Other than in connection with these loans and other
delinquent loans disclosed in this section, management was not aware of any
other borrowers who were experiencing financial difficulties. In addition, there
were no other assets that would need to be disclosed as non-performing
assets.






11




Delinquent Loans.The
following table sets forth certain information at December 31, 2007, 2006, and
2005 relating to delinquencies in the Bank’s portfolio. Delinquent loans that
are 90 days or more past due are considered non-performing
assets.




At
      December 31, 2007
            
            
            At
      December 31, 2006
            
            
            At
      December 31, 200530-89 Days
            
            
            90 Days or More
            
            
            30-89 Days
            
            
            90 Days or More
            
            
            30-89 Days
            
            
            90 Days or MoreNumber
      of Loans
            
            
            Principal
      Balance of Loans
            
            
            Number
      of Loans
            
            
            Principal
      Balance of Loans
            
            
            Number
      of Loans
            
            
            Principal
      Balance of Loans
            
            
            Number
      of Loans
            
            
            Principal
      Balance of Loans
            
            
            Number
      of Loans
            
            
            Principal
      Balance of Loans
            
            
            Number
      of Loans
            
            
            Principal
      Balance of Loans(Dollars
      in Thousands)Residential
      real estate loans
            
            
            15
            
            
            $
            1,064
            
            
            
            14
            
            
            $
            657
            
            
            
            11
            
            
            $
            310
            
            
            
            13
            
            
            $
            709
            
            
            
            9
            
            
            $
            1,306
            
            
            
            11
            
            
            $
            941Construction
      loans.
            
            
            1
            
            
            
            30
            
            
            
            —
            
            
            
            —
            
            
            
            2
            
            
            
            306
            
            
            
            —
            
            
            
            —
            
            
            
            1
            
            
            
            20
            
            
            
            2
            
            
            
            215Land
      loans
            
            
            1
            
            
            
            46
            
            
            
            1
            
            
            
            225
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1
            
            
            
            28Non-residential
      real estate loans
            
            
            2
            
            
            
            376
            
            
            
            3
            
            
            
            568
            
            
            
            1
            
            
            
            64
            
            
            
            1
            
            
            
            210
            
            
            
            1
            
            
            
            207
            
            
            
            1
            
            
            
            110Consumer
      loans
            
            
            13
            
            
            
            63
            
            
            
            1
            
            
            
            2
            
            
            
            7
            
            
            
            15
            
            
            
            4
            
            
            
            12
            
            
            
            10
            
            
            
            81
            
            
            
            2
            
            
            
            9Commercial
      loans
            
            
            5
            
            
            
            419
            
            
            
            3
            
            
            
            373
            
            
            
            7
            
            
            
            53
            
            
            
            2
            
            
            
            183
            
            
            
            1
            
            
            
            13
            
            
            
            4
            
            
            
            444Total
            
            
            37
            
            
            $
            1,998
            
            
            
            22
            
            
            $
            1,825
            
            
            
            28
            
            
            $
            748
            
            
            
            20
            
            
            $
            1,114
            
            
            
            22
            
            
            $
            1,627
            
            
            
            21
            
            
            $
            1,747Delinquent
      loans to total loans
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.48
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0.77
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.47
            %






Classified Assets. Federal
regulations and the Bank’s Asset Classification Policy provide for the
classification of loans and other assets such as debt and equity securities to
be of lesser quality as “substandard,” “doubtful,” or “loss” assets. An asset is
considered “substandard” if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
“Substandard” assets include those characterized by the “distinct possibility”
that the Bank will sustain “some loss” if the deficiencies are not corrected.
Assets classified as “doubtful” have all of the weaknesses inherent in those
classified “substandard,” with the added characteristic that the weaknesses
present make “collection or liquidation in full,” on the basis of currently
existing facts, conditions, and values, “highly questionable and improbable.”
Assets classified as “loss” are those considered “uncollectible” and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.




An
insured institution is required to establish general allowances for loan losses
in an amount deemed prudent by management for loans classified substandard or
doubtful, as well as for other problem loans. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as “loss,” it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount. An institution’s determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances.






At
December 31, 2007, the aggregate amount of the Bank’s classified assets are
as follows:




At December 31, 2007(In
      thousands)Substandard
      assets
            
            $
            7,034Doubtful
      assets
            
            
            417Loss
      assets
            
            
            0Total
      classified assets
            
            $
            7,451




The Bank
regularly reviews its loan portfolio to determine whether any loans require
classification in accordance with applicable regulations. Not all of the Bank’s
classified assets constitute non-performing assets.


12


ALLOWANCE
FOR LOAN LOSSES




The
allowance for loan losses is maintained through the provision for loan losses,
which is charged to earnings. The provision for loan losses is determined in
conjunction with management’s review and evaluation of current economic
conditions (including those of the Bank’s lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs and other pertinent
information derived from a review of the loan portfolio. In management’s
opinion, the Bank’s allowance for loan losses is adequate to absorb probable
incurred losses from loans at December 31, 2007. However, there can be no
assurance that regulators, when reviewing the Bank’s loan portfolio in the
future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect the Bank’s loan
portfolio.






Summary of Loan Loss Experience.The following table analyzes changes in the allowance during the five
years ended December 31, 2007.




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            2,176
            
            
            $
            2,320
            
            
            $
            2,364
            
            
            $
            2,056
            
            
            $
            2,101Charge-offs:Single-family
      residential
            
            
            (270
            )
            
            
            (247
            )
            
            
            (190
            )
            
            
            (24
            )
            
            
            (401
            )Consumer
            
            
            (183
            )
            
            
            (178
            )
            
            
            (217
            )
            
            
            (150
            )
            
            
            (242
            )Commercial
      loans
            
            
            (213
            )
            
            
            (19
            )
            
            
            —
            
            
            
            —
            
            
            
            (100
            )Total
      charge-offs
            
            
            (666
            )
            
            
            (444
            )
            
            
            (407
            )
            
            
            (174
            )
            
            
            (743
            )Recoveries
            
            
            136
            
            
            
            36
            
            
            
            75
            
            
            
            144
            
            
            
            190Net
      charge-offs
            
            
            (530
            )
            
            
            (408
            )
            
            
            (332
            )
            
            
            (30
            )
            
            
            (553
            )Provision
      for losses on loans
            
            
            562
            
            
            
            264
            
            
            
            288
            
            
            
            338
            
            
            
            508Balance
      end of period
            
            $
            2,208
            
            
            $
            2,176
            
            
            $
            2,320
            
            
            $
            2,364
            
            
            $
            2,056Allowance  for
      loan losses as a percent of total loans outstanding
            
            
            0.83
            %
            
            
            0.89
            %
            
            
            1.00
            %
            
            
            1.02
            %
            
            
            1.06
            %Ratio
      of net charge-offs to average loans outstanding before net
      items
            
            
            .20
            %
            
            
            .17
            %
            
            
            .14
            %
            
            
            .01
            %
            
            
            .29
            %






Allocation of Allowance for Loan
Losses.The following table presents an analysis of the allocation of the
Bank’s allowance for loan losses at the dates indicated.




At
      December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
            
            
            Percent
      of loans in each category to total loans
            
            
            Amount
            
            
            Percent
      of loans in each category to total loans
            
            
            Amount
            
            
            Percent
      of loans in each category to total loans
            
            
            Amount
            
            
            Percent
      of loans in each category to total loans
            
            
            Amount
            
            
            Percent
      of loans in each category to total loans(Dollars
      in Thousands)Balance
      at end of period applicable to:Residential
      real estate
            
            $
            743
            
            
            
            54.0
            %
            
            $
            954
            
            
            
            53.4
            %
            
            $
            1,102
            
            
            
            50.3
            %
            
            $
            930
            
            
            
            54.7
            %
            
            $
            1,007
            
            
            
            52.6
            %Nonresidential
      real estate
            
            
            0
            
            
            
            30.7
            
            
            
            —
            
            
            
            32.3
            
            
            
            64
            
            
            
            34.8
            
            
            
            162
            
            
            
            28.1
            
            
            
            171
            
            
            
            28.6Consumer
      loans
            
            
            57
            
            
            
            2.2
            
            
            
            171
            
            
            
            2.5
            
            
            
            156
            
            
            
            3.0
            
            
            
            226
            
            
            
            3.7
            
            
            
            246
            
            
            
            5.2Commercial
      loans
            
            
            892
            
            
            
            13.1
            
            
            
            855
            
            
            
            11.7
            
            
            
            724
            
            
            
            11.9
            
            
            
            807
            
            
            
            13.5
            
            
            
            512
            
            
            
            13.6Unallocated
            
            
            515
            
            
            
            0
            
            
            
            196
            
            
            
            —
            
            
            
            274
            
            
            
            —
            
            
            
            239
            
            
            
            —
            
            
            
            120
            
            
            
            —Total
            
            $
            2,208
            
            
            
            100.0
            %
            
            $
            2,176
            
            
            
            100.0
            %
            
            $
            2,320
            
            
            
            100.0
            %
            
            $
            2,364
            
            
            
            100.0
            %
            
            $
            2,056
            
            
            
            100.0
            %


13
  INVESTMENTS
AND MORTGAGE-BACKED SECURITIES




Investments. The Bank’s
investment portfolio (excluding mortgage-backed securities) consists of U.S.
government and agency obligations, corporate bonds, municipal securities and
Federal Home Loan Bank (“FHLB”) stock. At
December 31, 2007, the investments in the portfolio had a carrying value of
approximately $59.0 million, or 16.9%, of the consolidated total
assets.




The
following table sets forth the amortized cost and the market value of the Bank’s
investment portfolio at the dates indicated.




At
      December 31,2007
            
            
            2006
            
            
            2005Amortized Cost
            
            
            Market Value
            
            
            Amortized Cost
            
            
            Market Value
            
            
            Amortized Cost
            
            
            Market Value(In
      thousands)Available
      for sale:U.S.
      Government and agency obligations
            
            $
            35,821
            
            
            $
            36,123
            
            
            $
            50,812
            
            
            $
            50,369
            
            
            $
            57,737
            
            
            $
            56,986Corporate
      bonds
            
            
            888
            
            
            
            888
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Municipal
      securities
            
            
            15,598
            
            
            
            15,644
            
            
            
            14,776
            
            
            
            14,712
            
            
            
            2,562
            
            
            
            2,540Total
      available for sale
            
            
            52,307
            
            
            
            52,655
            
            
            
            65,588
            
            
            
            65,081
            
            
            
            60,299
            
            
            
            59,526FHLB
      stock
            
            
            4,750
            
            
            
            4,750
            
            
            
            4,400
            
            
            
            4,400
            
            
            
            4,050
            
            
            
            4,050Total
      investments
            
            $
            57,057
            
            
            $
            57,405
            
            
            $
            69,988
            
            
            $
            69,481
            
            
            $
            64,349
            
            
            $
            63,576






The
following table sets forth the amount of investment securities (excluding FHLB
stock) which mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31,
2007.




Amount
      at December 31, 2007 which matures inLess Than One Year
            
            
            One Year to Five Years
            
            
            Five to Ten Years
            
            
            After Ten YearsAmortized
      Cost
            
            
            Average
      Yield
            
            
            Amortized
      Cost
            
            
            Average
      Yield
            
            
            Amortized
      Cost
            
            
            Average
      Yield
            
            
            Amortized
      Cost
            
            
            Average
       Yield(Dollars
      in thousands)U.S.
      Government and agency obligations
            
            $
            17,983
            
            
            
            4.01
            %
            
            $
            9,960
            
            
            
            4.90
            %
            
            $
            3,966
            
            
            
            5.39
            %
            
            $
            3,912
            
            
            
            5.54
            %Municipal
      securities
            
            
            375
            
            
            
            3.08
            %
            
            
            1,109
            
            
            
            3.44
            %
            
            
            3,903
            
            
            
            3.83
            %
            
            
            10,211
            
            
            
            3.94
            %Corporate
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            888
            
            
            
            6.53
            %




Mortgage-Backed Securities.
The Bank maintains a portfolio of mortgage-backed pass-through securities in the
form of FHLMC, FNMA and Government National Mortgage Association (“GNMA”) participation
certificates. Mortgage-backed pass-through securities generally entitle the Bank
to receive a portion of the cash flows from an identified pool of mortgages and
gives the Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA
securities are each guaranteed by its respective agencies as to principal and
interest.




Although
mortgage-backed securities generally yield less than individual loans originated
by the Bank, they present less credit risk. Because mortgage-backed securities
have a lower yield relative to current market rates, retention of such
investments could adversely affect the Bank’s earnings, particularly in a rising
interest rate environment. The mortgage-backed securities portfolio is generally
considered to have very low credit risk because they are guaranteed as to
principal repayment by the issuing agency.




In
addition, the Bank has purchased adjustable rate mortgage-backed securities as
part of its effort to reduce its interest rate risk. In a period of declining
interest rates, the Bank is subject to prepayment risk




14




on such
adjustable rate mortgage-backed securities. The Bank attempts to mitigate this
prepayment risk by purchasing mortgage-backed securities at or near par. If
interest rates rise in general, the interest rates on the loans backing the
mortgage-backed securities will also adjust upward, subject to the interest rate
caps in the underlying mortgage loans. However, the Bank is still subject to
interest rate risk on such securities if interest rates rise faster than 1% to
2% maximum annual interest rate adjustments on the underlying
loans.




At
December 31, 2007, the Bank had mortgage-backed securities with a carrying
value of approximately $6.3 million, all of which were classified as available
for sale. These mortgage-backed securities may be used as collateral for
borrowings and, through repayments, as a source of liquidity.




The
following table sets forth the amortized cost and market value of the Bank’s
mortgage-backed securities at the dates indicated.




At
      December 31,2007
            
            
            2006
            
            
            2005Amortized Cost
            
            
            Market Value
            
            
            Amortized Cost
            
            
            Market Value
            
            
            Amortized Cost
            
            
            Market Value(In
      thousands)Available
      for sale:Government
      Agency securities
            
            $
            5,275
            
            
            $
            5,353
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Collateralized
      mortgage obligations
            
            
            981
            
            
            
            991
            
            
            
            68
            
            
            
            69
            
            
            
            83
            
            
            
            83Total
      mortgage-backed securities
            
            $
            6,256
            
            
            $
            6,344
            
            
            $
            68
            
            
            $
            69
            
            
            $
            83
            
            
            $
            83






The
following table sets forth the amount of mortgage-backed securities which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at December 31, 2007.




Amount
      at December 31, 2007 which matures inLess Than One Year
            
            
            One Year to Five Years
            
            
            Five to Ten Years
            
            
            After Ten YearsAmortized
      Cost
            
            
            Average
      Yield
            
            
            Amortized
      Cost
            
            
            Average
      Yield
            
            
            Amortized
      Cost
            
            
            Average
      Yield
            
            
            Amortized
      Cost
            
            
            Average
       Yield(Dollars
      in thousands)Mortgage-backed
      securities available for sale
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            5,275
            
            
            
            5.68
            %CMO’s
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1
            
            
            
            8.50
            %
            
            
            980
            
            
            
            5.39
            %






The
following table sets forth the changes in the Bank’s mortgage-backed securities
portfolio for the years ended December 31, 2007, 2006, and 2005.




For
      the Year Ended December 31,2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)Beginning
      balance
            
            $
            68
            
            
            $
            83
            
            
            $
            113Purchases
            
            
            6,423
            
            
            
            —
            
            
            
            —Sales
      proceeds
            
            
            —
            
            
            
            —
            
            
            
            —Repayments
            
            
            (236
            )
            
            
            (15
            )
            
            
            (30
            )Losses
      on sales
            
            
            —
            
            
            
            —
            
            
            
            —Premium
      and discount amortization, net
            
            
            1
            
            
            
            —
            
            
            
            —Unrealized
      gains (losses) on securities available for sale
            
            
            —
            
            
            
            —
            
            
            
            —Ending
      balance
            
            $
            6,256
            
            
            $
            68
            
            
            $
            83







15


SOURCES
OF FUNDS




General.  Deposits
have traditionally been the Bank’s primary source of funds for use in lending
and investment activities.  In addition to deposits, the Bank derives
funds from scheduled loan payments, investment maturities, loan prepayments,
retained earnings, income on earning assets, and borrowings.  While
scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions, and levels of
competition.  Borrowings from the FHLB of Indianapolis may be used in
the short term to compensate for reductions in deposits or deposit inflows at
less than projected levels.




Deposits. Deposits are
attracted, principally from within Jefferson County, through the offering of a
broad selection of deposit instruments including fixed rate certificates of
deposit, NOW, MMDAs and other transaction accounts, individual retirement
accounts and savings accounts. The Bank actively solicits and advertises for
deposits outside of Jefferson County. Since the opening of our branches in
Sellersburg, Indiana (Clark County), Charlestown, Indiana (Clark County), and
the branch in Carrollton, Kentucky (Carroll County), the Bank’s market area has
expanded. Deposits will come from all of our market area. Deposit account terms
vary, with the principal differences being the minimum balance required, the
amount of time the funds remain on deposit and the interest rate. The Bank does
not pay a fee for any deposits it receives.




Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established by the Bank on a periodic basis. Determination of rates and terms
are predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and applicable regulations. The Bank relies, in part,
on customer service and long-standing relationships with customers to attract
and retain its deposits, but also closely prices its deposits in relation to
rates offered by its competitors.




The flow
of deposits is influenced significantly by general economic conditions, changes
in money market and prevailing interest rates and competition. The variety of
deposit accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
The Bank has become more susceptible to short-term fluctuations in deposit flows
as customers have become more interest rate conscious. The Bank manages the
pricing of its deposits in keeping with its asset/liability management and
profitability objectives. Based on its experience, the Bank believes that its
NOW and MMDAs are relatively stable sources of deposits. However, the ability of
the Bank to attract and maintain certificates of deposit, and the rates paid on
these deposits, have been and will continue to be significantly affected by
market conditions.




16




An
analysis of the Company’s deposit accounts by type, maturity and rate at
December 31, 2007 is as follows:




Type of Account
            
            Minimum Opening Balance
            
            
            Balance at December 31,
      2007
            
            
            % of Deposits
            
            
            Weighted Average Rate(Dollars
      in thousands)Withdrawable:Non-interest
      bearing accounts
            
            $
            100
            
            
            $
            18,619
            
            
            
            8.47
            %
            
            
            0.00
            %Savings
      accounts
            
            
            50
            
            
            
            24,730
            
            
            
            11.26
            
            
            
            1.87MMDA
            
            
            2,500
            
            
            
            23,814
            
            
            
            10.84
            
            
            
            3.69NOW
      accounts
            
            
            1,000
            
            
            
            59,603
            
            
            
            27.13
            
            
            
            3.27Total
      withdrawable
            
            
            
            
            
            
            126,766
            
            
            
            57.70
            
            
            
            2.46Certificates
      (original terms):I.R.A.
            
            $
            2,500
            
            
            $
            6,666
            
            
            
            3.03
            %
            
            
            4.29
            %3
      month
            
            
            2,500
            
            
            
            25
            
            
            
            0.01
            
            
            
            2.756
      months
            
            
            2,500
            
            
            
            5,006
            
            
            
            2.28
            
            
            
            4.869
      month
            
            
            2,500
            
            
            
            3,152
            
            
            
            1.44
            
            
            
            5.0512
      months
            
            
            2,500
            
            
            
            10,693
            
            
            
            4.87
            
            
            
            4.2915
      month
            
            
            2,500
            
            
            
            22,159
            
            
            
            10.09
            
            
            
            4.9518
      month
            
            
            2,500
            
            
            
            1,525
            
            
            
            0.69
            
            
            
            4.7024
      months
            
            
            2,500
            
            
            
            2,998
            
            
            
            1.37
            
            
            
            4.7430
      months
            
            
            2,500
            
            
            
            752
            
            
            
            0.34
            
            
            
            4.2436
      months
            
            
            2,500
            
            
            
            1,023
            
            
            
            0.47
            
            
            
            4.0641
      months
            
            
            2,500
            
            
            
            481
            
            
            
            0.22
            
            
            
            5.4048
      months
            
            
            2,500
            
            
            
            1,590
            
            
            
            0.72
            
            
            
            4.0160
      months
            
            
            2,500
            
            
            
            4,348
            
            
            
            1.98
            
            
            
            4.06Jumbo
      certificates
            
            
            2,500
            
            
            
            32,498
            
            
            
            14.79
            
            
            
            4.83Total
      certificates
            
            
            
            
            
            
            92,916
            
            
            
            42.30
            
            
            
            4.70Total
      deposits
            
            
            
            
            
            $
            219,682
            
            
            
            100.00
            %
            
            
            3.41
            %






The
following table sets forth by various interest rate categories the composition
of time deposits of the Bank at the dates indicated:




At
      December 31,2007
            
            
            2006
            
            
            2005(In
      thousands)0.00
      to 3.00%
            
            $
            493
            
            
            $
            4,264
            
            
            $
            35,2273.01
      to 5.00%
            
            
            50,008
            
            
            
            68,257
            
            
            
            63,4555.01
      to 6.00%
            
            
            42,415
            
            
            
            29,480
            
            
            
            3,7596.01
      to 7.00%
            
            
            0
            
            
            
            —
            
            
            
            —7.01
      to 8.00%
            
            
            0
            
            
            
            —
            
            
            
            —Total
            
            $
            92,916
            
            
            $
            102,001
            
            
            $
            102,441






The
following table represents, by various interest rate categories, the amounts of
time deposits maturing during each of the three years following
December 31, 2007. Matured certificates, which have not been renewed as of
December 31, 2007, have been allocated based upon certain rollover
assumptions.




