UNITED
STATES


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, 2008Oro
            
            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.
                          oIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company. See the definitions of “large accelerated filer,” “accelerated
      filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
      (Check One):Large
      Accelerated Filer ̈
                          Accelerated
      Filer  ̈Non-Accelerated
      Filer  ̈
                            (Do
      not check if a smaller reporting company)
                          Smaller
      Reporting Company xIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act).
                          Yes
      o No ýAs
      of June 30, 2008, 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 $11,362,035
      based on the closing sale price as reported on the NASDAQ Capital
      Market.As
      of February 23, 2009, there were issued and outstanding 1,500,322 shares
      of the issuer’s Common
Stock.







Documents Incorporated by
Reference




Portions
of the Proxy Statement for the 2009 Annual Meeting of Shareholders to be held on
April 15, 2009 are incorporated in Part III.












1





RIVER
VALLEY BANCORP


FORM
10-K




INDEX




FORWARD-LOOKING
      STATEMENTSPART
      I
                
                3Item
      1.
                Business.
                3Item
      1A.
                Risk
      Factors.
                32Item
      1B.
                Unresolved
      Staff Comments.
                33Item
      2.
                Properties.
                33Item
      3.
                Legal
      Proceedings.
                34Item
      4.
                Submission
      of Matters to a Vote of Security Holders.
                34Item
      4.5.
                Executive
      Officers of the Registrant.
                34PART
      II
                
                36Item
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                36Item
      6.
                Selected
      Financial Data.
                38Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.
                39Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk.
                57Item
      8.
                Financial
      Statements and Supplementary Data.
                58Item
      9.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                90Item
      9A(T).
                Controls
      and Procedures.
                90Item
      9B.
                Other
      Information.
                90PART
      III
                
                91Item
      10.
                Directors,
      Executive Officers and Corporate Governance.
                91Item
      11.
                Executive
      Compensation.
                91Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                91Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence.
                92Item
      14.
                Principal
      Accounting Fees and Services.
                92PART
      IV
                
                92Item
      15.
                Exhibits,
      Financial Statement Schedules.
                92SIGNATURES
                
                93EXHIBIT
      INDEX
                
                94











2







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 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 financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or turmoil and governmental intervention in the financial services
industry.




PART
I




ITEM
      1.   BUSINESS.


BUSINESS




GENERAL




River
Valley Bancorp (the “Holding Company” or “River Valley” 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
eight full-service office locations in Jefferson, Floyd 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 44.3% of the Bank’s total loan portfolio at
December 31, 2008. The Bank identified loans totaling $130,000 as held for
sale at December 31, 2008. The Bank also offers multi-family mortgage
loans, non-residential real estate loans, land loans, construction loans,
non-mortgage commercial loans and consumer loans.





3







The
Bank’s primary market areas are Jefferson, Floyd and Clark Counties in
Southeastern Indiana and adjacent Carroll and Trimble Counties 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, 2008, 2007, 2006, 2005
and 2004 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 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Amount
              
              
              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
              
              $
              128,215
              
              
              
              44.3
              %
              
              $
              118,113
              
              
              
              44.7
              %
              
              $
              104,404
              
              
              
              42.2
              %
              
              $
              96,766
              
              
              
              41.0
              %
              
              $
              103,606
              
              
              
              43.0
              %Multi-family
              
              
              9,924
              
              
              
              3.4
              
              
              
              10,274
              
              
              
              3.9
              
              
              
              9,613
              
              
              
              3.9
              
              
              
              8,412
              
              
              
              3.6
              
              
              
              8,100
              
              
              
              3.4Construction
              
              
              10,999
              
              
              
              3.8
              
              
              
              14,319
              
              
              
              5.4
              
              
              
              17,993
              
              
              
              7.3
              
              
              
              13,549
              
              
              
              5.7
              
              
              
              20,046
              
              
              
              8.3Nonresidential
      real estate
              
              
              80,183
              
              
              
              27.7
              
              
              
              69,031
              
              
              
              26.1
              
              
              
              64,130
              
              
              
              25.9
              
              
              
              65,310
              
              
              
              27.7
              
              
              
              59,702
              
              
              
              24.8Land
      loans
              
              
              8,773
              
              
              
              3.0
              
              
              
              12,033
              
              
              
              4.6
              
              
              