Amounts
      at December 31, 2007 Maturing InOne Year or Less
            
            
            Two Years
            
            
            Three Years
            
            
            Greater
      Than Three Years(In
      thousands)0.00
      to 3.00%
            
            $
            297
            
            
            $
            —
            
            
            $
            —
            
            
            $
            1963.01
      to 5.00%
            
            
            39,524
            
            
            
            6,496
            
            
            
            1,309
            
            
            
            2,6795.01
      to 6.00%
            
            
            37,874
            
            
            
            2,733
            
            
            
            907
            
            
            
            9016.01
      to 7.00%
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            07.01
      to 8.00%
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Total
            
            $
            77,695
            
            
            $
            9,229
            
            
            $
            2,216
            
            
            $
            3,776









17




The
following table indicates the amount of the Bank’s jumbo and other certificates
of deposit of $100,000 or more by time remaining until maturity as of
December 31, 2007.




At
      December 31, 2007Maturity Period
            
            (In
      thousands)Three
      months or less
            
            $
            7,783Greater
      than three months through six months
            
            
            8,303Greater
      than six months through twelve months
            
            
            11,805Over
      twelve months
            
            
            4,607Total
            
            $
            32,498




The
following table sets forth the dollar amount of savings deposits in the various
types of deposits offered by the Bank at the dates indicated, and the amount of
increase or decrease in such deposits as compared to the previous
period.




Deposit
      ActivityBalance
      at December  31, 2007
            
            
            %
      of Deposits
            
            
            Increase
      (Decrease) from 2006
            
            
            Balance
      at December 31, 2006
            
            
            %
      of Deposits
            
            
            Increase
      (Decrease) from 2005
            
            
            Balance
      at December 31, 2005
            
            
            %
      of Deposits(Dollars
      in thousands)Withdrawable:Noninterest-bearing
      accounts
            
            $
            18,619
            
            
            
            8.47
            %
            
            $
            (721
            )
            
            $
            19,340
            
            
            
            8.78
            %
            
            $
            71
            
            
            $
            19,269
            
            
            
            9.32
            %Savings
      accounts
            
            
            24,730
            
            
            
            11.26
            
            
            
            621
            
            
            
            24,109
            
            
            
            10.95
            
            
            
            (4,329
            )
            
            
            28,438
            
            
            
            13.76MMDA
            
            
            23,814
            
            
            
            10.84
            
            
            
            7,590
            
            
            
            16,224
            
            
            
            7.37
            
            
            
            1,390
            
            
            
            14,834
            
            
            
            7.18NOW
      accounts
            
            
            59,603
            
            
            
            27.13
            
            
            
            1,039
            
            
            
            58,564
            
            
            
            26.59
            
            
            
            16,813
            
            
            
            41,751
            
            
            
            20.20Total
      withdrawable
            
            
            126,766
            
            
            
            57.70
            
            
            
            8,529
            
            
            
            118,237
            
            
            
            53.69
            
            
            
            13,945
            
            
            
            104,292
            
            
            
            50.45Certificates
      (original terms):I.R.A.
            
            
            6,666
            
            
            
            3.03
            
            
            
            (531
            )
            
            
            7,197
            
            
            
            3.27
            
            
            
            (169
            )
            
            
            7,366
            
            
            
            3.563
      months
            
            
            25
            
            
            
            0.01
            
            
            
            13
            
            
            
            12
            
            
            
            —
            
            
            
            12
            
            
            
            —
            
            
            
            —6
      months
            
            
            5,006
            
            
            
            2.28
            
            
            
            3,530
            
            
            
            1,476
            
            
            
            .67
            
            
            
            (2,279
            )
            
            
            3,755
            
            
            
            1.829
      months
            
            
            3,152
            
            
            
            1.44
            
            
            
            848
            
            
            
            2,304
            
            
            
            1.05
            
            
            
            1,168
            
            
            
            1,136
            
            
            
            .5512
      months
            
            
            10,693
            
            
            
            4.87
            
            
            
            (2,320
            )
            
            
            13,013
            
            
            
            5.91
            
            
            
            2,655
            
            
            
            10,358
            
            
            
            5.0115
      months
            
            
            22,159
            
            
            
            10.09
            
            
            
            6,570
            
            
            
            15,589
            
            
            
            7.08
            
            
            
            3,735
            
            
            
            11,854
            
            
            
            5.7318
      months
            
            
            1,525
            
            
            
            0.69
            
            
            
            (1,137
            )
            
            
            2,662
            
            
            
            1.21
            
            
            
            171
            
            
            
            2,491
            
            
            
            1.2024
      months
            
            
            2,998
            
            
            
            1.37
            
            
            
            (1,229
            )
            
            
            4,227
            
            
            
            1.92
            
            
            
            905
            
            
            
            3,322
            
            
            
            1.6130
      months
            
            
            752
            
            
            
            0.34
            
            
            
            (1,091
            )
            
            
            1,843
            
            
            
            .84
            
            
            
            (1,245
            )
            
            
            3,088
            
            
            
            1.4936
      months
            
            
            1,023
            
            
            
            0.47
            
            
            
            (1,499
            )
            
            
            2,522
            
            
            
            1.14
            
            
            
            (131
            )
            
            
            2,653
            
            
            
            1.2841
      months
            
            
            481
            
            
            
            0.22
            
            
            
            481
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —48
      months
            
            
            1,590
            
            
            
            0.72
            
            
            
            174
            
            
            
            1,416
            
            
            
            .64
            
            
            
            (489
            )
            
            
            1,905
            
            
            
            .9260
      months
            
            
            4,348
            
            
            
            1.98
            
            
            
            (3,850
            )
            
            
            8,198
            
            
            
            3.72
            
            
            
            (558
            )
            
            
            8,756
            
            
            
            4.24Jumbo
      certificates
            
            
            32,498
            
            
            
            14.79
            
            
            
            (9,044
            )
            
            
            41,542
            
            
            
            18.86
            
            
            
            (4,215
            )
            
            
            45,757
            
            
            
            22.13Total
      certificates
            
            
            92,916
            
            
            
            42.30
            
            
            
            (9,085
            )
            
            
            102,001
            
            
            
            46.31
            
            
            
            (440
            )
            
            
            102,441
            
            
            
            49.55Total
      deposits
            
            $
            219,682
            
            
            
            100.00
            %
            
            $
            (556
            )
            
            $
            220,238
            
            
            
            100.00
            %
            
            $
            13,505
            
            
            $
            206,733
            
            
            
            100.00
            %






Borrowings. The Bank focuses
on generating high quality loans and then seeks the best source of funding from
deposits, investments, or borrowings. At December 31, 2007, the Bank had
$95.0 million in FHLB advances. The Bank does not anticipate any difficulty in
obtaining advances appropriate to meet its requirements in the
future.




The
following table presents certain information relating to the Holding Company’s
and the Bank’s borrowings at or for the years ended December 31, 2007, 2006, and
2005.






18




At
      or for the Year Ended December 31,2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)FHLB
      Advances and Other Borrowed Money:Outstanding
      at end of period
            
            $
            102,217
            
            
            $
            95,217
            
            
            $
            96,782Average
      balance outstanding for period
            
            
            96,884
            
            
            
            86,635
            
            
            
            102,501Maximum
      amount outstanding at any month-end during the period
            
            
            102,217
            
            
            
            95,217
            
            
            
            111,555Weighted
      average interest rate during the period
            
            
            4.83
            %
            
            
            4.72
            %
            
            
            4.35
            %Weighted
      average interest rate at end of period
            
            
            4.76
            %
            
            
            4.76
            %
            
            4.36
            %


SERVICE
CORPORATION SUBSIDIARIES




Office of
Thrift Supervision regulations permit federal savings associations to invest in
the capital stock, obligations or other specified types of securities of
subsidiaries (referred to as “service corporations”) and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association’s assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association’s
regulatory capital if the association’s regulatory capital is in compliance with
applicable regulations.




A savings
association that acquires a non-savings association subsidiary, or that elects
to conduct a new activity within a subsidiary, must give the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision and the Department of
Financial Institutions at least 30 days advance written notice. The Federal
Deposit Insurance Corporation may, after consultation with the Office of Thrift
Supervision, prohibit specified activities if it determines such activities pose
a serious threat to the Deposit Insurance Fund. Moreover, a savings association
must deduct from capital, for purposes of meeting the core capital, tangible
capital and risk-based capital requirements, its entire investment in and loans
to a subsidiary engaged in activities not permissible for a national bank (other
than exclusively agency activities for its customers or mortgage banking
subsidiaries).




The
Bank’s wholly owned subsidiary, Madison First Service Corporation, which was
incorporated under the laws of the State of Indiana on July 3, 1973,
currently holds land but does not otherwise engage in significant business
activities.  During 2005, the Bank established in Nevada three new
subsidiaries --RVFB Investments, Inc., RVFB Holdings, Inc. and RVFB Portfolio,
LLC--to hold and manage a significant portion of the Bank’s investment
portfolio.






FINANCING
SUBSIDIARY




On
March 13, 2003, the Company formed the “RIVR Statutory Trust I,” a
statutory trust formed under Connecticut law, and filed a Certificate of Trust
with the Secretary of the State of Connecticut. The sole purpose of the Trust is
to issue and sell certain securities representing undivided beneficial interests
in the assets of the Trust and to invest the proceeds thereof in certain
debentures of the Company.






EMPLOYEES




As of
December 31, 2007, the Bank employed 78 persons on a full-time basis and 18
persons on a part-time basis. None of the employees is represented by a
collective bargaining group. Management considers its employee relations to be
good.




19




COMPETITION




The Bank
originates most of its loans to and accepts most of its deposits from residents
of Jefferson and Clark Counties, Indiana, and Carroll County, Kentucky. The Bank
is subject to competition from various financial institutions, including state
and national banks, state and federal savings associations, credit unions and
certain non-banking consumer lenders that provide similar services in Jefferson
County and Clark Counties in Indiana and Carroll County in Kentucky and which
have significantly larger resources available to them than does the Bank.In total, there are 22
financial institutions located in the three-county market area, including the
Bank. The Bank also competes with money market funds with respect to deposit
accounts and with insurance companies with respect to individual retirement
accounts.




The
primary factors influencing competition for deposits are interest rates, service
and convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
and through interest rates and loan fees charged. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors that
are not readily predictable.






REGULATION


GENERAL




As a
federally-chartered, FDIC-insured savings association, the Bank is subject to
extensive regulation by the OTS and the FDIC. For example, the Bank must obtain
OTS approval before it may engage in certain activities and must file reports
with the OTS regarding its activities and financial condition. The OTS
periodically examines the Bank’s books and records and, in conjunction with the
FDIC in certain situations, has examination and enforcement powers. This
supervision and regulation are intended primarily for the protection of
depositors and the federal deposit insurance fund. A savings association must
pay a semi-annual assessment to the OTS based upon a marginal assessment rate
that decreases as the asset size of the savings association increases, and which
includes a fixed-cost component that is assessed on all savings associations.
The assessment rate that applies to a savings association depends upon the
institution’s size, condition and the complexity of its operations. The Bank’s
semi-annual assessment is approximately $46,000.




The Bank
is also subject to federal and state regulation as to such matters as loans to
officers, directors, or principal shareholders, required reserves, limitations
as to the nature and amount of its loans and investments, regulatory approval of
any merger or consolidation, issuances or retirements of its securities, and
limitations upon other aspects of banking operations. In addition, the Bank’s
activities and operations are subject to a number of additional detailed,
complex and sometimes overlapping federal and state laws and regulations. These
include state usury and consumer credit laws, state laws relating to
fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal
Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act,
the Community Reinvestment Act, anti-redlining legislation, antitrust laws and
regulations protecting the confidentiality of consumer financial
information.






SAVINGS
AND LOAN HOLDING COMPANY REGULATION




As the
holding company for the Bank, the Holding Company is regulated as a
“non-diversified savings and loan holding company” within the meaning of the
Home Owners’ Loan Act, as amended (“HOLA”), and is subject to
regulatory oversight by the Director of the OTS. As such, the Holding Company is
registered with the OTS and is thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Holding Company and with other companies affiliated with the Holding
Company.




20




In
general, the HOLA prohibits a savings and loan holding company, without
obtaining the prior approval of the Director of the OTS, from acquiring control
of another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Holding Company, or any person who owns more than 25%
of the Holding Company’s stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.




The
Holding Company currently operates as a unitary savings and loan holding
company. Prior to the enactment of the Gramm-Leach-Bliley Act (the “GLB Act”) in 1999, there were
no restrictions on the permissible business activities of a unitary savings and
loan holding company. The GLB Act included a provision that prohibits any new
unitary savings and loan holding company, defined as a company that acquires a
thrift after May 4, 1999, from engaging in commercial activities. This
provision also includes a grandfather clause, however, that permits a company
that was a savings and loan holding company as of May 4, 1999, or had an
application to become a savings and loan holding company on file with the OTS as
of that date, to acquire and continue to control a thrift and to continue to
engage in commercial activities. Because the Holding Company qualifies under
this grandfather provision, the GLB Act did not affect the Holding Company’s
authority to engage in diversified business activities.




If the
Holding Company were to acquire control of another savings association other
than through a merger or other business combination with the Bank, the Holding
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the
Qualified Thrift Lender (“QTL”) test, the activities of
the Holding Company and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, a multiple savings and
loan holding company may not, either directly or acting through a subsidiary
that is not a savings association, conduct, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business,
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings association, (iv) holding or managing properties used or
occupied by a subsidiary savings association, (v) acting as trustee under
deeds of trust, (vi) those activities in which multiple savings and loan
holding companies were authorized (by regulation) to directly engage on
March 5, 1987, or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved
by the Director of the OTS before a multiple savings and loan holding company
may engage in such activities.




The
Director of the OTS may also approve acquisitions resulting in the formation of
a multiple savings and loan holding company which controls savings associations
in more than one state, if the multiple savings and loan holding company
involved controls a savings association which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.




Notwithstanding
the above rules as to permissible business activities of savings and loan
holding companies, if the savings association subsidiary of such a holding
company fails to meet the QTL test, then such holding company would be deemed to
be a bank holding company subject to all of the




21




provisions
of the Bank Holding Company Act of 1956 and other statutes applicable to bank
holding companies, to the same extent as if the Holding Company were a bank
holding company and the Bank were a bank. See “-Qualified Thrift Lender.” At
December 31, 2007, the Bank’s asset composition was in excess of that
required to qualify as a Qualified Thrift Lender.




Indiana
law permits federal and state savings association holding companies with their
home offices located outside of Indiana to acquire savings associations whose
home offices are located in Indiana and savings association holding companies
with their principal place of business in Indiana (“Indiana Savings Association Holding
Companies”) upon receipt of approval by the Indiana Department of
Financial Institutions. Moreover, Indiana Savings Association Holding Companies
may acquire savings associations with their home offices located outside of
Indiana and savings association holding companies with their principal place of
business located outside of Indiana upon receipt of approval by the Indiana
Department of Financial Institutions.




No
subsidiary savings association of a savings and loan holding company may declare
or pay a dividend or make a capital distribution on its permanent or
non-withdrawable stock unless it first gives the Director of the OTS 30 days
advance notice of such declaration and payment. Any dividend declared during
such period or without giving notice shall be invalid.






FEDERAL
HOME LOAN BANK SYSTEM




The Bank
is a member of the FHLB system, which consists of 12 regional banks. The Federal
Housing Finance Board (“FHFB”), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member financial institutions.
At December 31, 2007, the Bank’s investment in stock of the FHLB of
Indianapolis was $4.8 million. For the fiscal year ended December 31, 2007,
the FHLB of Indianapolis paid approximately $213,000 in cash dividends to the
Bank, for an annual rate of  4.66%.




All 12
FHLBs are required to provide funds to establish affordable housing programs
through direct loans or interest subsidies on advances to members to be used for
lending at subsidized interest rates for low-and moderate-income, owner-occupied
housing projects, affordable rental housing, and certain other community
projects. These contributions and obligations could adversely affect the value
of FHLB stock in the future. A reduction in the value of such stock may result
in a corresponding reduction in the Bank’s capital.




The FHLB
of Indianapolis serves as a reserve or central bank for its member institutions.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in accordance with
policies and procedures established by the FHLB and the Board of Directors of
the FHLB of Indianapolis.




All FHLB
advances must be fully secured by sufficient collateral as determined by the
FHLB. Eligible collateral includes first mortgage loans not more than 90 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured or guaranteed by the federal
government or any agency thereof, cash or FHLB deposits, certain small business
and agricultural loans of smaller institutions and real estate with readily
ascertainable value in which a perfected security interest may be obtained.
Other forms of collateral may be accepted as additional security or, under
certain circumstances, to renew outstanding advances. All long-term advances are
required to provide funds for residential home financing and the FHLB has
established standards of community service that members must meet to maintain
access to long-term advances.




22




Interest
rates charged for advances vary depending upon maturity, the cost of funds to
the FHLB of Indianapolis and the purpose of the borrowing.






INSURANCE
OF DEPOSITS




The
Bank’s deposits are insured to applicable limits by the FDIC. The Federal
Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed
into law in February 2006, has resulted in significant changes to the federal
deposit insurance program:







·
            Effective
      March 31, 2006, the Bank Insurance Fund (“BIF”) and the Savings
      Association Insurance Fund (“SAIF”) were merged to
      create a new fund, called the Deposit Insurance Fund (“DIF”)




·
            The
      current $100,000 deposit insurance coverage is subject to adjustment for
      inflation beginning in 2010 and every succeeding five
  years




·
            Deposit
      insurance coverage for individual retirement accounts and certain other
      retirement accounts was increased from $100,000 to $250,000 and also will
      be subject to adjustment for
inflation




Pursuant
to the Reform Act, the FDIC is authorized to set the reserve ratio for the DIF
annually at between 1.15% and 1.5% of estimated insured deposits and the FDIC
has been given discretion to set assessment rates according to risk regardless
of the level of the fund reserve ratio. On November 2, 2006, the FDIC adopted
final regulations that set the designated reserve ratio for the DIF at 1.25%
beginning January 1, 2007.




Insured
depository institutions that were in existence on December 31, 1996 and paid
assessments prior to that date (or their successors) are entitled to a one-time
credit against future assessments based on their past contributions to the BIF
or SAIF.  In 2007, the Bank received a one-time credit against future
assessments in the amount of $178,000.




Also on
November 2, 2006, the FDIC adopted final regulations that establish a new
risk-based premium system.  Under the new system, the
FDIC will evaluate each institution’s risk based on three primary sources of
information: supervisory ratings for all insured institutions, financial ratios
for most institutions, and long-term debt issuer ratings for large institutions
that have such ratings. An institution’s assessments will be based on the
insured institution’s ranking in one of four risk categories. Effective January
1, 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 are
grouped in Risk Category I and are assessed for deposit insurance at an annual
rate of between five and seven cents for every $100 of domestic deposits.
Institutions in Risk Categories II, III and IV are assessed at annual rates of
10, 28 and 43 cents, respectively. An increase in assessments could have a
material adverse effect on the Company’s earnings.




FDIC-insured
institutions remain subject to the requirement to pay assessments to the FDIC to
fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the
Federal government established to recapitalize the predecessor to the SAIF.
These assessments will continue until the FICO bonds mature in
2017.  For the quarter ended December 31, 2007, the FICO
assessment rate was equal to 1.14 cents for each $100 in domestic deposits
maintained at an institution.






SAVINGS
ASSOCIATION REGULATORY CAPITAL




Currently,
savings associations are subject to three separate minimum capital-to-assets
requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The
leverage




23




limit
requires that savings associations maintain “core capital” of at least 3% of
total assets. Core capital is generally defined as common shareholders’ equity
(including retained earnings), non-cumulative perpetual preferred stock and
related surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less non-qualifying intangibles.
The OTS requires a core capital level of 3% of total adjusted assets for savings
associations that receive the highest supervisory rating for safety and
soundness, and no less than 4% for all other savings associations. Under the
tangible capital requirement, a savings association must maintain tangible
capital (core capital less all intangible assets except purchased mortgage
servicing rights which may be included after making the above-noted adjustment
in an amount up to 100% of tangible capital) of at least 1.5% of total assets.
Under the risk-based capital requirements, a minimum amount of capital must be
maintained by a savings association to account for the relative risks inherent
in the type and amount of assets held by the savings association. The risk-based
capital requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 2007, the Bank was in compliance with all
capital requirements imposed by law.




If an
association is not in compliance with the capital requirements, the OTS is
required to prohibit asset growth and to impose a capital directive that may
restrict, among other things, the payment of dividends and officers’
compensation. In addition, the OTS and the FDIC  generally are
authorized to take enforcement actions against a savings association that fails
to meet its capital requirements. These actions may include restricting the
operations activities of the association, imposing a capital directive, cease
and desist order, or civil money penalties, or imposing harsher measures such as
appointing a receiver or conservator or forcing the association to merge into
another institution.






PROMPT
CORRECTIVE REGULATORY ACTION




The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FedICIA”) requires, among
other things, that federal bank regulatory authorities take “prompt corrective
action” with respect to institutions that do not meet minimum capital
requirements. For these purposes, FedICIA establishes five capital
tiers:  well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. At
December 31, 2007, the Bank was categorized as “well capitalized,” meaning
that its total risk-based capital ratio exceeded 10%, its Tier I risk-based
capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not
subject to a regulatory order, agreement or directive to meet and maintain a
specific capital level for any capital measure.




The FDIC
may order savings associations which have insufficient capital to take
corrective actions. For example, a savings association which is categorized as
“undercapitalized” would be subject to growth limitations and would be required
to submit a capital restoration plan, and a holding company that controls such a
savings association would be required to guarantee that the savings association
complies with the restoration plan. “Significantly undercapitalized” savings
associations would be subject to additional restrictions. Savings associations
deemed by the FDIC to be “critically undercapitalized” would be subject to the
appointment of a receiver or conservator.




24


DIVIDEND
LIMITATIONS




The OTS
also restricts the amount of “capital distributions” that may be made by savings
associations. The applicable regulation defines a capital distribution as a
distribution of cash or other property to a savings association’s owners, made
on account of their ownership. This definition includes a savings association’s
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate’s acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association’s shares or rights to purchase such shares.




The
regulation exempts certain savings associations from filing either a notice or
an application with the OTS before making any capital distribution, and requires
a savings association to file an application for approval of a proposed capital
distribution with the OTS if the association is not eligible for expedited
treatment under OTS’s application processing rules, or the total amount of all
capital distributions,  including the proposed capital distribution,
for the applicable calendar year would exceed an amount equal to the savings
association’s net income for that year to date plus the savings association’s
retained net income for the preceding two years (the “retained net income
standard”). A savings association must also file an application for approval of
a proposed capital distribution if, following the proposed distribution, the
association would not be at least adequately capitalized under the OTS prompt
corrective action regulations, or if the proposed distribution would violate a
prohibition contained in any applicable statute, regulation, or agreement
between the association and the OTS or the FDIC.




The
regulation requires a savings association to file a notice of a proposed capital
distribution in lieu of an application if the association or the proposed
capital distribution do not meet the conditions described above, and: (1) the
savings association will not be at least as well capitalized (as defined under
the OTS prompt corrective action regulations) following the capital
distribution; (2) the capital distribution would reduce the amount of, or retire
any part of the savings association’s common or preferred stock, or retire any
part of debt instruments such as notes or debentures included in the
association’s capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires, at a minimum, that the Bank file a notice with the OTS 30
days before making any capital distributions to the Holding
Company.




In
addition to these regulatory restrictions, the Bank’s Plan of Conversion imposes
additional limitations on the amount of capital distributions it may make to the
Holding Company. The Plan of Conversion requires the Bank to establish and
maintain a liquidation account for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders and prohibits the Bank from making capital
distributions to the Holding Company if its net worth would be reduced below the
amount required for the liquidation account.






LIMITATIONS
ON RATES PAID FOR DEPOSITS




Regulations
promulgated by the FDIC pursuant to FedICIA place limitations on the ability of
insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in the institution’s normal market area. Under
these regulations, “well-capitalized” depository institutions may accept, renew,
or roll such deposits over without restriction, “adequately capitalized”
depository institutions may accept, renew or roll such deposits over with a
waiver from the FDIC (subject to certain restrictions on payments of rates)
and




25




“undercapitalized”
depository institutions may not accept, renew or roll such deposits over. The
regulations contemplate that the definitions of “well capitalized,” “adequately
capitalized” and “undercapitalized” will be the same as the definition adopted
by the agencies to implement the corrective action provisions of FedICIA.
Management does not believe that these regulations will have a materially
adverse effect on the Bank’s current operations.






LIQUIDITY




The
Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed the
former statutory requirement that all savings associations maintain an average
daily balance of liquid assets in a minimum amount of not less than 4% or more
than 10% of their withdrawable accounts plus short-term borrowings. The OTS
adopted a rule that implemented this revised statutory requirement, although
savings associations remain subject to the OTS regulation that requires them to
maintain sufficient liquidity to ensure their safe and sound
operation.






SAFETY
AND SOUNDNESS STANDARDS




The
federal banking agencies have adopted final safety and soundness standards for
all insured depository institutions. The standards, which were issued in the
form of guidelines rather than regulations, relate to internal controls,
information systems, internal audit systems, loan underwriting and
documentation, compensation, interest rate exposure, asset quality and earnings
standards. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan may
result in enforcement proceedings.






REAL
ESTATE LENDING STANDARDS




OTS
regulations require savings associations to establish and maintain written
internal real estate lending policies. Each association’s lending policies must
be consistent with safe and sound banking practices and be appropriate to the
size of the association and the nature and scope of its operations. The policies
must establish loan portfolio diversification standards; establish prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable; establish loan administration procedures for the association’s real
estate portfolio; and establish documentation, approval and reporting
requirements to monitor compliance with the association’s real estate lending
policies. The association’s written real estate lending policies must be
reviewed and approved by the association’s Board of Directors at least annually.
Further, each association is expected to monitor conditions in its real estate
market to ensure that its lending policies continue to be appropriate for
current market conditions.






LOANS
TO ONE BORROWER




Under OTS
regulations, the Bank may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At December 31, 2007, the Bank did not
have any loans or extensions of credit to a single or related group of borrowers
in excess of its lending limits. Management does not believe that the
loans-to-one-borrower limits will have a significant impact on the Bank’s
business operations or earnings.




26


QUALIFIED
THRIFT LENDER




Savings
associations must meet a QTL test that requires the association to maintain an
appropriate level of qualified thrift investments (“QTIs”) (primarily residential
mortgages and related investments, including certain mortgage-related
securities) and otherwise to qualify as a QTL. The required percentage of QTIs
is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with
the QTL test is determined on a monthly basis in nine out of every twelve
months. As of December 31, 2007, the Bank was in compliance with its QTL
requirement, with approximately 73.4% of its portfolio assets invested in
QTIs.




A savings
association which fails to meet the QTL test must either convert to a bank or be
subject to the following penalties: (i) it may not enter into any new
activity except for those permissible for a national bank and for a savings
association; (ii) its branching activities shall be limited to those of a
national bank; and (iii) it shall be bound by regulations applicable to
national banks respecting payment of dividends. Three years after failing the
QTL test the association must dispose of any investment or activity not
permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).






ACQUISITIONS
OR DISPOSITIONS AND BRANCHING




The Bank
Holding Company Act specifically authorizes a bank holding company, upon receipt
of appropriate regulatory approvals, to acquire control of any savings
association or holding company thereof wherever located. Similarly, a savings
and loan holding company may acquire control of a bank. Moreover, federal
savings associations may acquire or be acquired by any insured depository
institution. Regulations promulgated by the FRB restrict the branching authority
of savings associations acquired by bank holding companies. Savings associations
acquired by bank holding companies may be converted to banks, but as such they
become subject to branching and activity restrictions applicable to
banks.




Subject
to certain exceptions, commonly-controlled banks and savings associations must
reimburse the FDIC for any losses suffered in connection with a failed bank or
savings association affiliate. Institutions are commonly controlled if one is
owned by another or if both are owned by the same holding company. Such claims
by the FDIC under this provision are subordinate to claims of depositors,
secured creditors, and holders of subordinated debt, other than
affiliates.




The OTS
has adopted regulations which permit nationwide branching to the extent
permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in §7701(a)(19) of the Internal Revenue Code of
1986, as amended (the “Code”) or the asset
composition test of §7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.




Finally,
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“Riegle-Neal Act”)
permits bank holding companies to acquire banks in other states and, with state
consent and subject to certain limitations, allows banks to acquire out-of-state
branches either through merger or de




27




novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the “Indiana Branching Law”). The
Indiana Branching Law, which became effective in 1996, authorizes Indiana banks
to branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocal basis.






TRANSACTIONS
WITH AFFILIATES




The Bank
is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which
limits credit transactions between a bank or savings association and its
executive officers and its affiliates. These provisions also prescribe terms and
conditions deemed to be consistent with safe and sound banking practices for
transactions between a financial institution and its affiliates, and restrict
the types of collateral security permitted in connection with a financial
institution’s extension of credit to an affiliate.






FEDERAL
SECURITIES LAW




The
shares of Common Stock of the Holding Company have been registered with the SEC
under the Securities Exchange Act (the “1934 Act”). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder. After three years following the Bank’s conversion to stock form, if
the Holding Company has fewer than 300 shareholders, it may deregister its
shares under the 1934 Act and cease to be subject to the foregoing
requirements.




Shares of
Common Stock held by persons who are affiliates of the Holding Company may not
be resold without registration unless sold in accordance with the resale
restrictions of Rule 144 under the Securities Act of 1933. If the Holding
Company meets the current public information requirements under Rule 144, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate’s sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding
Company or (ii) the average weekly volume of trading in such shares during
the preceding four calendar weeks.






SARBANES-OXLEY
ACT OF 2002




The
Holding Company is subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The
Sarbanes-Oxley Act’s stated goals include enhancing corporate responsibility,
increasing penalties for accounting and auditing improprieties at publicly
traded companies and protecting investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws. The
Sarbanes-Oxley Act generally applies to all companies that file or are required
to file periodic reports with the Securities and Exchange Commission under the
1934 Act.




Among
other things, the Sarbanes-Oxley Act creates the Public Company Accounting
Oversight Board as an independent body subject to SEC supervision with
responsibility for setting auditing, quality control and ethical standards for
auditors of public companies. The Sarbanes-Oxley Act also requires public
companies to make faster and more-extensive financial disclosures, requires the
chief executive officer and chief financial officer of public companies to
provide signed certifications as to the accuracy and completeness of financial
information filed with the SEC, and provides enhanced criminal and civil
penalties for violations of the federal securities laws.




28




The
Sarbanes-Oxley Act also addresses functions and responsibilities of audit
committees of public companies. The statute makes the audit committee directly
responsible for the appointment, compensation and oversight of the work of the
company’s outside auditor, and requires the auditor to report directly to the
audit committee. The Sarbanes-Oxley Act authorizes each audit committee to
engage independent counsel and other advisors, and requires a public company to
provide the appropriate funding, as determined by its audit committee, to pay
the company’s auditors and any advisors that its audit committee retains. The
Sarbanes-Oxley Act also requires public companies to include an internal control
report and assessment by management, along with an attestation to this report
prepared by the company’s registered public accounting firm, in their annual
reports to stockholders.




The
Holding Company continues to incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the resulting regulations, but
management does not expect that such compliance will have a material impact on
the Holding Company’s results of operations or financial condition.






COMMUNITY
REINVESTMENT ACT MATTERS




Federal
law requires that ratings of depository institutions under the Community
Reinvestment Act of 1977 (“CRA”) be disclosed. The
disclosure includes both a four-unit descriptive rating - outstanding,
satisfactory, needs to improve, and substantial noncompliance - and a written
evaluation of an institution’s performance. Each FHLB is required to establish
standards of community investment or service that its members must maintain for
continued access to long-term advances from the FHLBs. The standards take into
account a member’s performance under the CRA and its record of lending to
first-time home buyers. The OTS has designated the Bank’s record of meeting
community credit needs as satisfactory.






PREDATORY
LENDING




The
Federal Reserve Board issued a regulation that became effective on
October 1, 2002 that is aimed at curbing “predatory
lending.”  The term “predatory lending” encompasses a variety of
practices, but the term generally is used to refer to abusive lending practices
involving fraud, deception or unfairness. Predatory lending typically involves
one or more of the following: (i) making unaffordable loans based on the
assets of the borrower rather than on the borrower’s ability to repay an
obligation (“asset-based lending”); (ii) inducing a borrower to refinance a
loan repeatedly in order to charge high points and fees each time the loan is
refinanced (“loan flipping”); or (iii) engaging in fraud or deception to
conceal the true nature of the loan obligation from an unsuspecting or
unsophisticated borrower. The Federal Reserve Board amended Regulation Z to
broaden the scope of loans subject to the protections of the Home Ownership and
Equity Protection Act of 1994 (“HOEPA”). Among other things,
the regulation brings within the scope of HOEPA first-lien mortgage loans with
interest rates that are at least 8 percentage points above Treasury securities
having a comparable maturity. In addition, the regulation requires that the cost
of optional insurance and similar debt protection products paid by a borrower at
closing be included in calculating the finance charge paid by the borrower.
HOEPA coverage is triggered if such finance charges exceed 8 percent of the
total loan. Finally, the regulation restricts creditors from engaging in
repeated refinancings of their own HOEPA loans over a short time period when the
transactions are not in the borrower’s interest. Lenders that violate the rules
face cancellation of loans and penalties equal to the finance charges paid. The
Bank does not anticipate that these provisions, or any similar state predatory
lending regulations, will materially affect its financial condition or results
of operations.


USA
PATRIOT ACT OF 2001




The USA
PATRIOT Act of 2001 (the “PATRIOT Act”) is intended to
strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety
of fronts. The PATRIOT Act contains sweeping anti-




29




money
laundering and financial transparency laws and requires financial institutions
to implement additional policies and procedures with respect to, or additional
measures designed to address, any or all the following matters, among others:
money laundering, suspicious activities and currency transaction reporting, and
currency crimes. Many of the provisions in the PATRIOT Act were to have expired
December 31, 2005, but the U.S. Congress authorized renewals that extended the
provisions until March 10, 2006. In early March 2006, the U.S. Congress approved
the USA PATRIOT Improvement and Reauthorization Act of 2005 (the “Reauthorization Act”) and the
USA PATRIOT Act Additional Reauthorizing Amendments Act of 2006 (the “PATRIOT Act Amendments”), and
they were signed into law by President Bush on March 9, 2006. The
Reauthorization Act makes permanent all but two of the provisions that had been
set to expire and provides that the remaining two provisions, which relate to
surveillance and the production of business records under the Foreign
Intelligence Surveillance Act, will expire in four years. The PATRIOT Act
Amendments include provisions allowing recipients of certain subpoenas to obtain
judicial review of nondisclosure orders and clarifying the use of certain
subpoenas to obtain information from libraries. The Company does not anticipate
that these changes will materially affect its operations.






TAXATION


FEDERAL
TAXATION




Historically,
savings associations, such as the Bank, have been permitted to compute bad debt
deductions using either the bank experience method or the percentage of taxable
income method. However, for years beginning after December 31, 1995, the
Bank can no longer use the percentage of taxable income method of computing its
allowable tax bad debt deduction and instead must compute its allowable
deduction using the experience method. In addition, the pre-1988 reserve, for
which no deferred taxes have been recorded, will not have to be recaptured into
income unless (i) the Bank no longer qualifies as a bank under the Code or
(ii) excess dividends or distributions are paid out by the Bank or the Bank
redeems its own stock.






Depending
on the composition of its items of income and expense, a savings association may
be subject to the alternative minimum tax. A savings association must pay an
alternative minimum tax equal to the amount (if any) by which 20% of alternative
minimum taxable income (“AMTI”), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid can be
credited against regular tax due in later years.






For
federal income tax purposes, the Company has been reporting its income and
expenses on the accrual method of accounting. The Company’s federal income tax
returns have not been audited in recent years.






STATE
TAXATION




The
Company is subject to Indiana’s Financial Bank Tax (“IFBT”), which is imposed at a
flat rate of 8.5% on apportioned “adjusted gross income.” “Adjusted gross
income,” for purposes of IFBT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by




30




several
Indiana modifications. Other applicable state taxes include generally applicable
sales and use taxes plus real and personal property taxes. The Company’s state
income tax returns have not been audited in recent years.




The
Company is subject to Kentucky’s Bank Franchise Tax (“KBFT”), which is imposed at a
flat rate of 1.1% on apportioned “net capital.” For purposes of the KBFT, “net
capital” is determined by (1) adding together the Company’s paid-in capital
stock, surplus, undivided profits, capital reserves, net unrealized gains or
losses on certain securities, and cumulative foreign currency translation
adjustments and (2) deducting from the total an amount equal to the same
percentage of the total as the book value of U.S. obligations and Kentucky
obligations bears to the book value of the total assets of the Company.
“Kentucky obligations” are all obligations of the state, counties,
municipalities, taxing districts, and school districts that are exempt from
taxation under Kentucky law. Other applicable state taxes include generally
applicable sales and use taxes as well as Kentucky bank deposit and local
deposit taxes which are generally imposed on the Company with respect to the
deposits of Kentucky resident individuals at rates of .001% and .025%,
respectively.






ITEM
1A.   RISK FACTORS.




Not
applicable.






ITEM
1B.   UNRESOLVED STAFF COMMENTS.




Not
applicable.






ITEM
2.    PROPERTIES.




The
following table provides certain information with respect to the Bank’s offices
as of December 31, 2007.






31




Description
      and Address
            
            Owned
      or Leased
            
            Year
      Opened
            
            Total
      Deposits
            
            
            Net
      Book Value of Property, Furniture & Fixtures
            
            
            Approximate
      Square FootageLocations
      in Madison, Indiana:Downtown
      Office:233
      East Main Street
            
            Owned
            
            1952
            
            $
            25,052
            
            
            $
            373
            
            
            
            9,110Drive-Through
      Branch:401
      East Main Street
            
            Owned
            
            1984
            
            
            0
            
            
            
            228
            
            
            
            420Hilltop
      Location:430
      Clifty Drive
            
            Owned
            
            1983
            
            
            164,582
            
            
            
            3,047
            
            
            
            18,696Wal-mart
      Banking Center:567
      Ivy Tech Drive
            
            Leased
            
            1995
            
            
            7,259
            
            
            
            22
            
            
            
            517Location
      in Hanover, Indiana:10
      Medical Plaza Drive
            
            Owned
            
            1995
            
            
            9,840
            
            
            
            408
            
            
            
            1,344Location
      in Charlestown, Indiana:1025
      Highway 62
            
            Leased
            
            2002
            
            
            2,695
            
            
            
            529
            
            
            
            1,500Location
      in Sellersburg, Indiana:Highway
      311
            
            Owned
            
            2005
            
            
            5,651
            
            
            
            2,779
            
            
            
            13,000Location
      in Carrollton, Kentucky:1501
      Highland Avenue
            
            Leased
            
            2003
            
            
            4,603
            
            
            
            245
            
            
            
            1,656




The Bank
owns computer and data processing equipment which is used for transaction
processing, loan origination, and accounting. The net book value of electronic
data processing equipment owned by the Bank was approximately $204,000 at
December 31, 2007.




The Bank
operates 12 automated teller machines (“ATMs”), one at each office
location (the main office has two), one at Hanover College, in Hanover, Indiana,
one in the Big Lots parking lot in Madison, one at Great Escape Theatres in New
Albany, Indiana, one at Sellersburg, Indiana, and one at Butler Mall in
Carrolton, Kentucky. The Bank’s ATMs participate in the Passport®
network.




The Bank
performs its own data processing and reporting services.






ITEM
3.    LEGAL PROCEEDINGS.




As
previously reported in the Form 10-Qs for the quarters ended September 30,
2007 and June 30, 2007, on April 27, 2007, Cecilia Means filed a putative
class action complaint in the Marion County Superior Court, Marion County,
Indiana, on behalf of herself and others who paid funds into a pre-need trust
(the “Pre-Need Trust”) for burial services and merchandise from Grandview
Memorial Gardens, against the Bank, a former trustee of the Pre-Need Trust;
three other banks that serve or have served as trustees of the Pre-Need Trust;
and the current and former owners of Grandview Memorial Gardens.  The
complaint alleges that the Bank and other trustees did not properly account for
funds placed in the Pre-Need Trust and did not properly verify the legitimacy of
disbursements from the Pre-Need Trust in violation of certain state statutes and
in breach of the trustees’ alleged fiduciary duties.  The complaint is
not specific as to the amount of damages sought but states that the plaintiff
believes that the Pre-Need Trust has an estimated $4 million in unfunded
liabilities. The Bank believes that it has meritorious defenses to the
allegations, and the Bank continues to vigorously defend against the
litigation.




Except as
disclosed above, neither the Holding Company nor the Bank is a party to any
pending legal proceedings, other than routine litigation incidental to the
Holding Company’s or the Bank’s business.




32


ITEM
4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.




No matter
was submitted to a vote of the Holding Company’s shareholders during the quarter
ended December 31, 2007.






ITEM
4.5.    EXECUTIVE OFFICERS OF THE REGISTRANT.




The
executive officers of the Holding Company are identified below. The executive
officers of the Bank are elected annually by the Holding Company’s Board of
Directors.




Name
            
            Position with the Holding
      Company
            
            Position with the BankMatthew
      P. Forrester
            
            President  and
      Chief Executive Officer
            
            President
      and Chief Executive OfficerLonnie
      D. Collins
            
            Secretary
            
            SecretaryVickie
      L. Grimes
            
            Treasurer
            
            Vice
      President of FinanceAnthony
      D. Brandon
            
            
            
            Executive
      Vice PresidentDeanna
      Liter
            
            
            
            Vice
      President of Data ServicesBarbara
      Eades
            
            
            
            Vice
      President of Retail BankingLoy
      Skirvin
            
            
            
            Vice
      President of Human ResourcesMark
      A. Goley
            
            
            
            Vice
      President of LendingJohn
      Muessel
            
            
            
            Vice
      President – Trust OfficerWilliam
      H. Hensler
            
            
            
            Vice
      President – Wealth Management




Matthew P. Forrester (age 51)
has served as the Bank and Holding Company President and Chief Executive Officer
since October 1999. Prior to that, Mr. Forrester served as the Chief
Financial Officer for Home Loan Bank in Fort Wayne, Indiana and Senior Vice
President and Treasurer for its holding company, Home Bancorp. Prior to joining
Home Loan Bank, Mr. Forrester was an examiner for the Indiana Department of
Financial Institutions.