              15,790
              
              
              
              6.4
              
              
              
              16,744
              
              
              
              7.1
              
              
              
              7,933
              
              
              
              3.3Consumer
      loans:Automobile
      loans
              
              
              2,416
              
              
              
              .9
              
              
              
              2,686
              
              
              
              1.0
              
              
              
              2,853
              
              
              
              1.1
              
              
              
              3,444
              
              
              
              1.5
              
              
              
              4,675
              
              
              
              1.9Loans
      secured by deposits
              
              
              619
              
              
              
              .2
              
              
              
              632
              
              
              
              .2
              
              
              
              605
              
              
              
              .2
              
              
              
              510
              
              
              
              .2
              
              
              
              553
              
              
              
              .2Other
              
              
              2,023
              
              
              
              .7
              
              
              
              2,718
              
              
              
              1.0
              
              
              
              2,802
              
              
              
              1.2
              
              
              
              2,986
              
              
              
              1.3
              
              
              
              3,659
              
              
              
              1.5Commercial
      loans
              
              
              46,397
              
              
              
              16.0
              
              
              
              34,649
              
              
              
              13.1
              
              
              
              29,000
              
              
              
              11.8
              
              
              
              28,148
              
              
              
              11.9
              
              
              
              32,582
              
              
              
              13.6Gross
      loans receivable
              
              
              289,549
              
              
              
              100.0
              
              
              
              264,455
              
              
              
              100.0
              
              
              
              247,190
              
              
              
              100.0
              
              
              
              235,869
              
              
              
              100.00
              
              
              
              240,856
              
              
              
              100.00Add/(Deduct):Deferred
      loan origination costs
              
              
              503
              
              
              
              .2
              
              
              
              494
              
              
              
              .2
              
              
              
              487
              
              
              
              .2
              
              
              
              488
              
              
              
              .2
              
              
              
              496
              
              
              
              .2Undisbursed
      portions of loans in process
              
              
              (2,384
              )
              
              
              (.8
              )
              
              
              (4,113
              )
              
              
              (1.6
              )
              
              
              (3,614
              )
              
              
              (1.5
              )
              
              
              (5,152
              )
              
              
              (2.2
              )
              
              
              (8,812
              )
              
              
              (3.7
              )Allowance
      for loan losses
              
              
              (2,364
              )
              
              
              (.8
              )
              
              
              (2,208
              )
              
              
              (.8
              )
              
              
              (2,176
              )
              
              
              (.9
              )
              
              
              (2,320
              )
              
              
              (1.0
              )
              
              
              (2,364
              )
              
              
              (1.0
              )Net
      loans receivable
              
              $
              285,304
              
              
              
              98.6
              %
              
              $
              258,628
              
              
              
              97.8
              %
              
              $
              241,887
              
              
              
              97.8
              %
              
              $
              228,885
              
              
              
              97.0
              %
              
              $
              230,176
              
              
              
              95.6
              %




The
following table sets forth certain information at December 31, 2008,
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, 2008
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2011
      to 2012
                      
                      
                      2013
      to 2017
                      
                      
                      2018
      to 2022
                      
                      
                      2023
      and following(In
      thousands)Residential
      real estate loans:One-to-four-family
                      
                      $
                      128,215
                      
                      
                      $
                      177
                      
                      
                      $
                      142
                      
                      
                      $
                      752
                      
                      
                      $
                      6,038
                      
                      
                      $
                      12,439
                      
                      
                      $
                      108,667Multi-family
                      
                      
                      9,924
                      
                      
                      
                      579
                      
                      
                      
                      114
                      
                      
                      
                      -
                      
                      
                      
                      50
                      
                      
                      
                      624
                      
                      
                      
                      8,557Construction
                      
                      
                      10,999
                      
                      
                      
                      9,845
                      
                      
                      
                      1,154
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Nonresidential
      Real estate loans
                      
                      
                      80,183
                      
                      
                      
                      13
                      
                      
                      
                      13
                      
                      
                      
                      1,519
                      
                      
                      
                      3,751
                      
                      
                      
                      6,540
                      
                      
                      
                      68,347Land
      loans
                      
                      
                      8,773
                      
                      
                      
                      84
                      
                      
                      
                      5
                      
                      
                      
                      6
                      
                      
                      