Lonnie D. Collins (age 59)
has served as Secretary of the Bank since September 1994 and as Secretary of the
Holding Company since 1996. Mr. Collins has also practiced law since
October 1975 and has served as the Bank’s outside counsel since
1980.




Vickie L. Grimes (age 52) has
served as Vice President – Finance since May of 2007.  Prior to that
she acted as Controller for the Bank from September of 2006 until May of 2007.
She also served as the Bank’s Internal Auditor from 2003 to September 2006, and
as an accountant with the Bank from 2000 to 2003.  Prior to that, she
served as the Accounting Manager for a financial institution in Pueblo,
Colorado.




Anthony D. Brandon (age 36)
has served as Executive Vice President since July 29, 2005, and as Vice
President of Loan Administration of the Bank since September of 2001. Prior to
his appointment as Executive Vice President, he served as Vice President of Loan
Administration. Prior to joining the Bank, he served as President of Republic
Bank of Indiana.




Deanna Liter (age 44) has
served as Vice President of Data Services since 1999. From 1986 to 1997, she was
manager of the Citizens’ Data Processing Department.




Barbara Eades (age 58) has
served as Vice President of Retail Banking since 2000.  From 1997 to
1999, she was Branch Manager of the downtown branch. She served as Assistant
Vice President for Madison First Federal from 1990 to 1996.




Loy Skirvin(age 59) has
served as Vice President of Human Resources since 1998.  From 1991 to
1997, she was Human Resources Manager for a manufacturing firm.




33




Mark A. Goley(age 52) has
served as Vice President of Loan Services since 1997.  From 1989 to
1997, he served as Senior Loan Officer for Citizens.




John Muessel(age 55) has
served as Vice President - Trust Officer since April of 2002. Prior to joining
the Bank, he served as Trust Officer of National City Bank of
Indiana.




William H. Hensler (age 44)
has served as Vice President – Wealth Management since June of
2006.  Prior to joining the Bank he served as a financial consultant
with Hilliard Lyons.






PART
II




ITEM
5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.




Market
Information and Dividends




There
were 1,634,931 common shares of River Valley Bancorp outstanding at February 23,
2008, held of record by approximately 341 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 1996, the Company’s common
shares have been listed on The NASDAQ Capital Market (formerly called the NASDAQ
SmallCap Market) (“NASDAQ”), under the symbol
“RIVR.” On December 26, 2003, the shares of River Valley underwent a 2-for-1
stock split in order to create a more liquid market for the stock.




Presented
below are the high and low sale prices for the Holding Company’s common shares,
as well as cash distributions paid thereon since January 2004. Such sales prices
do not include retail financial markups, markdowns or commissions. Information
relating to sales prices has been obtained from NASDAQ.




Quarter
      Ended
            
            High
            
            
            Low
            
            
            Cash
      Distributions2007December 31
            
            $
            18.01
            
            
            $
            14.29
            
            
            $
            0.210September
      30
            
            
            19.84
            
            
            
            17.16
            
            
            
            0.200June
      30
            
            
            18.25
            
            
            
            17.00
            
            
            
            0.200March
      31
            
            
            18.05
            
            
            
            17.30
            
            
            
            0.2002006December 31
            
            $
            19.46
            
            
            $
            17.60
            
            
            $
            0.200September
      30
            
            
            18.74
            
            
            
            17.80
            
            
            
            0.195June
      30
            
            
            19.82
            
            
            
            18.05
            
            
            
            0.195March
      31
            
            
            20.50
            
            
            
            18.00
            
            
            
            0.1952005December 31
            
            $
            21.25
            
            
            $
            17.90
            
            
            $
            0.195September
      30
            
            
            22.06
            
            
            
            20.00
            
            
            
            0.195June
      30
            
            
            23.75
            
            
            
            19.01
            
            
            
            0.195March
      31
            
            
            24.30
            
            
            
            19.82
            
            
            
            0.190




The high
and low sale prices for River Valley’s common shares between December 31,
2007 and February 23, 2008, were $18.00 and $14.30, 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




34




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.




Regulations
of the OTS impose limitations on the payment of dividends and other capital
distributions by savings associations. Because the Bank is a subsidiary of a
savings and loan holding company, it is required to file a notice with the OTS
30 days before making any capital distributions to the Holding Company. It may
also have to file an application for approval of a proposed capital distribution
with the OTS if the Bank is not eligible for expedited treatment under the OTS’s
application processing rules, or the total amount of all capital distributions,
including the proposed capital distribution, for the applicable calendar year
would exceed an amount equal to the Bank’s net earnings for that year to date
plus the Bank’s retained net earnings for the preceding two years. The Bank must
also file an application for approval of a proposed capital distribution if,
following the proposed distribution, the Bank would not be adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the Bank and the OTS or the
FDIC.




Since the
Holding Company has no independent operation or other subsidiaries to generate
income, its ability to accumulate earnings for the payment of cash dividends to
its shareholders directly depends upon the ability of the Bank to pay dividends
to the Holding Company and upon the earnings on its investment
securities.




Any
dividend distributions by the Bank to the Holding Company in excess of current
or accumulated earnings and profits will be treated for federal income tax
purposes as a distribution from the Bank’s accumulated bad debt reserves, which
could result in increased federal income tax liability for the
Bank.




Generally,
there is no OTS regulatory restriction on the payment of dividends by the
Holding Company unless there is a determination by the Director of the OTS that
there is reasonable cause to believe that the payment of dividends constitutes a
serious risk to the financial safety, soundness or stability of the Bank. The
FDIC also has authority under current law to prohibit a bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice in light of the Bank’s financial condition. Indiana
law, however, would prohibit the Holding Company from paying a dividend, if,
after giving effect to the payment of that dividend, the Holding Company would
not be able to pay its debts as they become due in the usual course of business
or the Holding Company’s total assets would be less than the sum of its total
liabilities plus preferential rights of holders of preferred stock, if
any.






Equity
Compensation Plans




The
“Equity Compensation Plan Information” contained in Part III, Item 12 of this
Annual Report on Form 10-K is incorporated herein by reference.






Issuer
Purchases of Equity Securities




The
Company did not repurchase any shares of common stock during the three months
ended December 31, 2007.




35


ITEM
6.SELECTED FINANCIAL 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. The following selected financial data is
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto, presented in
Item 8 - Consolidated Financial Statements and Supplementary Data and in Item 7
- Management’s Discussion and Analysis of Financial Condition and Results of
Operation.






Selected
Consolidated Financial Information and Other Data




At
      December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Selected
      consolidated financial condition data:
            
            (In
      thousands)Total
      amount of:Assets
            
            $
            350,061
            
            
            $
            342,249
            
            
            $
            328,748
            
            
            $
            289,427
            
            
            $
            255,076Loans
      receivable - net (1)
            
            
            258,628
            
            
            
            241,887
            
            
            
            228,885
            
            
            
            230,513
            
            
            
            191,561Cash
      and cash equivalents
            
            
            8,137
            
            
            
            11,808
            
            
            
            17,730
            
            
            
            12,437
            
            
            
            12,512Investment
      securities
            
            
            58,999
            
            
            
            65,150
            
            
            
            59,609
            
            
            
            26,964
            
            
            
            34,557Deposits
            
            
            219,682
            
            
            
            220,238
            
            
            
            206,733
            
            
            
            170,538
            
            
            
            179,954FHLB
      advances and other borrowings
            
            
            102,217
            
            
            
            95,217
            
            
            
            96,782
            
            
            
            94,600
            
            
            
            50,000Shareholders’
      equity
            
            
            25,677
            
            
            
            24,147
            
            
            
            23,018
            
            
            
            22,393
            
            
            
            22,855









Year
      Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Summary
      of consolidated income data:
            
            (In
      thousands, except share data)Total
      interest income
            
            $
            20,558
            
            
            $
            18,910
            
            
            $
            16,298
            
            
            $
            13,545
            
            
            $
            12,653Total
      interest expense
            
            
            12,334
            
            
            
            11,053
            
            
            
            8,155
            
            
            
            5,617
            
            
            
            5,348Net
      interest income
            
            
            8,224
            
            
            
            7,857
            
            
            
            8,143
            
            
            
            7,928
            
            
            
            7,305Provision
      for losses on loans
            
            
            562
            
            
            
            264
            
            
            
            288
            
            
            
            338
            
            
            
            508Net
      interest income after provision for losses on loans
            
            
            7,662
            
            
            
            7,593
            
            
            
            7,855
            
            
            
            7,590
            
            
            
            6,797Other
      income
            
            
            2,992
            
            
            
            2,516
            
            
            
            2,500
            
            
            
            2,518
            
            
            
            3,354General,
      administrative and other expense
            
            
            7,675
            
            
            
            7,323
            
            
            
            7,094
            
            
            
            6,342
            
            
            
            5,831Income
      before income tax expense
            
            
            2,979
            
            
            
            2,786
            
            
            
            3,261
            
            
            
            3,766
            
            
            
            4,320Income
      tax expense
            
            
            770
            
            
            
            841
            
            
            
            1,175
            
            
            
            1,419
            
            
            
            1,665Net
      income
            
            $
            2,209
            
            
            $
            1,945
            
            
            $
            2,086
            
            
            $
            2,347
            
            
            $
            2,655Basic
      earnings per share
            
            $
            1.36
            
            
            $
            1.21
            
            
            $
            1.32
            
            
            $
            1.48
            
            
            $
            1.67Diluted
      earnings per share
            
            $
            1.34
            
            
            $
            1.18
            
            
            $
            1.27
            
            
            $
            1.42
            
            
            $
            1.59


(1) 
Includes loans held for sale.
 36




Year
      Ended December 31,Selected
      financial ratios and other data:
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Interest
      rate spread during period
            
            
            2.50
            %
            
            
            2.53
            %
            
            
            2.79
            %
            
            
            3.13
            %
            
            
            3.21
            %Net
      yield on interest-earning assets (1)
            
            
            2.56
            
            
            
            2.55
            
            
            
            2.82
            
            
            
            3.19
            
            
            
            3.28Return
      on assets (2)
            
            
            .64
            
            
            
            .59
            
            
            
            .63
            
            
            
            .88
            
            
            
            1.11Return
      on equity (3)
            
            
            8.92
            
            
            
            8.27
            
            
            
            9.06
            
            
            
            10.46
            
            
            
            12.22Equity
      to assets (4)
            
            
            7.21
            
            
            
            7.06
            
            
            
            7.00
            
            
            
            7.73
            
            
            
            8.96Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            101.49
            
            
            
            100.68
            
            
            
            101.29
            
            
            
            102.51
            
            
            
            102.86Non-performing
      assets to total assets (4)
            
            
            .57
            
            
            
            .33
            
            
            
            .61
            
            
            
            0.76
            
            
            
            0.18Allowance
      for loan losses to total loans outstanding (4)
            
            
            .83
            
            
            
            .89
            
            
            
            1.00
            
            
            
            1.02
            
            
            
            1.06Allowance
      for loan losses to non-performing loans (4)
            
            
            120.99
            
            
            
            195.33
            
            
            
            132.80
            
            
            
            107.41
            
            
            
            399.70Net
      charge-offs to average total loans outstanding
            
            
            .21
            
            
            
            .17
            
            
            
            0.14
            
            
            
            0.01
            
            
            
            0.29General,
      administrative and other expense to average assets (5)
            
            
            2.23
            
            
            
            2.19
            
            
            
            2.29
            
            
            
            2.38
            
            
            
            2.43Dividend
      payout ratio
            
            
            60.45
            
            
            
            66.53
            
            
            
            61.02
            
            
            
            50.70
            
            
            
            37.74Number
      of full service offices (4)
            
            
            7
            
            
            
            7
            
            
            
            7
            
            
            
            6
            
            
            
            5





(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.






ITEM
7. MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.




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, 2007, 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 in Item 8 of this Annual Report on Form 10-K.




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; and




3.
            Management’s
      opinion as to the effect of recent accounting pronouncements on River
      Valley’s consolidated financial position and results of
      operations.




Critical
Accounting Policies




Note 1 to
the Consolidated Financial Statements contains a summary of the Company’s
significant accounting policies for the year ended December 31, 2007.
Certain of these policies are important to the portrayal of the Company’s
financial condition, since they require management to make
difficult,




37




complex
or subjective judgments, some of which may relate to matters that are inherently
uncertain. Management believes that its critical accounting policies include
determining the allowance for loan losses and the valuation of mortgage
servicing rights.






Allowance
For Loan Losses




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




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




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




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




Larger
commercial loans that exhibit probable or observed credit weaknesses are subject
to individual review. Where appropriate, reserves are allocated to individual
loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow and legal
options available to the Company. Included in the review of individual loans are
those that are impaired as provided in Statement of Financial Accounting
Standards (“SFAS”) No.
114, Accounting by Creditors for Impairment of a Loan. Any allowances for
impaired loans are measured based on the present value of expected future cash
flows discounted at the loan’s effective interest rate or fair value of the
underlying collateral. The Company evaluates the collectibility of both
principal and interest when assessing the need for a loss accrual. Historical
loss rates are applied to other commercial loans not subject to specific reserve
allocations.




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




Historical
loss rates for commercial and consumer loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition. Factors which management considers in the
analysis include the effects of the national and local economies, trends in the
nature and volume of loans (delinquencies, charge-offs and nonaccrual loans),
changes in mix, credit score migration comparisons, asset quality trends, risk
management and loan administration, changes in the internal lending policies and
credit standards, collection practices and examination results from bank
regulatory agencies and the Company’s internal loan review.




38




Allowances
on individual loans and historical loss rates are reviewed no less than
quarterly and adjusted as necessary based on changing borrower and/or collateral
conditions and actual collection and charge-off experience.




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




The
Company has not substantively changed any aspect to its overall approach in the
determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.






Mortgage
Servicing Rights




The
Company recognizes the rights to service mortgage loans as separate assets in
the consolidated balance sheet. The total cost of loans, when sold, is allocated
between loans and mortgage servicing rights based on the relative fair values of
each. Mortgage servicing rights are subsequently carried at the lower of the
initial carrying value, adjusted for amortization, or fair value. Mortgage
servicing rights are evaluated for impairment based on the fair value of those
rights. Factors included in the calculation of fair value of the mortgage
servicing rights include, estimating the present value of future net cash flows,
market loan prepayment speeds for similar loans, discount rates, servicing
costs, and other economic factors. Servicing rights are amortized over the
estimated period of net servicing revenue. It is likely that these economic
factors will change over the life of the mortgage servicing rights, resulting in
different valuations of the mortgage servicing rights. The differing valuations
will affect the carrying value of the mortgage servicing rights on the
consolidated balance sheet as well as the amounts recorded in the consolidated
income statement.






Discussion
of Changes in Financial Condition from December 31, 2006 to
December 31, 2007




At
December 31, 2007, River Valley’s consolidated assets totaled $350.1
million, representing an increase of $7.8 million over the December 31,
2006 total. This increase in assets was funded by $7.0 million from borrowings
from the FHLB and $6.2 million from the proceeds of investment
maturities.  Deposits decreased only slightly by $600,000 to a total
of $219.7 million at December 31, 2007. Savings and demand deposits
increased by $8.5 million, or 7.2%, during 2007, while certificates of deposit
experienced an offsetting decrease of $9.1 million for 2007.  Total
certificates of deposit at December 31, 2007 totaled $92.9 million compared to
$102.0 million for 2006. The Bank’s ability to grow its asset base in the face
of relative deposit stagnation reflects the strengths inherent in being a
community based financial institution versus being a division of a regionally
based institution.




Liquid
assets (i.e., cash,
federal funds sold, interest-earning deposits and certificates of deposit)
decreased by $3.7 million from December 31, 2006 levels to a total of $8.1
million at December 31, 2007.




Investment
securities totaled $59.0 million at December 31, 2007, a decrease of $6.2
million from December 31, 2006.   Maturities in the
investment portfolio were used to fund asset growth, resulting in the indicated
decrease. In September of 2005 the Company formed an investment subsidiary in
Nevada with the sole purpose of holding liquid investments as interest on these
investments is not subject to state taxation.  This resulted in
substantial tax savings for the Company in 2007.




Loans
receivable, including loans held for sale, totaled $258.9  million at
December 31, 2007, an increase of $17.0 million from the $241.9 million
total at December 31, 2006.  Despite concerns in the real
estate




39




markets
in general, there were strong increases in one- to four- family loans originated
during 2007, again reflecting the strength in being a community based financial
institution. The Bank also saw an increase in commercial lending during the same
period.  Over the same period construction lending dropped, a
reflection of the depressed national construction market.




River
Valley’s consolidated allowance for loan losses totaled approximately $2.2
million for the year ended December 31, 2007 and $2.2 million for the year
ended December 31, 2006.  Whereas the total consolidated
allowance experienced little change period to period, the total loan portfolio
increased, resulting in a lower consolidated allowance as a percent of total
loans; 0.83% for 2007 as compared to 0.89% for 2006. Management is aggressive in
their analysis of delinquent loans. Likewise, they are conservative in the
classification of troubled assets, and in their approach to loan origination in
general.  The Bank does not originate the type of loans publicized as
“sub-prime” and therefore does not anticipate delinquencies other than those
normally associated with economic trends in general.  In response to
the potential for a downturn in the economy, and to increases in non-performing
loans within the Bank, the expense for the provision for loan losses increased
from $264,000 in 2006 to $562,000 in 2007, an increase of 112.9%.




Non-performing
loans (defined as loans delinquent greater than 90 days and loans on non-accrual
status) totaled $1.8 million and $1.1 million at December 31, 2007 and
2006, respectively, an increase of $711,000. A significant portion of the
non-performing loan totals are chronic delinquencies currently in foreclosure or
bankruptcy.




Although
management believes that its allowance for loan losses at December 31,
2007, 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 Company’s results of
operations.




Advances
from the Federal Home Loan Bank (“FHLB”) and other borrowed money increased by
$7.0 million from the total at December 31, 2006. The increases were used
to fund asset growth.  The Bank continues to take advantage of the
long-term funding done in 2005 with the average rate on advances at December 31,
2007 at 4.64% as compared to 4.63% at the same point in 2006.




Shareholders’
equity totaled $25.7 million at December 31, 2007, an increase of $1.6
million from the $24.1 million total at December 31, 2006. The increase
resulted primarily from net income offset by cash dividends and an increase due
to an unrealized gain on available for sale securities of $280,000 at December
31, 2007 as opposed to an unrealized loss of $328,000 at the same point in
2006.






Comparison
of Results of Operations for the Years Ended December 31, 2007 and
2006




General




River
Valley’s net income for the year ended December 31, 2007, totaled $2.2
million, an increase of $264,000, or 13.5%, from net income reported in
2006.  The increase in net income was primarily a result of increased
net interest income due to loan growth, affected only slightly by the decrease
in the interest spread, and increased non-interest income.  Income tax
expense decreased despite the overall increase in income, with a drop in the
effective tax rate from 30.2% in 2006 to 25.9% in 2007, a dollar drop of
$71,000. Income from the increased average investment in municipals combined
with increased average balances in the cash surrender value of Bank owned life
insurance, contributed to the drop in the effective tax rate, year to
year.




40




Net
Interest Income




Total
interest income for the year ended December 31, 2007, amounted to $20.6
million, an increase of $1.6 million, or 8.7%, from the 2006 total, reflecting
higher average balances of interest earning assets and higher interest rates.
The average balance of interest-earning assets outstanding year-to-year
increased by $12.9 million, and the yield on those assets increased from an
average yield of 6.13% in 2006 to 6.40% in 2007. Interest income on loans
totaled $17.3 million for 2007, an increase of approximately $1.5 million, or
9.3%, from 2006. Interest income on investments, FHLB stock and interest-earning
deposits increased by $166,000, or 5.6%, due primarily to the higher
rates.




Interest
expense on deposits increased by $689,000, or 9.9%, to a total of $7.7 million
for the year ended December 31, 2007, due primarily to higher costs of
funding higher average balances. The cost of deposits increased from 3.2% in
2006 to 3.5% in fiscal 2007. Interest expense on borrowings totaled $4.7 million
for the year ended December 31, 2007, an increase of $592,000 from 2006 as
a result of increased average balances in FHLB advances for the
year.




As a
result of the foregoing changes in interest income and interest expense, net
interest income increased during 2007 by $367,000, or 4.7%, compared to 2006.
The interest rate spread decreased by 3 basis points from 2.53% in 2006 to 2.50%
in 2007, while the net interest margin increased slightly from 2.55% in 2006 to
2.56% at the end of 2007.






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 result of such analysis, management recorded a $562,000
provision for losses on loans in 2007, an increase of $298,000 or 112.9%,
compared to the $264,000 provision recorded in 2006. The current period
provision generally reflects growth in the loan portfolio and management’s
analysis of the delinquency trends for the Bank in view of the local real estate
market.




Non-performing
loans for the period ended December 31, 2007 were $1.8 million, an increase
of approximately $700,000 from the $1.1 million recorded as of fiscal year ended
2006.  Net charge-offs amounted to $530,000 in 2007, compared to
$408,000 in 2006. While management believes that the allowance for losses on
loans is adequate at December 31, 2007, 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 amounted to $3.0 million for the year ended December 31, 2007, an
increase of $476,000, or 18.9%, compared to 2006.  This positive
change was the result of increased service fees and charges, increased income
from the cash surrender value of bank owned life insurance, and income from the
Bank’s trust division relating to estate fees collected during the
period.  Whereas the additional income from the bank owned life
insurance cash surrender value may be predictable into the upcoming year, income
from service fees and charges and trust operations cannot. The volume of loan
sales increased from $5.5 million in 2006 to $6.0 million in 2007 with the
associated gain/loss on those sales remaining relatively flat year to
year.




41




General,
Administrative and Other Expense




General,
administrative and other expense totaled $7.7 million for the year ended
December 31, 2007, an increase of $352,000 over the 2006 total. Employee
compensation and benefits increased by $235,000 in fiscal 2007 as compared to
2006 primarily from the addition of a credit underwriter, a dedicated loan
review professional, and wealth management personnel.  Mortgage
servicing rights expense decreased by $78,000 in 2007 over the same period in
2006 reflecting a continued trend of lower amortization of those rights as loans
serviced for others has declined.






Income
Taxes




The
provision for income taxes decreased by $71,000 or 8.4%, for the year ended
December 31, 2007, as compared to 2006.  Increased average levels
of municipal investments held at the Bank’s Nevada subsidiary, and increased
income from the cash surrender value of bank owned life insurance, relating to
increased balances in that insurance, contributed primarily to a drop in the
effective tax rate from 30.2% in 2006 to 25.9% in 2007.






Comparison
of Results of Operations for the Years Ended December 31, 2006 and
2005




General




River
Valley’s net income for the year ended December 31, 2006, totaled $1.9
million, a slight decrease of $141,000, or 6.8%, from net income reported in
2005. The decrease in net income in the 2006 period was primarily attributable
to a decrease in net interest income offset by a reduction in income tax
expense.  The drop in income tax expense was due to a drop in the
effective tax rate from 36.0% in 2005 to 30.2% in 2006, a dollar drop of
$334,000, primarily resulting from the establishment of the Nevada investment
subsidiary.






Net
Interest Income




Total
interest income for the year ended December 31, 2006, amounted to $18.9
million, an increase of $2.6 million, or 16.0%, from the 2005 total, reflecting
higher average balances of interest earning assets and higher interest rates.
The average balance of interest-earning assets outstanding year-to-year
increased by $19.6 million, and the yield on those assets increased from an
average yield of 5.65% in 2005 to 6.13% in 2006. Interest income on loans
totaled $15.9 million for 2006, an increase of approximately $1.6 million, or
11.0%, from 2005. Interest income on investments, FHLB stock and
interest-earning deposits increased by $1.0 million, or 52.2%, due to much
higher average balances on those investments and higher rates.




Interest
expense on deposits increased by $3.3 million, or 88.6%, to a total of $7.0
million for the year ended December 31, 2006, due primarily to higher costs
of funding higher average balances. The cost of deposits increased from 2.0% in
2005 to 3.2% in fiscal 2006. Interest expense on borrowings totaled $4.0 million
for the year ended December 31, 2006, a decrease of $.5 million from
2005.




As a
result of the foregoing changes in interest income and interest expense, net
interest income decreased during 2006 by $286,000, or 3.5%, compared to 2005.
The interest rate spread decreased by 26 basis points for 2006, to 2.53% from
2.79% in the 2005 period, while the net interest margin amounted to 2.55% in
2006 and 2.82% in 2005.




42




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 result of such analysis, management recorded a $264,000
provision for losses on loans in 2006, a decrease of $24,000 or 8.3%, compared
to the $288,000 provision recorded in 2005. The current period provision
generally reflects growth in the loan portfolio, coupled with a change in the
loan mix, that is more 1-4 family residential loans and fewer consumer
loans.




Non-performing
loans for the period ended December 31, 2006 were $1.1 million, a decrease
of approximately $630,000 from the $1.7 million recorded as of fiscal year ended
2005.  Net charge-offs amounted to $408,000 in 2006, compared to
$332,000 in 2005. While management believes that the allowance for losses on
loans is adequate at December 31, 2006, 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 amounted to $2.4 million for the year ended December 31, 2006, a
decrease of $52,000, or 2.1%, compared to 2005, due primarily to a decrease in
net gains on loan sales from $299,000 in 2005 to $107,000 in 2006, a decrease of
$192,000 or 64.2%. The volume of loan sales decreased from $14.0 million in 2005
to $5.5 million in 2006. The decline in other income due to the decline in loan
sales was offset by an increase in service fees and charges of $131,000
resulting from other programs and services.






General,
Administrative and Other Expense




General,
administrative and other expense totaled $7.3 million for the year ended
December 31, 2006, an increase of $161,000 over the 2005 total. Employee
compensation and benefits increased slightly by $122,000 in fiscal 2006 as
compared to 2005 primarily from additional staffing, cost of living and benefit
expense.  Mortgage servicing rights expense increased by $177,000 in
2006 over the same period in 2005.  In the years prior to 2005, the
Company recorded impairment on its mortgage servicing rights.  As the
market value of the mortgage servicing rights increased during 2005, the
previously recorded impairment was recovered thus significantly lowering
amortization expense during 2005.






Income
Taxes




The
provision for income taxes decreased by $334,000 or 28.4%, for the year ended
December 31, 2006, as compared to 2005.  In September of 2005 the
Company formed an investment subsidiary in Nevada with the sole purpose of
holding liquid investments as interest on these investments is not subject to
state taxation.  As a result, the effective tax rates dropped from
36.0% in 2005 to 30.2% in 2006.






AVERAGE
BALANCE, YIELD, RATE AND VOLUME DATA




The
following table presents certain information relating to River Valley’s average
balance sheet 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
daily balance of interest-earning assets or interest-bearing liabilities,
respectively, for the years presented. Average balances are derived from daily
balances, which include nonaccruing loans in the loan portfolio.






43




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Average
      outstanding balance
            
            
            Interest
      earned/ paid
            
            
            Yield/
      rate
            
            
            Average
      outstanding balance
            
            
            Interest
      earned/ paid
            
            
            Yield/
      rate
            
            
            Average
      outstanding balance
            
            
            Interest
      earned/ paid
            
            
            Yield/
      rateAssets
            
            (Dollars
      in thousands)Interest-earning
      assets:Interest-earning
      deposits
            
            $
            5,765
            
            
            $
            351
            
            
            
            6.09
            %
            
            $
            5,807
            
            
            $
            286
            
            
            
            4.93
            %
            
            $
            5,397
            
            
            $
            238
            
            
            
            4.41
            %Other
      securities (1)
            
            
            57,632
            
            
            
            2,505
            
            
            
            4.35
            
            
            
            63,258
            
            
            
            2,557
            
            
            
            4.04
            
            
            
            47,845
            
            
            
            1,589
            
            
            
            3.32Mortgage-backed
      securities (1)
            
            
            2,605
            
            
            
            142
            
            
            
            5.45
            
            
            
            74
            
            
            
            4
            
            
            
            5.41
            
            
            
            93
            
            
            
            4
            
            
            
            4.30Loans
      receivable (2)
            
            
            250,420
            
            
            
            17,347
            
            
            
            6.93
            
            
            
            234,886
            
            
            
            15,865
            
            
            
            6.75
            
            
            
            231,217
            
            
            
            14,297
            
            
            
            6.18FHLB
      stock
            
            
            4,575
            
            
            
            213
            
            
            
            4.66
            
            
            
            4,113
            
            
            
            198
            
            
            
            4.81
            
            
            
            3,959
            
            
            
            170
            
            
            
            4.29Total
      interest-earning assets
            
            
            320,997
            
            
            
            20,558
            
            
            
            6.40
            
            
            
            308,138
            
            
            
            18,910
            
            
            
            6.14
            
            
            
            288,511
            
            
            
            16,298
            
            
            
            5.65Non-interest
      earning assets, net of allowance for loan losses
            
            
            22,624
            
            
            
            
            
            
            
            
            
            
            
            23,590
            
            
            
            
            
            
            
            
            
            
            
            21,163Total
      assets
            
            $
            343,621
            
            
            
            
            
            
            
            
            
            
            $
            331,728
            
            
            
            
            
            
            
            
            
            
            $
            309,674Liabilities/shareholder
      equityInterest-bearing
      liabilities:Savings
      deposits
            
            $
            42,081
            
            
            
            1,105
            
            
            
            2.63
            %
            
            $
            41,228
            
            
            $
            963
            
            
            
            2.34
            %
            
            $
            42,776
            
            
            $
            692
            
            
            
            1.62
            %Interest-bearing
      demand (3)
            
            
            75,509
            
            
            
            1,839
            
            
            
            2.44
            
            
            
            74,492
            
            
            
            1,826
            
            
            
            2.45
            
            
            
            45,400
            
            
            
            217
            
            
            
            0.48Certificates
      of deposit
            
            
            101,800
            
            
            
            4,709
            
            
            
            4.63
            
            
            
            103,706
            
            
            
            4,175
            
            
            
            4.03
            
            
            
            94,168
            
            
            
            2,784
            
            
            
            2.96FHLB
      advances and other borrowings
            
            
            96,884
            
            
            
            4,681
            
            
            
            4.83
            
            
            
            86,635
            
            
            
            4,089
            
            
            
            4.72
            
            
            
            102,501
            
            
            
            4,462
            
            
            
            4.35Total
      interest-bearing liabilities
            
            
            316,274
            
            
            
            12,334
            
            
            
            3.90
            
            
            
            306,061
            
            
            
            11,053
            
            
            
            3.61
            
            
            
            284,845
            
            
            
            8,155
            
            
            
            2.86Other
      liabilities
            
            
            2,575
            
            
            
            
            
            
            
            
            
            
            
            2,142
            
            
            
            
            
            
            
            
            
            
            
            1,862Total
      liabilities
            
            $
            318,849
            
            
            
            
            
            
            
            
            
            
            
            308,203
            
            
            
            
            
            
            
            
            
            
            
            286,707Total
      equity
            
            
            24,772
            
            
            
            
            
            
            
            
            
            
            
            23,525
            
            
            
            
            
            
            
            
            
            
            
            22,967Total
      liabilities and equity
            
            $
            343,621
            
            
            
            
            
            
            
            
            
            
            $
            331,728
            
            
            
            
            
            
            
            
            
            
            $
            309,674Net
      interest earning assets
            
            $
            4,723
            
            
            
            
            
            
            
            
            
            
            $
            2,077
            
            
            
            
            
            
            
            
            
            
            $
            3,666Net
      interest income
            
            
            
            
            
            $
            8,224
            
            
            
            
            
            
            
            
            
            
            $
            7,857
            
            
            
            
            
            
            
            
            
            
            $
            8,143Interest
      rate spread (4)
            
            
            
            
            
            
            
            
            
            
            2.50
            %
            
            
            
            
            
            
            
            
            
            
            2.53
            %
            
            
            
            
            
            
            
            
            
            
            2.79
            %Net
      yield on weighted average interest-earning assets (5)
            
            
            
            
            
            
            
            
            
            
            2.56
            %
            
            
            
            
            
            
            
            
            
            
            2.55
            %
            
            
            
            
            
            
            
            
            
            
            2.82
            %Average
      interest-earning assets to average bearing liabilities
            
            
            
            
            
            
            
            
            
            
            101.49
            %
            
            
            
            
            
            
            
            
            
            
            100.68
            %
            
            
            
            
            
            
            
            
            
            
            101.29
            %





(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)
            Includes
      Non-Interest Demand Deposit Accounts of $19,359, $20,405, and
      $17,346


(4)
            Interest
      rate spread is calculated by subtracting weighted average interest rate
      cost from weighted average interest rate yield for the period
      indicated.


(5)
            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.






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




44




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:




Year
      Ended December 31,2007
      vs. 2006
            
            
            2006
      vs. 2005Volume
            
            
            Increase
      (decrease) due to Rate
            
            
            Total
            
            
            Volume
            
            
            Increase
      (decrease) due to Rate
            
            
            Total(In
      thousands)Interest-earning
      assets:Interest-earning
      deposits and other
            
            $
            20
            
            
            $
            60
            
            
            $
            80
            
            
            $
            26
            
            
            $
            50
            
            
            $
            76Investment
      securities
            
            
            (99
            )
            
            
            185
            
            
            
            86
            
            
            
            578
            
            
            
            390
            
            
            
            968Loans
      receivable, net
            
            
            1,069
            
            
            
            413
            
            
            
            1,482
            
            
            
            230
            
            
            
            1,338
            
            
            
            1,568Total
            
            
            990
            
            
            
            658
            
            
            
            1,648
            
            
            
            834
            
            
            
            1,778
            
            
            
            2,612Interest-bearing
      liabilities:Deposits
            
            
            (88
            )
            
            
            777
            
            
            
            689
            
            
            
            494
            
            
            
            2,777
            
            
            
            3,271FHLB
      advances and other borrowings
            
            
            493
            
            
            
            99
            
            
            
            592
            
            
            
            (728
            )
            
            
            355
            
            
            
            (373
            )Total
            
            
            405
            
            
            
            876
            
            
            
            1,281
            
            
            
            (234
            )
            
            
            3,132
            
            
            
            2,898Net
      change in interest income
            
            $
            585
            
            
            $
            (218
            )
            
            $
            367
            
            
            $
            1,068
            
            
            $
            (1,354
            )
            
            $
            (286
            )






Asset
and Liability Management




Like
other financial institutions, River Valley Financial is subject to interest rate
risk to the extent that interest-earning assets re-price 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.




Presented
on the following table is an analysis of River Valley Financial’s interest rate
risk, as of December 31, 2007 and December 31, 2006, as measured by
changes in NPV for an instantaneous and sustained parallel shift of 100 through
300 basis points in market interest rates.




Generally,
NPV is more sensitive to rising rates than declining rates. Such difference in
sensitivity occurs principally because, as rates rise, a bank’s assets reprice
slower than the deposits that fund them. As a result, in a rising interest rate
environment, the amount of interest a bank would receive on loans would increase
as loans are slowly prepaid and new loans at higher rates are made. Moreover,
the interest the bank would pay on deposits would increase, but generally slower
than the bank’s ability to reprice its interest-earning assets. However, River
Valley Financial Bank has addressed some of these issues, which has generally
reduced its overall exposure to interest rate risk.






45




As
      of December 31, 2007(Dollars
      in thousands)Change
      in Interest Rates (basis points)
            
            
            Estimated
      NPV
            
            
            Amount
      of Change
            
            
            Percent+300
            
            
            
            $43,230
            
            
            
            $(407)
            
            
            
            -1%+200
            
            
            
            44,507
            
            
            
            870
            
            
            
            +2%+100
            
            
            
            44,673
            
            
            
            1,036
            
            
            
            +2%—
            
            
            
            43,637-100
            
            
            
            41,722
            
            
            
            (1,915)
            
            
            
            -4%-200
            
            
            
            39,376
            
            
            
            (4,261)
            
            
            
            -10%-300 (1)As
      of December 31, 2006(Dollars
      in thousands)Change
      in Interest Rates (basis points)
            
            
            Estimated
      NPV
            
            
            Amount
      of Change
            
            
            Percent+300
            
            
            
            $43,156
            
            
            $
            (1,918)
            
            
            
            -4%+200
            
            
            
            44,200
            
            
            
            (873)
            
            
            
            -2%+100
            
            
            
            45,280
            
            
            
            206
            
            
            
            0%—
            
            
            
            45,073-100
            
            
            
            44,007
            
            
            
            (1,066)
            
            
            
            -2%-200
            
            
            
            44,123
            
            
            
            (951)
            
            
            
            -2%-300 (1)
            
            
            
            0
            
            
            
            0
            
            
            
            0


_____________________


(1)
            At
      December 31, 2007 and at December 31, 2006, the OTS did not provide
      information as to interest rate risk for a 300 point
    decrease.






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.






Liquidity
and Capital Resources




The
Company’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 Company 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.




The
Financial Regulatory Relief and Economic Efficiency Act of 2000, which was
signed into law on December 27, 2000, repealed the former statutory requirement
that all savings associations maintain an average daily balance of liquid assets
in a minimum amount of not less than 4% or more than 10% of their withdrawable
accounts plus short-term borrowings. The OTS adopted a rule that implemented
this revised statutory requirement, although savings associations remain subject
to the OTS regulation that requires them to maintain sufficient liquidity to
ensure their safe and sound operation. At December 31, 2007,




46




River
Valley Financial Bank had commitments to originate loans totaling $2.5 million
and in addition, had undisbursed loans in process, unused lines of credit and
standby letters of credit totaling $29.3 million. At such date, River Valley
Financial Bank had $480,000 in commitments to sell loans and no outstanding
commitment to purchase loans. The Company considers River Valley Financial
Bank’s liquidity and capital resources sufficient to meet outstanding short and
long term needs.




The
Company’s liquidity, primarily represented by cash and cash equivalents, is a
result of the funds provided by or used in the Company’s operating, investing
and financing activities. These activities are summarized below for the years
ended December 31, 2007, 2006 and 2005:




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005(In
      thousands)Cash
      flows from operating activities
            
            $
            2,537
            
            
            $
            3,542
            
            
            $
            3,646Cash
      flows from investing activities:Purchase
      of securities
            
            
            (18,181
            )
            
            
            (23,139
            )
            
            
            (48,816
            )Proceeds
      from maturities of securities
            
            
            16,483
            
            
            
            7,012
            
            
            
            15,521Proceeds
      from sales of securities
            
            
            8,910
            
            
            
            10,933
            
            
            
            —Net
      loan originations
            
            
            (17,715
            )
            
            
            (14,384
            )
            
            
            536Other
            
            
            (662
            )
            
            
            (861
            )
            
            
            (2,607
            )Cash
      flows from financing activities:Net
      increase (decrease) in deposits
            
            
            (556
            )
            
            
            13,505
            
            
            
            36,195Net
      increase in borrowings
            
            
            7,000
            
            
            
            (1,565
            )
            
            
            2,182Purchase
      of stock
            
            
            (183
            )
            
            
            (46
            )
            
            
            (201
            )Other
            
            
            (1,304
            )
            
            
            (919
            )
            
            
            (1,163
            )Net
      increase (decrease) in cash and cash equivalents
            
            $
            (3,671
            )
            
            $
            (5,922
            )
            
            $
            5,293






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 associations. OTS regulations require savings
associations to maintain core capital generally equal to 4% of the association’s
total assets except those associations with the highest examination rating and
acceptable levels of risk.




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 $1.7
million at December 31, 2007.




River
Valley Financial exceeded all of its regulatory capital requirements at
December 31, 2007. The following table summarizes River Valley Financial’s
regulatory capital requirements and regulatory capital at December 31,
2007:




47


OTS
      Requirement
            
            
            Actual
      AmountPercent
      of Assets
            
            Amount
            
            
            Percent
      of Assets (1)
            
            Amount
            
            
            Amount
      of Excess(Dollars
      in thousands)Tangible
      capital
            
            
            1.50
            %
            
            $
            5,225
            
            
            
            8.49
            %
            
            $
            29,542
            
            
            $
            24,317Core
      capital (2)
            
            
            4.00
            %
            
            
            13,933
            
            
            
            8.49
            %
            
            
            29,542
            
            
            
            15,609Risk-based
      capital
            
            
            8.00
            %
            
            
            20,209
            
            
            
            12.37
            %
            
            
            31,276
            
            
            
            11,067





(1)
            Tangible
      and core capital levels are shown as a percentage of 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 Office of the
      Comptroller of the Currency for national banks. The regulation requires
      core capital of 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. River Valley
      Financial is in compliance with this
  requirement.






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.






Off-Balance
Sheet Arrangements




As of the
date of this Annual Report on Form 10-K, the Company does not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on the Company’s financial condition, change in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors. The
term “off-balance sheet arrangement” generally means any transaction, agreement,
or other contractual arrangement to which any entity unconsolidated with the
Company is a party and under which the company has (i) any obligation arising
under a guarantee contract, derivative instrument or variable interest; or (ii)
a retained or contingent interest in assets transferred to such entity or
similar arrangement that serves as credit, liquidity or market risk support for
such assets.






ITEM
7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.


Not
applicable.




48







River
Valley Bancorp




December
31, 2007 and 2006














Contents









Report
      of Independent Registered Public Accounting Firm
            50Consolidated
      Financial StatementsBalance
      Sheets
            51Statements
      of Income
            52Statements
      of Comprehensive Income
            53Statements
      of Stockholders' Equity
            54Statements
      of Cash Flows
            55Notes
      to Financial Statements
            56












49


Report
of Independent Registered Public Accounting Firm








Audit
Committee, Board of Directors and Shareholders


River
Valley Bancorp


Madison,
Indiana








We have
audited the accompanying consolidated balance sheets of River Valley Bancorp as
of December 31, 2007 and 2006, and the related consolidated statements of
income, comprehensive income, shareholders’ equity and cash flows for the years
then ended.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of River Valley Bancorp as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of
America.