                      848
                      
                      
                      
                      667
                      
                      
                      
                      7,163Consumer
      loans:Loans
      secured by deposits
                      
                      
                      619
                      
                      
                      
                      473
                      
                      
                      
                      34
                      
                      
                      
                      112
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Other
      loans
                      
                      
                      4,439
                      
                      
                      
                      847
                      
                      
                      
                      638
                      
                      
                      
                      1,844
                      
                      
                      
                      1,084
                      
                      
                      
                      26
                      
                      
                      
                      -Commercial
      loans
                      
                      
                      46,397
                      
                      
                      
                      26,330
                      
                      
                      
                      12,562
                      
                      
                      
                      1,865
                      
                      
                      
                      5,401
                      
                      
                      
                      239
                      
                      
                      
                      -Total
                      
                      $
                      289,549
                      
                      
                      $
                      38,348
                      
                      
                      $
                      14,662
                      
                      
                      $
                      6,098
                      
                      
                      $
                      17,172
                      
                      
                      $
                      20,535
                      
                      
                      $
                      192,734












4







The
following table sets forth, as of December 31, 2008, the dollar amount of
all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.




Due
      After December 31, 2009Fixed Rates
                
                
                Variable Rates
                
                
                Total(In
      thousands)Residential
      real estate loans:One-to-four-family
                
                $
                23,924
                
                
                $
                104,114
                
                
                $
                128,038Multi-family
                
                
                406
                
                
                
                8,939
                
                
                
                9,345Construction
                
                
                -
                
                
                
                1,154
                
                
                
                1,154Nonresidential
      real estate loans
                
                
                6,396
                
                
                
                73,774
                
                
                
                80,170Land
      loans
                
                
                111
                
                
                
                8,578
                
                
                
                8,689Consumer
      loans:Loans
      secured by deposits
                
                
                146
                
                
                
                -
                
                
                
                146Other
      loans
                
                
                3,528
                
                
                
                64
                
                
                
                3,592Commercial
      loans
                
                
                7,064
                
                
                
                13,003
                
                
                
                20,067Total
                
                $
                41,575
                
                
                $
                209,626
                
                
                $
                251,201




Residential Loans.
Residential loans consist primarily of one- to four-family residential loans.
Approximately $128.2 million, or 44.3% of the Bank’s portfolio of loans, at
December 31, 2008, consisted of one- to four-family residential loans, of
which approximately 80.6% 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. 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, 2008 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, 2008, approximately 19.4% 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, 2008, the Bank had approximately $75.7 million of
fixed rate residential mortgage loans which were sold to the FHLMC and for which
the Bank provides servicing.





5







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 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 2008 the Bank originated and retained $9.0 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, 2008, the Bank had outstanding approximately $10.6 million of
home equity loans, with unused lines of credit totaling approximately $15.8
million. No home equity loans were included in non-performing assets as of
December 31, 2008. 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, 2008, $752,000 of one- to four-family residential mortgage
loans, or 0.3% 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, 2008, $11.0 million, or 3.8% of the Bank’s total loan
portfolio, consisted of construction loans. The largest construction loan at
December 31, 2008 totaled $1.2 million. There were no non-performing
construction loans at December 31, 2008.




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.





6







Nonresidential Real Estate
Loans. At December 31, 2008, $80.2 million, or 27.7% of the Bank’s
portfolio, consisted of nonresidential real estate loans. Nonresidential real
estate loans are primarily 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, 2008, the Bank’s largest nonresidential real estate loan was
$4.5 million. Nonresidential real estate loans in the amount of $160,000, or
0.1% of total loans, were included in non-performing assets at December 31,
2008.




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, 2008, approximately $9.9 million, or 3.4% 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, 2008
was $980,000 and was secured by an apartment complex in New Albany, Indiana. No
multi-family loans were included in non-performing assets as of
December 31, 2008.




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, 2008, approximately $8.8 million, or 3.0% 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, 2008, the Bank’s largest land loan totaled $1.9 million. No
land loans were included in non-performing assets as of December 31,
2008.




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.