Indianapolis,
Indiana


March 12,
2008









50


River
Valley Bancorp


Consolidated
Balance Sheets


December
31, 2007 and 2006




Assets




2007
            
            
            2006(In
      Thousands, Except Share Amounts)Cash
      and due from banks
            
            $
            5,131
            
            
            $
            6,838Interest-bearing
      demand deposits
            
            
            3,006
            
            
            
            4,736Fed
      funds sold
            
            
            —
            
            
            
            234Cash
      and cash equivalents
            
            
            8,137
            
            
            
            11,808Investment
      securities available for sale
            
            
            58,999
            
            
            
            65,150Loans
      held for sale
            
            
            312
            
            
            
            —Loans,
      net of allowance for loan losses of $2,208 and $2,176
            
            
            258,628
            
            
            
            241,887Premises
      and equipment
            
            
            7,631
            
            
            
            7,813Real
      estate, held for sale
            
            
            184
            
            
            
            —Federal
      Home Loan Bank stock
            
            
            4,750
            
            
            
            4,400Interest
      receivable
            
            
            2,396
            
            
            
            2,334Cash
      value of life insurance
            
            
            7,552
            
            
            
            7,222Other
      assets
            
            
            1,472
            
            
            
            1,635Total
      assets
            
            $
            350,061
            
            
            $
            342,249LiabilitiesDepositsNoninterest-bearing
            
            $
            18,619
            
            
            $
            19,340Interest-bearing
            
            
            201,063
            
            
            
            200,898Total
      deposits
            
            
            219,682
            
            
            
            220,238Borrowings
            
            
            102,217
            
            
            
            95,217Interest
      payable
            
            
            724
            
            
            
            705Other
      liabilities
            
            
            1,761
            
            
            
            1,942Total
      liabilities
            
            
            324,384
            
            
            
            318,102Commitments
      and ContingenciesStockholders'
      EquityPreferred
      stock, no par valueAuthorized
      and unissued - 2,000,000 sharesCommon
      stock, no par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding - 1,634,931 and 1,620,431 shares
            
            
            9,160
            
            
            
            9,129Retained
      earnings
            
            
            16,237
            
            
            
            15,346Shares
      acquired by stock benefit plans
            
            
            —
            
            
            
            —Accumulated
      other comprehensive gain (loss)
            
            
            280
            
            
            
            (328
            )Total
      stockholders’ equity
            
            
            25,677
            
            
            
            24,147Total
      liabilities and stockholders’ equity
            
            $
            350,061
            
            
            $
            342,249









51


River
Valley Bancorp


Consolidated
Statements of Income


Years
Ended December 31, 2007 and 2006




2007
            
            
            2006(In
      Thousands, Except Per Share Amounts)Interest
      IncomeLoans
      receivable
            
            $
            17,347
            
            
            $
            15,865Investment
      securities
            
            
            2,647
            
            
            
            2,561Interest-earning
      deposits and other
            
            
            564
            
            
            
            484Total
      interest income
            
            
            20,558
            
            
            
            18,910Interest
      ExpenseDeposits
            
            
            7,653
            
            
            
            6,964Borrowings
            
            
            4,681
            
            
            
            4,089Total
      interest expense
            
            
            12,334
            
            
            
            11,053Net
      Interest Income
            
            
            8,224
            
            
            
            7,857Provision
      for loan losses
            
            
            562
            
            
            
            264Net
      Interest Income After Provision for Loan Losses
            
            
            7,662
            
            
            
            7,593Other
      IncomeService
      fees and charges
            
            
            2,138
            
            
            
            2,021Net
      realized losses on sales of available-for-sale securities
            
            
            (21
            )
            
            
            (58
            )Net
      gains on loan sales
            
            
            104
            
            
            
            107Interchange
      fee income
            
            
            136
            
            
            
            68Increase
      in cash value of life insurance
            
            
            330
            
            
            
            199Trust
      operations income
            
            
            194
            
            
            
            125Other
      income
            
            
            111
            
            
            
            54Total
      other income
            
            
            2,992
            
            
            
            2,516Other
      ExpensesSalaries
      and employee benefits
            
            
            4,198
            
            
            
            3,963Net
      occupancy and equipment expenses
            
            
            1,184
            
            
            
            1,151Data
      processing fees
            
            
            178
            
            
            
            159Advertising
            
            
            332
            
            
            
            259Mortgage
      servicing rights
            
            
            295
            
            
            
            373Office
      supplies
            
            
            123
            
            
            
            171Professional
      fees
            
            
            400
            
            
            
            221Other
      expenses
            
            
            965
            
            
            
            1,026Total
      other expenses
            
            
            7,675
            
            
            
            7,323Income
      Before Income Tax
            
            
            2,979
            
            
            
            2,786Income
      tax expense
            
            
            770
            
            
            
            841Net
      Income
            
            $
            2,209
            
            
            $
            1,945Basic
      Earnings per Share
            
            $
            1.36
            
            
            $
            1.21Diluted
      Earnings per Share
            
            $
            1.34
            
            
            $
            1.18









52


River
Valley Bancorp


Consolidated
Statements of Comprehensive Income


Years
Ended December 31, 2007 and 2006









2007
            
            
            2006(In
      Thousands)Net
      Income
            
            $
            2,209
            
            
            $
            1,945Other
      comprehensive income(loss), net of
      taxUnrealized
      gains (losses) on securities available for saleUnrealized
      holding gains (losses) arising during the period, net of tax expense
      (benefit) of $324 and  $107
            
            
            595
            
            
            
            103Less:  Reclassification
      adjustment for losses included in net income, net of tax benefit of $8
      and  $23
            
            
            (13
            )
            
            
            (35
            )608
            
            
            
            138Comprehensive
      Income
            
            $
            2,817
            
            
            $
            2,083












53


River
Valley Bancorp


Consolidated
Statements of Stockholders’ Equity


Years
Ended December 31, 2007 and 2006









Shares
            
            
            AccumulatedAcquired
            
            
            OtherBy
      Stock
            
            
            ComprehensiveCommon
            
            
            Retained
            
            
            Benefit
            
            
            IncomeShares
            
            
            Stock
            
            
            Earnings
            
            
            Plans
            
            
            (Loss)
            
            
            TotalBalances,
      January 1, 2006
            
            
            1,586,495
            
            
            $
            8,973
            
            
            $
            14,663
            
            
            $
            (152
            )
            
            $
            (466
            )
            
            $
            23,018Net
      income
            
            
            
            
            
            
            
            
            
            
            1,945
            
            
            
            
            
            
            
            
            
            
            
            1,945Unrealized
      losses on securities, net of reclassification adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            138
            
            
            
            138Reclassification
      of unearned compensation to common stock upon adoption of SFAS
      123(R)
            
            
            
            
            
            
            (152
            )
            
            
            
            
            
            
            152Cash
      dividends ($.785 per share)
            
            
            
            
            
            
            
            
            
            
            (1,262
            )
            
            
            
            
            
            
            
            
            
            
            (1,262
            )Exercise
      of stock options
            
            
            36,336
            
            
            
            266
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            266Tax
      benefit of stock options exercised and RRP
            
            
            
            
            
            
            51
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            51Stock
      option expense
            
            
            
            
            
            
            2
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2Amortization
      of expense related to stock compensation plans
            
            
            
            
            
            
            35
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35Purchase
      of stock
            
            
            (2,400
            )
            
            
            (46
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (46
            )Balances,
      December 31, 2006
            
            
            1,620,431
            
            
            
            9,129
            
            
            
            15,346
            
            
            
            —
            
            
            
            (328
            )
            
            
            24,147Net
      income
            
            
            
            
            
            
            
            
            
            
            2,209
            
            
            
            
            
            
            
            
            
            
            
            2,209Unrealized
      losses on securities, net of reclassification adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            608
            
            
            
            608Cash
      dividends ($.81 per share)
            
            
            
            
            
            
            
            
            
            
            (1,318
            )
            
            
            
            
            
            
            
            
            
            
            (1,318
            )Exercise
      of stock options
            
            
            14,504
            
            
            
            103
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            103Tax
      benefit of stock options exercised and RRP
            
            
            
            
            
            
            17
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17Contribution
      to stock benefit plans
            
            
            
            
            
            
            (107
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (107
            )Issuance
      of ESOP shares
            
            
            9,996
            
            
            
            175
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            175Stock
      option expense
            
            
            
            
            
            
            2
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2Amortization
      of expense related to stock compensation  plans
            
            
            
            
            
            
            24
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            24Purchase
      of stock
            
            
            (10,000
            )
            
            
            (183
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (183
            )Balances,
      December 31, 2007
            
            
            1,634,931
            
            
            $
            9,160
            
            
            $
            16,237
            
            
            $
            —
            
            
            $
            280
            
            
            $
            25,677







54


River
Valley Bancorp


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2007 and 2006




2007
            
            
            2006(In
      Thousands)Operating
      ActivitiesNet
      income
            
            $
            2,209
            
            
            $
            1,945Items
      not requiring (providing) cashProvision
      for loan losses
            
            
            562
            
            
            
            264Depreciation
      and amortization
            
            
            601
            
            
            
            625Deferred
      income tax
            
            
            (27
            )
            
            
            (162
            )Investment
      securities (gain) loss
            
            
            21
            
            
            
            58Loans
      originated for sale in the secondary market
            
            
            (6,303
            )
            
            
            (5,500
            )Proceeds
      from sale of loans in the secondary market
            
            
            6,040
            
            
            
            5,548Gain
      on sale of loans
            
            
            (104
            )
            
            
            (107
            )Amortization
      of deferred loan origination cost
            
            
            125
            
            
            
            148Issuance
      of ESOP shares
            
            
            175
            
            
            
            —Amortization
      of expense related to stock benefit plans
            
            
            24
            
            
            
            38Tax
      benefit on stock options exercised
            
            
            (17
            )
            
            
            (51
            )(Gain)
      loss on sale of premises and equipment
            
            
            (4
            )
            
            
            —Net
      change inInterest
      receivable
            
            
            (62
            )
            
            
            (274
            )Interest
      payable
            
            
            19
            
            
            
            151Other
      adjustments
            
            
            (722
            )
            
            
            859Net
      cash provided by operating activities
            
            
            2,537
            
            
            
            3,542Investing
      ActivitiesPurchase
      of FHLB stock
            
            
            (350
            )
            
            
            (350
            )Purchases
      of securities available for sale
            
            
            (18,181
            )
            
            
            (23,139
            )Proceeds
      from maturities of securities available for sale
            
            
            16,483
            
            
            
            7,012Proceeds
      from sales of securities available for sale
            
            
            8,910
            
            
            
            10,933Net
      change in loans
            
            
            (17,715
            )
            
            
            (14,384
            )Purchases
      of premises and equipment
            
            
            (415
            )
            
            
            (249
            )Proceeds
      from sale of real estate acquired through foreclosure
            
            
            103
            
            
            
            1,286Premiums
      paid on life insurance
            
            
            —
            
            
            
            (1,500
            )Other
      investing activities
            
            
            —
            
            
            
            (48
            )Net
      cash used in investing activities
            
            
            (11,165
            )
            
            
            (20,439
            )Financing
      ActivitiesNet
      change inNoninterest-bearing,
      interest-bearing demand and savings deposits
            
            
            8,529
            
            
            
            13,944Certificates
      of deposit
            
            
            (9,085
            )
            
            
            (439
            )Short-term
      borrowings
            
            
            —
            
            
            
            (14,565
            )Proceeds
      from borrowings
            
            
            36,000
            
            
            
            42,000Repayment
      of borrowings
            
            
            (29,000
            )
            
            
            (29,000
            )Cash
      dividends
            
            
            (1,299
            )
            
            
            (1,249
            )Purchase
      of stock
            
            
            (183
            )
            
            
            (46
            )Proceeds
      from exercise of stock options
            
            
            103
            
            
            
            266Advances
      by borrowers for taxes and insurance
            
            
            (18
            )
            
            
            13Acquisition
      of stock for stock benefit plans
            
            
            (107
            )
            
            
            —Tax
      benefit on stock options exercised
            
            
            17
            
            
            
            51Net
      cash provided by financing activities
            
            
            4,957
            
            
            
            10,975Net
      Change in Cash and Cash Equivalents
            
            
            (3,671
            )
            
            
            (5,922
            )Cash
      and Cash Equivalents, Beginning of Year
            
            
            11,808
            
            
            
            17,730Cash
      and Cash Equivalents, End of Year
            
            $
            8,137
            
            
            $
            11,808Additional
      Cash Flows InformationInterest
      paid
            
            $
            12,315
            
            
            $
            10,902Income
      tax paid
            
            
            770
            
            
            
            904







55


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)






Note
      1:   Nature
      of Operations and Summary of Significant Accounting
      Policies




The
accounting and reporting policies of River Valley Bancorp (Company) and its
wholly owned subsidiary, River Valley Financial Bank (Bank) and the Bank’s
wholly owned subsidiaries, Madison First Service Corporation (First Service) and
RVFB Investments, Inc. (RVFB Investments), conform to accounting principles
generally accepted in the United States of America and reporting practices
followed by the thrift industry.  The more significant of the policies
are described below.




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Actual results could differ from those
estimates.




The
Company is a thrift holding company whose principal activity is the ownership
and management of the Bank.  The Bank operates under a federal thrift
charter and provides full banking services, in a single significant business
segment.  As a federally-chartered thrift, the Bank is subject to
regulation by the Office of Thrift Supervision, and the Federal Deposit
Insurance Corporation.




The Bank
generates commercial, mortgage and consumer loans and receives deposits from
customers located primarily in southeastern Indiana.  The Bank’s loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets.




Consolidation - The
consolidated financial statements include the accounts of the Company, the Bank,
RVFB Investments and Madison First Service after elimination of all material
inter-company transactions.




Cash Equivalents - The Company
considers all liquid investments with original maturities of three months or
less to be cash equivalents.




Investment Securities - Debt
securities are classified as held to maturity when the Company has the positive
intent and ability to hold the securities to maturity.  Securities
held to maturity are carried at amortized cost.  Debt securities not
classified as held to maturity and marketable equity securities are classified
as available for sale.  Securities available for sale are carried at
fair value with unrealized gains and losses reported separately in accumulated
other comprehensive income, net of tax.




Amortization
of premiums and accretion of discounts are recorded as interest income from
securities.  Realized gains and losses are recorded as net security
gains (losses).  Gains and losses on sales of securities are
determined on the specific-identification method.




Loans held for sale are
carried at the lower of aggregate cost or market.  Market is
determined using the aggregate method.  Net unrealized losses, if any,
are recognized through a valuation allowance by charges to income based on the
difference between estimated sales proceeds and aggregate cost.




56


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Loans are carried at the
principal amount outstanding.  A loan is impaired when, based on
current information or events, it is probable that the Company will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement.  Payments with insignificant delays not
exceeding 90 days are not considered impaired.  Certain non-accrual
and substantially delinquent loans may be considered to be
impaired.  The Company considers its investment in one-to-four family
residential loans and consumer loans to be homogeneous and therefore excluded
from separate identification for evaluation of impairment.  Interest
income is accrued on the principal balances of loans.  The accrual of
interest on impaired and non-accrual loans is discontinued when, in management’s
opinion, the borrower may be unable to meet payments as they become
due.  When interest accrual is discontinued, all unpaid accrued
interest is reversed when considered uncollectible.  Interest income
is subsequently recognized only to the extent cash payments are
received.  Certain loan fees and direct costs are being deferred and
amortized as an adjustment of yield on the loans over the contractual lives of
the loans.  When a loan is paid off or sold, any unamortized loan
origination fee balance is credited to income.




Allowance for loan lossesis
maintained to absorb loan losses based on management's continuing review and
evaluation of the loan portfolio and its judgment as to the impact of economic
conditions on the portfolio.  The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolio, the current condition and amount of loans outstanding, and the
probability of collecting all amounts due.  Impaired loans are
measured by the present value of expected future cash flows, or the fair value
of the collateral of the loan, if collateral dependent.  Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed.  Subsequent recoveries, if any, are
credited to the allowance.




The
determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions.  Management believes that
as of December 31, 2007, the allowance for loan losses is adequate based on
information currently available.  A worsening or protracted economic
decline in the areas within which the Company operates would increase the
likelihood of additional losses due to credit and market risks and could create
the need for additional loss reserves.




Premises and equipment are
carried at cost net of accumulated depreciation.  Depreciation is
computed using the straight-line method based principally on the estimated
useful lives of the assets.  Maintenance and repairs are expensed as
incurred while major additions and improvements are
capitalized.  Gains and losses on dispositions are included in current
operations.




Federal Home Loan Bank stock
is a required investment for institutions that are members of the Federal Home
Loan Bank system.  The required investment in the common stock is
based on a predetermined formula.




Foreclosed assetsare carried
at the lower of cost or fair value less estimated selling costs.  When
foreclosed assets are acquired, any required adjustment is charged to the
allowance for loan losses.  All subsequent activity is included in
current operations.




57


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Mortgage servicing rights on
originated loans are capitalized by allocating the total cost of the mortgage
loans between the mortgage servicing rights and the loans based on their
relative fair values.  Capitalized servicing rights are amortized in
proportion to and over the period of estimated servicing revenues.




Stock options -The Company
has a stock-based employee compensation plan, which is described more fully in
Note 15.  Prior to 2006, the Company accounted for this plan
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to
Employees, and related interpretations.  No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the grant date.




Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment.  The Company selected the modified prospective
application.  Accordingly, after January 1, 2006, the Company began
expensing the fair value of stock options granted, modified, repurchased or
cancelled.




Income tax in the consolidated
statements of income includes deferred income tax provisions or benefits for all
significant temporary differences in recognizing income and expenses for
financial reporting and income tax purposes.




Effective
January 1, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109.  FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  As a result of the implementation
of FIN 48, the Company did not identify any uncertain tax positions that it
believes should be recognized in the financial statements.  The
Company’s tax years still subject to examination by taxing authorities are years
subsequent to 2003.




Earnings per share have been
computed based upon the weighted-average common shares outstanding during each
year.  Unearned ESOP shares have been excluded from the computation of
average shares outstanding.




Reclassifications of certain
amounts in the 2006 consolidated financial statements have been made to conform
to the 2007 presentation.






Note
      2:    Restriction
      on Cash and Due From Banks




The Bank
is required to maintain reserve funds in cash and/or on deposit with the Federal
Reserve Bank.  The reserve required at December 31, 2007 was
$511,000.




58


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Note
      3:   Investment
      Securities




2007Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              ValueAvailable
      for saleFederal
      agencies
            
            $
            35,821
            
            
            $
            324
            
            
            $
            22
            
            
            $
            36,123State
      and municipal
            
            
            15,598
            
            
            
            104
            
            
            
            58
            
            
            
            15,644Mortgage
      and other asset-backed securities
            
            
            6,256
            
            
            
            89
            
            
            
            1
            
            
            
            6,344Corporate
            
            
            888
            
            
            
            —
            
            
            
            —
            
            
            
            888Total
      investment securities
            
            $
            58,563
            
            
            $
            517
            
            
            $
            81
            
            
            $
            58,9992006Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              ValueAvailable
      for saleFederal
      agencies
            
            $
            50,812
            
            
            $
            9
            
            
            $
            452
            
            
            $
            50,369State
      and municipal
            
            
            14,776
            
            
            
            26
            
            
            
            90
            
            
            
            14,712Mortgage
      and other asset-backed securities
            
            
            68
            
            
            
            1
            
            
            
            —
            
            
            
            69Total
      investment securities
            
            $
            65,656
            
            
            $
            36
            
            
            $
            542
            
            
            $
            65,150






The
amortized cost and fair value of securities available for sale at December 31,
2007, by contractual maturity, are shown below.  Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment
penalties.




Available
      for SaleAmortized
              Cost
            
            
            Fair
              ValueLess
      than one year
            
            $
            18,358
            
            
            $
            18,344One
      to five years
            
            
            11,069
            
            
            
            11,202Five
      to ten years
            
            
            7,869
            
            
            
            7,990More
      than ten years
            
            
            15,011
            
            
            
            15,11952,307
            
            
            
            52,655Mortgage
      and other asset-backed securities
            
            
            6,256
            
            
            
            6,344Totals
            
            $
            58,563
            
            
            $
            58,999







59


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)




Securities
with a carrying value of $6,011,000 and $12,855,000 were pledged at
December 31, 2007 and 2006 to secure FHLB advances.  Securities
with a carrying value of $17,004,000 and $25,646,000 were pledged at
December 31, 2007 and 2006 to secure certain deposits and for other
purposes as permitted or required by law.




Proceeds
from sales of securities available for sale during 2007 and 2006 were $8,910,000
and $10,933,000, respectively.  Gross gains of $11,000 and $0 and
gross losses of $32,000 and $58,000 resulting from sales of available for sale
securities were realized for 2007 and 2006 respectively.




Certain
investment securities are reported in the financial statements at an amount less
than their historical cost.  Total fair value of these investments at
December 31, 2007 and 2006, were $21,094,000 and $52,759,000, which is
approximately 35.7 percent and 81.0 percent of the Company’s investment
portfolio.  The increase in fair value, and resulting reduction in
impairment, reflects net increases in the market value of the Bank’s
portfolio.




Based on
evaluation of available evidence, including recent changes in market interest
rates, management believes that any decline in fair values for these securities
are temporary.




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




The
following tables show our investments’ gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at December 31, 2007 and
December 31, 2006:




2007Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalDescription
      of
              Securities
            
            Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Fair
      Value
            
            
            Unrealized
              LossesU.
      S. Government agencies
            
            $
            999
            
            
            $
            —
            
            
            $
            12,961
            
            
            $
            22
            
            
            $
            13,960
            
            
            $
            22State
      and Municipal
            
            
            2,241
            
            
            
            28
            
            
            
            3,908
            
            
            
            30
            
            
            
            6,149
            
            
            
            58Mortgage
      and other asset-backed securities
            
            
            985
            
            
            
            1
            
            
            
            —
            
            
            
            —
            
            
            
            985
            
            
            
            1Total
      temporarily impaired securities
            
            $
            4,225
            
            
            $
            29
            
            
            $
            16,869
            
            
            $
            52
            
            
            $
            21,094
            
            
            $
            812006Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalDescription
      of
              Securities
            
            Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Fair
      Value
            
            
            Unrealized
              LossesU.
      S. Government agencies
            
            $
            9,839
            
            
            $
            36
            
            
            $
            34,522
            
            
            $
            416
            
            
            $
            44,361
            
            
            $
            452State
      and Municipal
            
            
            7,193
            
            
            
            70
            
            
            
            1,205
            
            
            
            20
            
            
            
            8,398
            
            
            
            90Total
      temporarily impaired securities
            
            $
            17,032
            
            
            $
            106
            
            
            $
            35,727
            
            
            $
            436
            
            
            $
            52,759
            
            
            $
            542


60


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Note
      4:   Loans
      and Allowance




2007
            
            
            2006Residential
      real estateOne-to-four
      family residential
            
            $
            118,113
            
            
            $
            104,404Multi-family
      residential
            
            
            10,274
            
            
            
            9,613Construction
            
            
            14,319
            
            
            
            17,993Nonresidential
      real estate and land
            
            
            81,064
            
            
            
            79,920Commercial
            
            
            34,649
            
            
            
            29,000Consumer
      and other
            
            
            6,036
            
            
            
            6,260264,455
            
            
            
            247,190Unamortized
      deferred loan costs
            
            
            494
            
            
            
            487Undisbursed
      loans in process
            
            
            (4,113
            )
            
            
            (3,614
            )Allowance
      for loan losses
            
            
            (2,208
            )
            
            
            (2,176
            )Total
      loans
            
            $
            258,628
            
            
            $
            241,887







2007
            
            
            2006Allowance
      for loan lossesBalances,
      January 1
            
            $
            2,176
            
            
            $
            2,320Provision
      for losses
            
            
            562
            
            
            
            264Recoveries
      on loans
            
            
            136
            
            
            
            36Loans
      charged off
            
            
            (666
            )
            
            
            (444
            )Balances,
      December 31
            
            $
            2,208
            
            
            $
            2,176







Information
on impaired loans is summarized below.




2007
            
            
            2006Impaired
      loans with an allowance
            
            $
            668
            
            
            $
            1,044Impaired
      loans for which the discounted cash flows or collateral value exceeds the
      carrying value of the loan
            
            
            3,516
            
            
            
            2,796$
            4,184
            
            
            $
            3,840Allowance
      for impairment loans (included in the Company’s allowance for loan
      losses)
            
            $
            461
            
            
            $
            435







61


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









2007
            
            
            2006Average
      balance of impaired loans
            
            $
            3,748
            
            
            $
            3,634Interest
      income recognized on impaired loans
            
            
            225
            
            
            
            259Cash-basis
      interest included above
            
            
            33
            
            
            
            28







At
December 31, 2007 and 2006, the Company had non-accruing loans totaling
$1,825,000 and $1,114,000, respectively.  At December 31, 2007 and
2006, there were no accruing loans delinquent 90 days or more.




Note
      5:   Premises
      and Equipment




2007
            
            
            2006Land
            
            $
            1,503
            
            
            $
            1,503Buildings
            
            
            6,507
            
            
            
            6,507Equipment
            
            
            3,621
            
            
            
            3,257Construction
      in progress
            
            
            63
            
            
            
            7Total
      cost
            
            
            11,694
            
            
            
            11,274Accumulated
      depreciation and amortization
            
            
            (4,063
            )
            
            
            (3,461
            )Net
            
            $
            7,631
            
            
            $
            7,813






Note
      6:   Deposits




2007
            
            
            2006Demand
      deposits
            
            $
            102,036
            
            
            $
            94,128Savings
      deposits
            
            
            24,730
            
            
            
            24,109Certificates
      and other time deposits of $100,000 or more
            
            
            32,498
            
            
            
            41,542Other
      certificates and time deposits
            
            
            60,418
            
            
            
            60,459Total
      deposits
            
            $
            219,682
            
            
            $
            220,238







Certificates and other time deposits maturing
      in2008
            
            $
            77,6952009
            
            
            9,2292010
            
            
            2,2162011
            
            
            2,0252012
            
            
            1,556Thereafter
            
            
            195$
            92,916


62


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Note
      7:   Borrowings




2007
            
            
            2006Federal
      Home Loan Bank advances
            
            $
            95,000
            
            
            $
            88,000Subordinated
      debentures
            
            
            7,217
            
            
            
            7,217Total
      borrowings
            
            $
            102,217
            
            
            $
            95,217







Maturities
by year for advances at December 31, 2007 are $19,000,000 in 2008, $17,000,000
in 2009, $15,000,000 in 2010, $12,000,000 in 2011, $17,000,000 in 2012 and
$15,000,000 in 2013 and thereafter.  The weighted-average interest
rate at December 31, 2007 and 2006 was 4.64% and 4.63%.




The
Federal Home Loan Bank advances are secured by loans and investment securities
totaling $159,517,000 at December 31, 2007.  Advances are subject
to restrictions or penalties in the event of prepayment.




On March
13, 2003, the Company formed RIVR Statutory Trust I (Trust), a wholly owned
subsidiary.  On March 26, 2003, the Trust issued 7,000 Fixed/Floating
Rate Capital Securities with a liquidation amount of $1,000 per Capital Security
in a private placement to an offshore entity for an aggregate offering price of
$7,000,000, and 217 Common Securities with a liquidation amount of $1,000 per
Common Security to the Company for $217,000.  The aggregate proceeds
of $7,217,000 were used by the Trust to purchase $7,217,000 in Fixed/Floating
Rate Junior Subordinated Deferrable Interest Debentures from the
Company.  The Debentures and the Common and Capital Securities have a
term of 30 years, bear interest at the annual rate of 6.4% for five years and
thereafter bear interest at the rate of the 3-Month LIBOR plus
3.15%.  The Company has guaranteed payment of amounts owed by the
Trust to holders of the Capital Securities.









Note
      8:   Loan
      Servicing




Loans
serviced for others are not included in the accompanying consolidated balance
sheets.  The unpaid principal balances of loans serviced for others
totaled $78,010,000 and $83,703,000 at December 31, 2007 and 2006,
respectively.









63


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







The
Company uses comparable market values and a valuation model that calculates the
present value of future cash flows to estimate fair value of its mortgage
servicing rights.  For purposes of measuring impairment, risk
characteristics including product type, investor type, and interest rates, were
used to stratify the originated mortgage servicing rights.




2007
            
            
            2006Mortgage
      Servicing RightsBalances,
      January 1
            
            $
            525
            
            
            $
            839Servicing
      rights capitalized
            
            
            54
            
            
            
            59Amortization
      of servicing rights
            
            
            (295
            )
            
            
            (373
            )Balances,
      December 31
            
            $
            284
            
            
            $
            525







Note
      9:   Income
      Tax




2007
            
            
            2006Income
      tax expense (benefit)Currently
      payableFederal
            
            $
            719
            
            
            $
            904State
            
            
            78
            
            
            
            99DeferredFederal
            
            
            (30
            )
            
            
            (136
            )State
            
            
            3
            
            
            
            (26
            )Total
      income tax expense
            
            $
            770
            
            
            $
            841Reconciliation
      of federal statutory to actual tax expense (benefit)Federal
      statutory income tax at 34%
            
            $
            1,013
            
            
            $
            947Effect
      of state income taxes
            
            
            53
            
            
            
            48Tax
      exempt interest
            
            
            (197
            )
            
            
            (91
            )Cash
      value of life insurance
            
            
            (112
            )
            
            
            (68
            )Other
            
            
            13
            
            
            
            5Actual
      tax expense
            
            $
            770
            
            
            $
            841Effective
      tax rate
            
            
            25.9
            %
            
            
            30.2
            %







64


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







A
cumulative net deferred tax asset is included in the balance
sheets.  The components of the asset are as follows:




2007
            
            
            2006AssetsAllowance
      for loan losses
            
            $
            862
            
            
            $
            875Deferred
      compensation
            
            
            322
            
            
            
            302Pensions
      and employee benefits
            
            
            —
            
            
            
            26Purchase
      accounting adjustments
            
            
            46
            
            
            
            52Securities
      available for sale
            
            
            —
            
            
            
            178Investment
      valuation allowance
            
            
            103
            
            
            
            103Other
            
            
            26
            
            
            
            5Total
      assets
            
            
            1,359
            
            
            
            1,541LiabilitiesDepreciation
      and amortization
            
            
            (479
            )
            
            
            (467
            )Loan
      fees
            
            
            (193
            )
            
            
            (191
            )Pensions
      and employee benefits
            
            
            (20
            )
            
            
            —Mortgage
      servicing rights
            
            
            (111
            )
            
            
            (206
            )Federal
      Home Loan Bank stock dividends
            
            
            (102
            )
            
            
            (102
            )Prepaid
      expenses
            
            
            (137
            )
            
            
            (105
            )Securities
      available for sale
            
            
            (155
            )
            
            
            —Other
            
            
            (22
            )
            
            
            (24
            )Total
      liabilities
            
            
            (1,219
            )
            
            
            (1,095
            )$
            140
            
            
            $
            446







Retained
earnings include approximately $2,100,000 for which no deferred income tax
liability has been recognized.  This amount represents an allocation
of income to bad debt deductions as of December 31, 1987 for tax purposes
only.  Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which income would be subject to the
then-current corporate income tax rate.  The unrecorded deferred
income tax liability on the above amount was approximately
$714,000.




65


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









Note
      10:   Commitments
      and Contingent Liabilities




In the
normal course of business there are outstanding commitments and contingent
liabilities, such as commitments to extend credit and standby letters of credit,
which are not included in the accompanying financial statements.  The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments.  The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
balance sheets.




Financial
instruments whose contract amount represents credit risk as of December 31 were
as follows:




2007
            
            
            2006Commitments
      to extend credit
            
            $
            26,452
            
            
            $
            28,214Standby
      letters of credit
            
            
            1,258
            
            
            
            740







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 are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  The Bank evaluates
each customer's credit worthiness on a case-by-case basis.  The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation.  Collateral held
varies but may include accounts receivable, inventory, property and equipment,
and income-producing commercial properties.




Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party.




The
Company and subsidiaries lease operating facilities under lease arrangements
expiring 2010 through 2030.  Rental expense included in the
consolidated statements of income for the years ended December 31, 2007 and 2006
was $115,000 and $115,000.









66


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









Future
minimum lease payments under the leases are:




2008
            
            $
            1612009
            
            
            2112010
            
            
            1802011
            
            
            1782012
            
            
            177Thereafter
            
            
            2,191Total
      minimum lease payments
            
            $
            3,098







The
Company and Bank are also subject to claims and lawsuits which arise primarily
in the ordinary course of business.  It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.









Note
      11:   Dividend
      and Capital Restrictions




Without
prior approval, current regulations allow the Bank to pay dividends to the
Company not exceeding net profits (as defined) for the current year plus those
for the previous two years.  The Bank normally restricts dividends to
a lesser amount because of the need to maintain an adequate capital
structure.  At December 31, 2007, the stockholder’s equity of the
Bank was $30,274,000 of which approximately $29,295,000 was restricted from
dividend distribution to the Company.









Note
      12:   Regulatory
      Capital




The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category.  The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios.  The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures of the entity.  The capital category
assigned to an entity can also be affected by qualitative judgments made by
regulatory agencies about the risk inherent in the entity’s activities that are
not part of the calculated ratios.




67


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







There are
five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized.  Classification of a bank
in any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank’s operations.  At December
31, 2007 and 2006, the Bank is categorized as well capitalized and met all
subject capital adequacy requirements.  There are no conditions or
events since December 31, 2007 that management believes have changed the Bank’s
classification.




Actual
            
            
            Required
      for Adequate Capital
            
            
            To
      Be Well
              CapitalizedAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio2007Total
      risk-based capital (to risk-weighted assets)
            
            $
            31,276
            
            
            
            12.37
            %
            
            $
            20,209
            
            
            
            8.00
            %
            
            $
            25,261
            
            
            
            10.00
            %Tier
      1 capital (to risk-weighted assets)
            
            
            29,542
            
            
            
            11.69
            %
            
            
            10,104
            
            
            
            4.00
            %
            
            
            15,156
            
            
            
            6.00
            %Core
      capital (to adjusted total assets)
            
            
            29,542
            
            
            
            8.49
            %
            
            
            13,933
            
            
            
            4.00
            %
            
            
            17,417
            
            
            
            5.00
            %Core
      capital (to adjusted tangible assets)
            
            
            29,542
            
            
            
            8.49
            %
            
            
            6,967
            
            
            
            2.00
            %
            
            
            —
            
            
            
            N/ATangible
      capital (to adjusted total assets)
            
            
            29,542
            
            
            
            8.49
            %
            
            
            5,225
            
            
            
            1.50
            %
            
            
            —
            
            
            
            N/A2006Total
      risk-based capital (to risk-weighted assets)
            
            $
            30,472
            
            
            
            12.92
            %
            
            $
            18,868
            
            
            
            8.00
            %
            
            $
            23,585
            
            
            
            10.00
            %Tier
      1 capital (to risk-weighted assets)
            
            
            28,798
            
            
            
            12.21
            %
            
            
            9,434
            
            
            
            4.00
            %
            
            
            14,151
            
            
            
            6.00
            %Core
      capital (to adjusted total assets)
            
            
            28,798
            
            
            
            8.47
            %
            
            
            13,599
            
            
            
            4.00
            %
            
            
            16,999
            
            
            
            5.00
            %Core
      capital (to adjusted tangible assets)
            
            
            28,798
            
            
            
            8.47
            %
            
            
            6,800
            
            
            
            2.00
            %
            
            
            —
            
            
            
            N/ATangible
      capital (to adjusted total assets)
            
            
            28,798
            
            
            
            8.47
            %
            
            
            5,100
            
            
            
            1.50
            %
            
            
            —
            
            
            
            N/A







Note
      13:   Employee
      Benefits




The Bank
provides pension benefits for substantially all of the Bank’s employees who were
employed by the Bank prior to September 1, 2005, through its participation in a
pension fund known as the Pentegra Group.  This plan is a
multi-employer plan; separate actuarial valuations are not made with respect to
each participating employer.  Pension expense related to this plan was
$200,000 and $234,000 for the years ended December 31, 2007 and
2006.




68


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







The Bank
has a retirement savings 401(k) plan in which substantially all employees may
participate.  For employees hired prior to September 1, 2005, the Bank
matches employees’ contributions at the rate of 50 percent for the first
6 percent of W-2 earnings contributed by participants.  For
employees hired on or after September 1, 2005, the Bank matches employees’
contributions at the rate of 100 percent for the first 6 percent of W-2 earnings
contributed by participants.  The Bank’s expense for the plan was
$73,000 and $59,000 for the years ended December 31, 2007 and 2006.




The Bank
has a supplemental retirement plan which provides retirement benefits to all
directors.  The Bank’s obligations under the plan have been funded by
the purchase of key man life insurance policies, of which the Bank is the
beneficiary.  Expense recognized under the supplemental retirement
plan totaled approximately $79,000 and $75,000 for the years ended
December 31, 2007 and 2006.




The
Company has an ESOP covering substantially all employees of the Company and
Bank.  All contributions to the ESOP are determined annually by the
Board of Directors of the Company and Bank.  Compensation expense was
recorded based on the annual contributions to the ESOP.  ESOP expense
for the years ended December 31, 2007 and 2006 was $175,000 and $200,000,
respectively.  At December 31, 2007, the ESOP had 137,733 allocated
shares, no suspense shares and no committed-to-be released shares.  At
December 31, 2006, the ESOP had 143,969 allocated shares, no suspense shares and
no committed-to-be released shares.




The
Company also has a Recognition and Retention Plan (RRP) which provides for the
award and issuance of up to 95,220 shares of the Company’s stock to members of
the Board of Directors and management.  The RRP has purchased 80,990
shares of the Company’s common stock in the open market.  At
December 31, 2007, all 81,390 shares had been awarded.  Common
stock awarded under the RRP vests ratably over a five-year period, commencing
with the date of the award.  Expense recognized under the RRP plan
totaled approximately $37,000 and $33,000 for the years ended December 31,
2007 and 2006.




69


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









Unvested
RRP shares at December 31, 2007:




Number
              of
      Shares
            
            
            Grant
      Date
              Fair
      ValueBeginning
      of year
            
            
            4,350
            
            
            $
            21.94Granted
            
            
            6,000
            
            
            
            19.00Exercised
            
            
            (1,350
            )
            
            
            22.07End
      of year
            
            
            9,000
            
            
            $
            19.96







Unearned
compensation at December 31, 2007 related to RRP shares is $180,000 and will be
recognized over a weighted average period of 3.5 years.









Note
      14:   Related
      Party Transactions




The Bank
has entered into transactions with certain directors, executive officers,
significant stockholders and their affiliates or associates (related
parties).  Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable
features.




The
aggregate amount of loans, as defined, to such related parties were as
follows:




Balances, January 1, 2007
            
            $
            923Change
      in composition
            
            
            (35
            )New
      loans, including renewals
            
            
            1,773Payments,
      etc., including renewals
            
            
            (406
            )Balances,
      December 31, 2007
            
            $
            2,255







Deposits
from related parties held by the Bank at December 31, 2007 and 2006 totaled
$985,000 and $1,583,000.




70


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Note
      15:   Stock
      Option Plan




The
Company’s Incentive Stock Option Plan (the Plan), which is shareholder approved,
permits the grant of stock options to its directors, officers and other key
employees.  The Plan authorized the grant of options for up to 238,050
shares of the Company’s common stock, which generally vest at a rate of 20
percent a year and have a 10-year contractual term.  The Company
believes that such awards better align the interests of its directors and
employees with those of its shareholders.  Option awards are generally
granted with an exercise price equal to the market price of the Company’s stock
at the date of grant.  Certain option awards provide for accelerated
vesting if there is a change in control (as defined in the
Plans).  The Company generally issues shares from its authorized
shares to satisfy option exercises.




The fair
value of each option award is estimated on the date of grant using a binomial
option valuation model that uses the assumptions noted in the following
table.  Expected volatility is based on historical volatility of the
Company’s stock and other factors.  The Company uses historical data
to estimate option exercise and employee termination within the valuation
model.  The expected term of options granted is derived from the
output of the option valuation model and represents the period of time that
options granted are expected to be outstanding.  The risk-free rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.  No grants were
made in 2007 or 2006.




A summary
of option activity under the Plan as of December 31, 2007, and changes during
the years then ended, is presented below:




2007Shares
            
            
            Weighted-Average
      Exercise Price
            
            
            Weighted-Average
      Remaining Contractual Term
            
            
            Aggregate
      Intrinsic ValueOutstanding,
      beginning of year
            
            $
            61,864
            
            
            $
            8.85GrantedExercised
            
            
            (14,504
            )
            
            
            7.11Forfeited
      or expired
            
            
            (4,460
            )
            
            
            6.99Outstanding,
      end of year
            
            $
            42,900
            
            
            $
            9.59
            
            
            
            3.20
            
            
            $
            242,000Exercisable,
      end of year
            
            $
            40,900
            
            
            $
            8.97
            
            
            
            3.05
            
            
            $
            242,000







There
were no options granted during 2007, 2006, nor 2005.  The total
intrinsic value of options exercised during the years ended December 31, 2007
and 2006 was $150,000 and $405,000 respectively.




71


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







As of
December 31, 2007 and 2006, there was $1,000 and $2,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Plan.  That cost for both periods was expected to be
recognized over a weighted-average period of 1.25years.




During
2007 and 2006 the Company recognized $1,500 and $2,000 of share-based
compensation expense with no tax benefit related to the share based compensation
expense.









Note
      16:   Earnings
      Per Share




2007
            
            
            2006
            
            
            2005Income
            
            
            Weighted-
      Average
              Shares
            
            
            Per
              Share
              Amount
            
            
            Income
            
            
            Weighted-
              Average
              Shares
            
            
            Per
              Share
      Amount
            
            
            Income
            
            
            Weighted-
              Average
              Shares
            
            
            Per
      Share AmountBasic
      Earnings Per ShareIncome
      available to common stockholders
            
            $
            2,209
            
            
            
            1,624,512
            
            
            $
            1.34
            
            
            $
            1,945
            
            
            
            1,607,319
            
            
            $
            1.21
            
            
            $
            2,086
            
            
            
            1,579,762
            
            
            $
            1.32Effect
      of Dilutive Stock Options
            
            
            
            
            
            
            25,779
            
            
            
            
            
            
            
            
            
            
            
            38,857
            
            
            
            
            
            
            
            
            
            
            
            59,778Diluted
      Earnings Per ShareIncome
      available to common stockholders and assumed conversions
            
            $
            2,209
            
            
            
            1,650,291
            
            
            $
            1.36
            
            
            $
            1,945
            
            
            
            1,646,176
            
            
            $
            1.18
            
            
            $
            2,086
            
            
            
            1,639,540
            
            
            $
            1.27







Options
to purchase 5,000 shares of common stock at an exercised price of $22.25 per
share were outstanding at December 31, 2007 and 2006, but were not included in
the computation of diluted earnings per share because the options were
anti-dilutive.