7







Commercial Loans. At
December 31, 2008, $46.4 million, or 16.0% 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, 2008,
approximately $41.0 million, or 91.2%, of the Bank’s commercial loans were
secured by collateral, generally in the form of equipment, inventory, crops or,
in some cases, real estate. The Bank’s adjustable rate commercial 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, 2008, the largest commercial loan was $2.5
million. As of the same date, commercial loans totaling $109,000 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 $5.1 million at December 31, 2008, or 1.8% 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, 2008, 96.9% 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
primarily offers only direct automobile loans. Due to dealer incentives,
indirect automobile loans are rare and over the last few years the Bank has done
only a few. Under the Bank’s indirect automobile program, participating
automobile dealers would receive loan applications from prospective purchasers
of automobiles at the point of sale and deliver them to the Bank for processing.
The dealer would then receive 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,
2008, consumer loans amounting to $24,000 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, 2008, the Bank serviced $75.7 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,
2008, the Bank held loans totaling approximately $49.9 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 eight full-service offices.





8







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, 2008, the Bank held no participation loans in
its loan portfolio.




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




Year
      Ended December 312008
              
              
              2007
              
              
              2006(In
      thousands)Loans
      Disbursed:Residential
      real estate loans
              
              $
              47,309
              
              
              $
              46,496
              
              
              $
              42,320Multi-family
      loans
              
              
              2,460
              
              
              
              2,351
              
              
              
              1,770Construction
      loans
              
              
              7,333
              
              
              
              10,708
              
              
              
              19,107Non-residential
      real estate loans
              
              
              16,978
              
              
              
              8,488
              
              
              
              10,042Land
      loans
              
              
              7,324
              
              
              
              8,963
              
              
              
              5,761Consumer
      and other loans
              
              
              3,081
              
              
              
              4,037
              
              
              
              4,260Commercial
      loans
              
              
              43,158
              
              
              
              28,835
              
              
              
              21,034Total
      loans disbursed
              
              
              127,643
              
              
              
              109,878
              
              
              
              104,294Reductions:Sales
              
              
              10,009
              
              
              
              6,514
              
              
              
              5,501Principal
      loan repayments and other (1)
              
              
              90,958
              
              
              
              86,623
              
              
              
              85,791Total
      reductions
              
              
              100,967
              
              
              
              93,137
              
              
              
              91,292Net
      Increase (decrease)
              
              $
              26,676
              
              
              $
              16,741
              
              
              $
              13,002





(1)
            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.








9







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, 2008, $1.0 million, or 0.28% of consolidated total assets,
were non-performing loans compared to $1.8 million, or .52% of consolidated
total assets, at December 31, 2007. The Bank had $259,000 of REO at
December 31, 2008 as compared to $184,000 at the same date in
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 312008
              
              
              2007
              
              
              2006(In
      thousands)Non-performing
      assets:Non-performing
      loans
              
              $
              1,045
              
              
              $
              1,825
              
              
              $
              1,114Foreclosed
      real estate
              
              
              259
              
              
              
              184
              
              
              
              -Total
      non-performing assets
              
              $
              1,304
              
              
              $
              2,009
              
              
              $
              1,114Total
      non-performing loans to total loans
              
              
              .37
              %
              
              
              0.71
              %
              
              
              0.46
              %Total
      non-performing assets to total assets
              
              
              .35
              %
              
              
              0.57
              %
              
              
              0.33
              %




At
December 31, 2008, the Bank held loans delinquent from 30 to 89 days
totaling $2.0 million. As of that date, management was not aware of any other
assets that would need to be disclosed as non-performing assets.




Problem
relationships identified since December 31, 2008, and not included in the
non-performing totals above, include the following relationship. In January
2009, the Bank received notice that its largest lending relationship, of
approximately $4.8 million, was seeking to deleverage that position. The
relationship is secured by residential, investment properties, farms, and other
land holdings at an average loan-to-value of 74%. The borrower has a strong
credit history and the intent to work out this issue. The Bank will continue to
evaluate this issue and assess reserves if and when they are
warranted.






10




Delinquent
Loans.The following table sets forth certain information at December 31,
2008, 2007, and 2006 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, 2008
                  
                  
                  At
      December 31, 2007
                  
                  
                  At
      December 31, 200630-89 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
                  
                  
                  8
                  
                  
                  $
                  412
                  
                  
                  
                  9
                  
                  
                  $
                  752
                  
                  
                  
                  15
                  
                  
                  $
                  1,064
                  
                  
                  
                  14
                  
                  
                  $
                  657
                  
                  
                  
                  11
                  
                  
                  $
                  310
                  
                  
                  
                  13
                  
                  
                  $
                  709Construction
      loans.
                  