Note
      17:   Fair
      Values of Financial Instruments




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




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




Investment Securities- Fair
values are based on quoted market prices.




72


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









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




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




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




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




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




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




Other Borrowings - The fair
value of these borrowings are estimated using a discounted cash flow
calculation, based on current rates for similar debt.




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




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









73


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)


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




2007
            
            
            2006CarryingAmount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueAssetsCash
      and cash equivalents
            
            $
            8,137
            
            
            $
            8,137
            
            
            $
            11,808
            
            
            $
            11,808Investment
      securities available for sale
            
            
            58,999
            
            
            
            58,999
            
            
            
            65,150
            
            
            
            65,150Loans
      including loans held for sale, net
            
            
            258,940
            
            
            
            261,584
            
            
            
            241,887
            
            
            
            242,697Interest
      receivable
            
            
            2,396
            
            
            
            2,396
            
            
            
            2,334
            
            
            
            2,334Stock
      in FHLB
            
            
            4,750
            
            
            
            4,750
            
            
            
            4,400
            
            
            
            4,400LiabilitiesDeposits
            
            
            219,682
            
            
            
            220,379
            
            
            
            220,238
            
            
            
            219,850FHLB
      advances
            
            
            95,000
            
            
            
            96,649
            
            
            
            88,000
            
            
            
            88,303Other
      borrowings
            
            
            7,217
            
            
            
            7,210
            
            
            
            7,217
            
            
            
            7,141Interest
      payable
            
            
            724
            
            
            
            724
            
            
            
            705
            
            
            
            705Advance
      payments by borrowers for taxes and insurance
            
            
            67
            
            
            
            67
            
            
            
            85
            
            
            
            85Off-Balance
      Sheet Assets (Liabilities)Commitments
      to extend credit
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Standby
      letters of credit
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —












74


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)







Note
      18:
            Condensed
      Financial Information (Parent Company
Only)




Presented
below is condensed financial information as to financial position, results of
operations and cash flows of the Company:




Condensed Balance Sheets2007
            
            
            2006AssetsCash
      and due from banks
            
            $
            2,820
            
            
            $
            2,255Investment
      in common stock of the Bank
            
            
            30,274
            
            
            
            29,161Investment
      in RVB Trust I
            
            
            217
            
            
            
            217Other
      assets
            
            
            442
            
            
            
            555Total
      assets
            
            $
            33,753
            
            
            $
            32,188LiabilitiesBorrowings
            
            $
            7,217
            
            
            $
            7,217Dividends
      payable
            
            
            343
            
            
            
            324Other
      liabilities
            
            
            516
            
            
            
            500Total
      liabilities
            
            
            8,076
            
            
            
            8,041Stockholders'
      Equity
            
            
            25,677
            
            
            
            24,147Total
      liabilities and stockholders' equity
            
            $
            33,753
            
            
            $
            32,188







Condensed
      Statements of
Income2007
            
            
            2006IncomeDividends
      from the Bank
            
            $
            2,000
            
            
            $
            2,000Other
      income
            
            
            57
            
            
            
            7Total
      income
            
            
            2,057
            
            
            
            2,007ExpensesInterest
      expense
            
            
            462
            
            
            
            462Other
      expenses
            
            
            215
            
            
            
            273Total
      expenses
            
            
            677
            
            
            
            735Income
      before income tax and equity in undistributed income of
      subsidiary
            
            
            1,380
            
            
            
            1,272Income
      tax benefit
            
            
            242
            
            
            
            281Income
      before equity in undistributed income of subsidiary
            
            
            1,622
            
            
            
            1,553Equity
      in undistributed income of the Bank
            
            
            587
            
            
            
            392Net
      Income
            
            $
            2,209
            
            
            $
            1,945


75


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









Condensed Statements of Cash Flows2007
            
            
            2006Operating
      ActivitiesNet
      income
            
            $
            2,209
            
            
            $
            1,945Items
      not providing cash
            
            
            (282
            )
            
            
            (57
            )Net
      cash provided by operating activities
            
            
            1,927
            
            
            
            1,888Financing
      ActivitiesPurchase
      of stock
            
            
            (183
            )
            
            
            (46
            )Proceeds
      from exercise of stock options
            
            
            103
            
            
            
            266Tax
      benefit on stock options exercised
            
            
            17
            
            
            
            51Cash
      dividends
            
            
            (1,299
            )
            
            
            (1,249
            )Net
      cash used in financing activities
            
            
            (1,362
            )
            
            
            (978
            )Net
      Change in Cash and Cash Equivalents
            
            
            565
            
            
            
            910Cash
      and Cash Equivalents at Beginning of Year
            
            
            2,255
            
            
            
            1,345Cash
      and Cash Equivalents at End of Year
            
            $
            2,820
            
            
            $
            2,255







Note
      19:
            Quarterly
      Results of Operations (Unaudited)




Quarter
              Ending
            
            Interest
              Income
            
            
            Interest
              Expense
            
            
            Net
      Interest
              Income
            
            
            Provision
              For
              Loan
      Losses
            
            
            Net
              Income
            
            
            Basic
              Earnings
              Per
              Share
            
            
            Diluted
              Earnings
              Per
              Share2007March
            
            $
            4,958
            
            
            $
            3,009
            
            
            $
            1,949
            
            
            $
            48
            
            
            $
            533
            
            
            $
            .33
            
            
            $
            .33June
            
            
            5,022
            
            
            
            3,007
            
            
            
            2,015
            
            
            
            48
            
            
            
            558
            
            
            
            .34
            
            
            
            .34September
            
            
            5,255
            
            
            
            3,152
            
            
            
            2,103
            
            
            
            196
            
            
            
            532
            
            
            
            .33
            
            
            
            .32December
            
            
            5,323
            
            
            
            3,166
            
            
            
            2,157
            
            
            
            270
            
            
            
            586
            
            
            
            .36
            
            
            
            .35$
            20,558
            
            
            $
            12,334
            
            
            $
            8,224
            
            
            $
            562
            
            
            $
            2,209
            
            
            $
            1.36
            
            
            $
            1.342006March
            
            $
            4,444
            
            
            $
            2,498
            
            
            $
            1,946
            
            
            $
            84
            
            
            $
            403
            
            
            $
            0.25
            
            
            $
            0.25June
            
            
            4,750
            
            
            
            2,724
            
            
            
            2,026
            
            
            
            84
            
            
            
            503
            
            
            
            0.31
            
            
            
            0.31September
            
            
            4,707
            
            
            
            2,834
            
            
            
            1,873
            
            
            
            48
            
            
            
            473
            
            
            
            0.29
            
            
            
            0.29December
            
            
            5,009
            
            
            
            2,997
            
            
            
            2,012
            
            
            
            48
            
            
            
            566
            
            
            
            0.35
            
            
            
            0.34$
            18,910
            
            
            $
            11,053
            
            
            $
            7,857
            
            
            $
            264
            
            
            $
            1,945
            
            
            $
            1.21
            
            
            $
            1.18


76


River
Valley Bancorp
 Notes to
Consolidated Financial Statements
 December
31, 2007 and 2006
 (Table Dollar Amounts in
Thousands
 Except Per Share
Amounts)









Note
      20:   Future
      Accounting Pronouncements




In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard is effective for fiscal years beginning after November 15,
2007.  The adoption on January 1, 2008 of SFAS No. 157 did not have a
material impact on the financial condition or results of operations of the
Company.




On
February 15, 2007, the FASB issued its Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115.  FAS 159 permits entities to elect to report most
financial assets and liabilities at their fair value with changes in fair value
included in net income.  The fair value option may be applied on an
instrument-by-instrument or instrument class-by-class basis.  The
option is not available for deposits withdrawable on demand, pension plan assets
and obligations, leases, instruments classified as stockholders’ equity,
investments in consolidated subsidiaries and variable interest entities and
certain insurance policies.  The new standard is effective at the
beginning of the Company’s fiscal year beginning January 1, 2008, and early
application may be elected in certain circumstances.  The adoption on
January 1, 2008 of SFAS No. 159 did not have a material impact on financial
condition or results of operations of the Company.









77


ITEM
9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.




There are
no such changes and disagreements to report during the applicable
period.






ITEM
9A(T).   CONTROLS AND PROCEDURES.
  Evaluation
of disclosure controls and procedures. The Company’s Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the
Company’s disclosure controls and procedures (as defined in Sections 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of the end of the most recent fiscal quarter covered by this
annual report (the “Evaluation
Date”), have concluded that as of the Evaluation Date, the Company’s
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time period specified in the Securities and Exchange Commission’s rules and
forms and are designed to ensure that information required to be disclosed in
those reports is accumulated and communicated to management as appropriate to
allow timely decisions regarding disclosure.




Management's
Report on Internal Control over Financial Reporting.


The
management of River Valley Bancorp (the "Company") is responsible for
establishing and maintaining adequate internal control over financial
reporting.  The Company's system of internal control over financial
reporting includes policies and procedures pertaining to the Company's
ability to record, process, and report reliable information.  The
system is designed to provide reasonable assurance to both management and the
Board of Directors regarding the preparation and fair presentation of published
financial statements.
  The
Company’s management assessed the effectiveness of internal control over
financial reporting as of December 31, 2007.  In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated
Framework.  Based on this assessment, Management concluded that, as of
December 31, 2007, the Company's internal control over financial reporting is
effective based on those criteria.
  This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by it’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.




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








78




ITEM
9B.   OTHER INFORMATION.




There is
no information that was required to be disclosed on a Form 8-K during the fourth
quarter but was not reported.








PART
III




ITEM
10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




The
information required by this item with respect to directors is incorporated by
reference to the sections of the Holding Company’s Proxy Statement for its
Annual Shareholder Meeting to be held on April 16, 2008 (the “2008 Proxy Statement”) with
the caption “Proposal I - Election of Directors.” Information concerning the
Registrant’s executive officers is included in Item 4.5 in Part I of this
report. Information with respect to corporate governance is incorporated by
reference to the section of the 2008 Proxy Statement with the caption “Corporate
Governance.” Information regarding compliance with Section 16(a) of the Exchange
Act is incorporated by reference to the section of the 2008 Proxy Statement
captioned “Section 16(a) Beneficial Ownership Reporting
Compliance.”




The
Company has adopted a code of ethics that applies, among other persons, to its
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. A copy of that
Code of Ethics was filed as an exhibit to the Company’s Form 10-KSB filed for
the year ended December 31, 2003, and a link to that filing is posted at
our website at http://www.rvfbank.com under “About Our Stock.”  In
addition, the Company will provide a copy,






79




without
charge, upon a request directed to Matthew P. Forrester, 430 Clifty Drive, P.O.
Box 1590, Madison, Indiana 47250, (812) 273-4944 (fax).






ITEM
11.    EXECUTIVE COMPENSATION.




The
information required by this item with respect to executive compensation is
incorporated by reference to the sections of the 2008 Proxy Statement with the
captions “Proposal I - Election of Directors,” “Corporate Governance,”
“Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation
of Directors for 2007” and “Compensation Committee Report.”






ITEM
12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.




The
information required by this item is incorporated by reference to the sections
of the 2008 Proxy Statement with the captions “Principal Holders of Common
Stock” and “Proposal I - Election of Directors.”




The
following table sets forth certain information pertaining to the Bank’s equity
compensation plans:






Equity
      Compensation Plan Information


Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                (a)
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
                (b)
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in
      column(a))
                (c)Equity
      compensation plans approved by security holders
            
            
            42,900
            (1)
            
            
            9.59
            
            
            
            40,508Equity
      compensation plans not approved by security holders
            
            
            (2
            )
            
            
            (2
            )Total
            
            
            42,900
            
            
            $
            (3
            )
            
            
            40,508





(1)
            River
      Valley Bancorp Stock Option Plan.


(2)
            River
      Valley Bancorp Recognition and Retention Plan and Trust (“RRP”). Column (a)
      includes 9,000 shares granted to management but not yet vested. In
      addition, 71,990 shares granted to management have fully vested, and
      shares have been issued to management in connection
    therewith.


(3)
            The
      total in Column (b) includes only the weighted-average price of stock
      options, as the restricted shares awarded under the RRP plan have no
      exercise price.






ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.




The
information required by this item is incorporated by reference to the sections
of the 2008 Proxy Statement with the captions “Corporate Governance” and
“Transactions with Certain Related Persons.”






ITEM
14.   PRINCIPAL ACCOUNTING FEES AND SERVICES.




The
information required by this item with respect to principal accounting fees and
services is incorporated by reference to the sections of the 2008 Proxy
Statement with the captions “Accountants,” and “Accountant’s Fees.”




80




PART
IV


ITEM
15.    EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.




The
following documents are filed as part of this report:






1.
            Financial
      Statements:




See
“Contents” of Consolidated Financial Statements in Item 8 of this Annual Report
on Form 10-K, which is incorporated herein by this reference.




2.
            Financial
      Statement Schedules:




All
schedules are omitted as the required information either is not applicable or is
included in the Consolidated Financial Statements or related Notes contained in
Item 8.




3.
            Exhibits:




The
exhibits listed in the Exhibit Index are filed with or incorporated herein by
reference.




Copies
of any Exhibits are available from the Company upon request by contacting
Matthew P. Forrester, 430 Clifty Drive, P.O. Box 1590, Madison, Indiana 47250,
(812) 273-4944 (fax).


81


SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




River
      Valley BancorpDate:  March
      14, 2008
            By:
            /s/
      Matthew P. ForresterMatthew
      P. Forrester, President and Chief Executive
  Officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signatures
            
            Title
            
            Date(1)
      Principal Executive Officer:
            
            
            ))/s/
      Matthew P. Forrester
            
            
            )
            March
      14, 2008Matthew
      P. Forrester
            
            President
      and Chief Executive Officer
            ))(2)
      Principal Financial and Accounting Officer:
            
            
            )
              ))/s/
      Vickie L. Grimes
            
            
            )
            March
      14, 2008Vickie
      L. Grimes
            
            Treasurer
            ))(3)
      The Board of Directors:
            
            
            ))/s/
      Robert W. Anger
            
            
            )
            March
      14, 2008Robert
      W. Anger
            
            Director
            )))/s/
      Matthew P. Forrester
            
            
            )
            March
      14, 2008Matthew
      P. Forrester
            
            Director
            )))/s/
      Michael J. Hensley
            
            
            )
            March
      14, 2008Michael
      J. Hensley
            
            Director
            )))/s/
      Fred W. Koehler
            
            
            )
            March
      14, 2008Fred
      W. Koehler
            
            Director
            )))/s/
      L. Sue Livers
            
            
            )
            March
      14, 2008L.
      Sue Livers
            
            Director
            )))/s/
      Charles J. McKay
            
            
            )
            March
      14, 2008Charles
      J. McKay
            
            Director
            )







EXHIBIT
INDEX




Exhibit
      No.
            
            Description3
            (1)
            
            Registrant’s
      Articles of Incorporation are incorporated by reference to Exhibit 3(1) to
      the Registration Statement on Form S-1 (Registration No. 333-05121) (the
      “Registration Statement”)(2)
            
            Amended
      and Restated Code of By-Laws is incorporated by reference to Exhibit 3.1
      to the Registrant’s Form 8-K filed on December 14,
    20074
            (1)
            
            Form
      of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
      Indenture, dated March 26, 2003, is incorporated by reference to Exhibit
      4.1 of Registrant’s Form 10-QSB filed May 15, 2003(2)
            
            Form
      of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
      Trust Agreement, dated March 26, 2003, incorporated by reference to
      Exhibit 4.2 of Registrant’s Form 10-QSB filed May 15,
      2003(3)
            
            Form
      of Fixed/Floating Rate Junior Subordinated Deferrable Interest Guarantee
      Agreement, dated March 26, 2003, incorporated by reference to Exhibit 4.3
      of Registrant’s Form 10-QSB filed May 15, 200310
            (1)*
            
            Employment
      Agreement between River Valley Financial Bank and Matthew P.
      Forresteris
      incorporated by reference to Exhibit 10(1) to the Registrant’s Form
      10-KSB filed on March 31, 2005(2)*
            
            Director
      Deferred Compensation Master Agreement is incorporated by reference to
      Exhibit 10(8) to the Registration Statement(3)*
            
            Director
      Deferred Compensation Joinder Agreement − Robert W. Anger is incorporated
      by reference to Exhibit 10(10) to the Registration
    Statement(4)*
            
            Director
      Deferred Compensation Joinder Agreement − Earl W. Johann is incorporated
      by reference to Exhibit 10(12) to the Registration
    Statement(5)*
            
            Director
      Deferred Compensation Joinder Agreement − Frederick W. Koehler is
      incorporated by reference to Exhibit 10(13) to the Registration
      Statement(6)*
            
            Director
      Deferred Compensation Joinder Agreement − Michael Hensley is incorporated
      by reference to Exhibit 10(15) to the Registration
    Statement(7)*
            
            Exempt
      Loan and Share Purchase Agreement between Trust under River Valley Bancorp
      Employee Stock Ownership Plan and Trust Agreement and River Valley Bancorp
      is incorporated by reference to Exhibit 10(22) to the Registration
      Statement(8)*
            
            River
      Valley Bancorp Recognition and Retention Plan and Trust is incorporated by
      reference to Exhibit 10(8) to the Form 10-KSB filed March 31,
      2005(9)*
            
            River
      Valley Bancorp Stock Option Plan is incorporated by reference to Exhibit
      10(9) to the Form 10-KSB filed March 31, 2005(10)*
            
            Employment
      Agreement between River Valley Financial Bank and Gregory T. Siegrist is
      incorporated by reference to Exhibit 10 of Registrant’s Form 10-QSB filed
      November 15, 2004











Exhibit
      No.
            
            Description(11)*
            
            First
      Amendment of the Director Deferred Compensation Master Agreement is
      incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
      March 21, 2005(12)*
            
            Form
      of Employee Incentive Stock Option Agreement under the River Valley
      Bancorp Stock Option Plan is incorporated by reference to Exhibit 10(12)
      of Registrant’s Form 10-KSB filed March 31, 2005(13)*
            
            Form
      of Director Non-Qualified Stock Option Agreement is incorporated by
      reference to Exhibit 10(13) of Registrant’s 10-KSB filed on March 31,
      2005(14)*
            
            Form
      of Award Notification under the River Valley Bancorp Recognition and
      Retention Plan and Trust is incorporated by reference to Exhibit 10(14) of
      Registrant’s 10-KSB filed on March 31, 2005(15)*
            
            First
      Amendment of the Director Deferred Compensation Master Agreement is
      incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K
      filed on March 21, 2005(16)*
            
            Employment
      Agreement between River Valley Financial Bank and Anthony D. Brandon is
      incorporated by reference to Exhibit 10.1 to the Registrant’s 8-K filed on
      August 4, 2005(17)*
            
            River
      Valley Financial Bank Split Dollar Insurance Plan, effective
      January 1, 2007, is incorporated by reference to Exhibit 10.1 to the
      Registrant’s Form 8-K filed on January 31, 2007(18)*
            
            Supplemental
      Life Insurance Agreement, dated January 25, 2007, between
      River Valley Financial Bank and Matthew Forrester, is incorporated by
      reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on January
      31, 2007(19)*
            
            Salary
      Continuation Agreement, dated January 25, 2007, between River Valley
      Financial Bank and Matthew Forrester , is incorporated by reference to
      Exhibit 10.3 to the Registrant’s Form 8-K filed on January 31,
      2007(20)*
            
            River
      Valley Financial Bank Split Dollar Insurance Plan, effective
      January 1, 2007, is incorporated by reference to Exhibit 10.1 to the
      Registrant’s Form 8-K filed on January 31, 2007(21)*
            
            Supplemental
      Life Insurance Agreement, dated January 25, 2007, between River
      Valley Financial Bank and Matthew Forrester, is incorporated by reference
      to Exhibit 10.2 to the Registrant’s Form 8-K filed on January 31,
      2007(22)*
            
            Salary
      Continuation Agreement, dated January 25, 2007, between River Valley
      Financial Bank and Matthew Forrester, is incorporated by reference to
      Exhibit 10.3 to the Registrant’s Form 8-K filed on January 31,
      2007(23)*
            
            Amended
      and Restated Employment Agreement (Matthew P. Forrester), is incorporated
      by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on
      November 26, 2007(24)*
            
            Amended
      and Restated Employment Agreement (Anthony D. Brandon), is incorporated by
      reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on
      November 26, 2007











Exhibit
      No.
            
            Description(25)*
            
            Amended
      and Restated Employment Agreement (John Muessel), is incorporated by
      reference to Exhibit 10.3 to the Registrant’s Form 8-K filed on
      November 26, 2007(26)*
            
            Amended
      and Restated Director Deferred Compensation Master Agreement, is
      incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K
      filed on November 26, 200714
            
            
            Code
      of Ethics is incorporated by reference to Exhibit 14 of Registrant’s Form
      10-KSB filed March 30, 200421
            
            
            Subsidiaries
      of the Registrant23
            
            
            Consent
      of BKD, LLP31
            (1)
            
            CEO
      Certification(2)
            
            CFO
      Certification32
            
            
            Section
      906 Certification


*
Indicates exhibits that describe or evidence management contracts and plans
required to be filed as exhibits.