                  
                  2
                  
                  
                  
                  261
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  30
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  306
                  
                  
                  
                  -
                  
                  
                  
                  -Land
      loans
                  
                  
                  1
                  
                  
                  
                  45
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  46
                  
                  
                  
                  1
                  
                  
                  
                  225
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Non-residential
      real estate loans
                  
                  
                  2
                  
                  
                  
                  585
                  
                  
                  
                  2
                  
                  
                  
                  160
                  
                  
                  
                  2
                  
                  
                  
                  376
                  
                  
                  
                  3
                  
                  
                  
                  568
                  
                  
                  
                  1
                  
                  
                  
                  64
                  
                  
                  
                  1
                  
                  
                  
                  210Consumer
      loans
                  
                  
                  13
                  
                  
                  
                  54
                  
                  
                  
                  5
                  
                  
                  
                  24
                  
                  
                  
                  13
                  
                  
                  
                  63
                  
                  
                  
                  1
                  
                  
                  
                  2
                  
                  
                  
                  7
                  
                  
                  
                  15
                  
                  
                  
                  4
                  
                  
                  
                  12Commercial
      loans
                  
                  
                  6
                  
                  
                  
                  663
                  
                  
                  
                  3
                  
                  
                  
                  109
                  
                  
                  
                  5
                  
                  
                  
                  419
                  
                  
                  
                  3
                  
                  
                  
                  373
                  
                  
                  
                  7
                  
                  
                  
                  53
                  
                  
                  
                  2
                  
                  
                  
                  183Total
                  
                  
                  32
                  
                  
                  $
                  2,020
                  
                  
                  
                  19
                  
                  
                  $
                  1,045
                  
                  
                  
                  37
                  
                  
                  $
                  1,998
                  
                  
                  
                  22
                  
                  
                  $
                  1,825
                  
                  
                  
                  28
                  
                  
                  $
                  748
                  
                  
                  
                  20
                  
                  
                  $
                  1,114Delinquent
      loans to total loans
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.07
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.48
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0.77
                  %


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 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.




Not all
of the Bank’s classified assets constitute non-performing assets. Historically,
management has been very conservative in its listing of assets as classified,
especially in comparison to peer classification of similar assets and to actual
delinquency status. For this reason the amount of classified assets for the Bank
may appear high in relation to actual delinquencies. This indicates a diligence
by the Bank in management of problem loans, as the Bank uses the classification
listing as a “watch list” of loans that management believes to be potentially
problematic, rather than just a listing of known problem loans. Lower than peer
delinquencies are the result of this conservative and proactive approach to
management of the classified list.





11







The
classification of assets listing is evaluated monthly by a committee comprised
of lending personnel, the Bank Chief Executive Officer, the Chief Financial
Officer, and the Bank’s Internal Auditor. The list encompasses entire
relationships, rather than single problem loans, and removal of loans from the
list is only approved by the committee upon demonstrated performance by the
borrower. Loans are classified as “doubtful” if the committee believes the loan
to be unlikely to perform to its agreed upon terms and may also be higher than
peer due to management’s conserative approach.




At
December 31, 2008, the aggregate amount of the Bank’s classified assets are
as follows:




At December 31, 2008(In
      thousands)Substandard
      assets
                              
                              $
                              5,816Doubtful
      assets
                              
                              
                              2,397Loss
      assets
                              
                              
                              -Total
      classified assets
                              
                              $
                              8,213




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.




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, 2008. 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, 2008.




Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      in Thousands)Balance
      at beginning of period
                  
                  $
                  2,208
                  
                  
                  $
                  2,176
                  
                  
                  $
                  2,320
                  
                  
                  $
                  2,364
                  
                  
                  $
                  2,056Charge-offs:Real
      estate loans
                  
                  
                  (782
                  )
                  
                  
                  (270
                  )
                  
                  
                  (247
                  )
                  
                  
                  (190
                  )
                  
                  
                  (24
                  )Consumer
                  
                  
                  (183
                  )
                  
                  
                  (183
                  )
                  
                  
                  (178
                  )
                  
                  
                  (217
                  )
                  
                  
                  (150
                  )Commercial
      loans
                  
                  
                  (83
                  )
                  
                  
                  (213
                  )
                  
                  
                  (19
                  )
                  
                  
                  -
                  
                  
                  
                  -Total
      charge-offs
                  
                  
                  (1,048
                  )
                  
                  
                  (666
                  )
                  
                  
                  (444
                  )
                  
                  
                  (407
                  )
                  
                  
                  (174
                  )Recoveries
                  
                  
                  124
                  
                  
                  
                  136
                  
                  
                  
                  36
                  
                  
                  
                  75
                  
                  
                  
                  144Net
      charge-offs
                  
                  
                  (924
                  )
                  
                  
                  (530
                  )
                  
                  
                  (408
                  )
                  
                  
                  (332
                  )
                  
                  
                  (30
                  )Provision
      for losses on loans
                  
                  
                  1,080
                  
                  
                  
                  562
                  
                  
                  
                  264
                  
                  
                  
                  288
                  
                  
                  
                  338Balance
      end of period
                  
                  $
                  2,364
                  
                  
                  $
                  2,208
                  
                  
                  $
                  2,176
                  
                  
                  $
                  2,320
                  
                  
                  $
                  2,364Allowance  for
      loan losses as a percent of total loans outstanding
                  
                  
                  .82
                  %
                  
                  
                  .83
                  %
                  
                  
                  .89
                  %
                  
                  
                  1.00
                  %
                  
                  
                  1.02
                  %Ratio
      of net charge-offs to average loans outstanding before net
      items
                  
                  
                  .32
                  %
                  
                  
                  .20
                  %
                  
                  
                  .17
                  %
                  
                  
                  .14
                  %
                  
                  
                  .01
                  %












12







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 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Amount
                    
                    
                    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
                    
                    $
                    602
                    
                    
                    
                    51.5
                    %
                    
                    $
                    743
                    
                    
                    
                    54.0
                    %
                    
                    $
                    954
                    
                    
                    
                    53.4
                    %
                    
                    $
                    1,102
                    
                    
                    
                    50.3
                    %
                    
                    $
                    930
                    
                    
                    
                    54.7
                    %Nonresidential
      real estate
                    
                    
                    37
                    
                    
                    
                    30.7
                    
                    
                    
                    -
                    
                    
                    
                    30.7
                    
                    
                    
                    -
                    
                    
                    
                    32.3
                    
                    
                    
                    64
                    
                    
                    
                    34.8
                    
                    
                    
                    162
                    
                    
                    
                    28.1Consumer
      loans
                    
                    
                    77
                    
                    
                    
                    1.8
                    
                    
                    
                    57
                    
                    
                    
                    2.3
                    
                    
                    
                    171
                    
                    
                    
                    2.5
                    
                    
                    
                    156
                    
                    
                    
                    3.0
                    
                    
                    
                    226
                    
                    
                    
                    3.7Commercial
      loans
                    
                    
                    1,088
                    
                    
                    
                    16.0
                    
                    
                    
                    892
                    
                    
                    
                    13.1
                    
                    
                    
                    855
                    
                    
                    
                    11.7
                    
                    
                    
                    724
                    
                    
                    
                    11.9
                    
                    
                    
                    807
                    
                    
                    
                    13.5Unallocated
                    
                    
                    560
                    
                    
                    
                    -
                    
                    
                    
                    515
                    
                    
                    
                    -
                    
                    
                    
                    196
                    
                    
                    
                    -
                    
                    
                    
                    274
                    
                    
                    
                    -
                    
                    
                    
                    239
                    
                    
                    
                    -Total
                    
                    $
                    2,364
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,208
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,176
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,320
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,364
                    
                    
                    
                    100.0
                    %






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, 2008, the
investments in the portfolio had a carrying value of approximately $38.2
million, or 10.3%, 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 31,2008
                    
                    
                    2007
                    
                    
                    2006Amortized Cost
                    
                    
                    Market Value
                    
                    
                    Amortized Cost
                    
                    
                    Market Value
                    
                    
                    Amortized Cost
                    
                    
                    Market Value(In
      thousands)Available
      for sale:U.S.
      Government and agency obligations
                    
                    $
                    12,900
                    
                    
                    $
                    13,362
                    
                    
                    $
                    35,821
                    
                    
                    $
                    36,123
                    
                    
                    $
                    50,812
                    
                    
                    $
                    50,369Corporate
      bonds
                    
                    
                    4,414
                    
                    
                    
                    3,641
                    
                    
                    
                    888
                    
                    
                    
                    888
                    
                    
                    
                    -
                    
                    
                    
                    -Municipal
      securities
                    
                    
                    16,978
                    
                    
                    
                    16,332
                    
                    
                    
                    15,598
                    
                    
                    
                    15,644
                    
                    
                    
                    14,776
                    
                    
                    
                    14,712Total
      available for sale
                    
                    
                    34,292
                    
                    
                    
                    33,335
                    
                    
                    
                    52,307
                    
                    
                    
                    52,655
                    
                    
                    
                    65,588
                    
                    
                    
                    65,081FHLB
      stock
                    
                    
                    4,850
                    
                    
                    
                    4,850
                    
                    
                    
                    4,750
                    
                    
                    
                    4,750
                    
                    
                    
                    4,400
                    
                    
                    
                    4,400Total
      investments
                    
                    $
                    39,142
                    
                    
                    $
                    38,185
                    
                    
                    $
                    57,057
                    
                    
                    $
                    57,405
                    
                    
                    $
                    69,988
                    
                    
                    $
                    69,481










13







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,
2008.




Amount
      at December 31, 2008 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
                  
                  $
                  1,997
                  
                  
                  
                  4.79
                  %
                  
                  $
                  4,996
                  
                  
                  
                  4.19
                  %
                  
                  $
                  1,990
                  
                  
                  
                  5.34
                  %
                  
                  $
                  3,917
                  
                  
                  
                  5.54
                  %Municipal
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,284
                  
                  
                  
                  3.53
                  
                  
                  
                  7,076
                  
                  
                  
                  3.83
                  
                  
                  
                  8,618
                  
                  
                  
                  4.36Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,623
                  
                  
                  
                  4.27
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,791
                  
                  
                  
                  3.57




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 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, 2008, the Bank had mortgage-backed securities with a carrying
value of approximately $18.9 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 31,2008
                      
                      
                      2007
                      
                      
                      2006Amortized Cost
                      
                      
                      Market Value
                      
                      
                      Amortized Cost
                      
                      
                      Market Value
                      
                      
                      Amortized Cost
                      
                      
                      Market Value(In
      thousands)Available
      for sale:Government
      Agency securities
                      
                      $
                      10,626
                      
                      
                      $
                      10,955
                      
                      
                      $
                      5,275
                      
                      
                      $
                      5,353
                      
                      
                      $
                      -
                      
                      
                      $
                      -Collateralized
      mortgage obligations
                      
                      
                      7,750
                      
                      
                      
                      7,994
                      
                      
                      
                      981
                      
                      
                      
                      991
                      
                      
                      
                      68
                      
                      
                      
                      69Total
      mortgage-backed securities
                      
                      $
                      18,376
                      
                      
                      $
                      18,949
                      
                      
                      $
                      6,256
                      
                      
                      $
                      6,344
                      
                      
                      $
                      68
                      
                      
                      $
                      69










14







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, 2008.





Amount
      at December 31, 2008 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
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              10,625
              
              
              
              5.34
              %CMOs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              8.38
              
              
              
              7,750
              
              
              
              6.35






The
following table sets forth the changes in the Bank’s mortgage-backed securities
portfolio at amortized cost for the years ended December 31, 2008, 2007, and
2006.




For
      the Year Ended December 31,2008
              
              
              2007
              
              
              2006(Dollars
      in thousands)Beginning
      balance
              
              $
              6,256
              
              
              $
              68
              
              
              $
              83Purchases
              
              
              13,650
              
              
              
              6,423
              
              
              
              -Sales
      proceeds
              
              
              -
              
              
              
              -
              
              
              
              -Repayments
              
              
              (1,571
              )
              
              
              (236
              )
              
              
              (15
              )Losses
      on sales
              
              
              -
              
              
              
              -
              
              
              
              -Premium
      and discount amortization, net
              
              
              41
              
              
              
              1
              
              
              
              -Ending
      balance
              
              $
              18,376
              
              
              $
              6,256
              
              
              $
              68






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), Floyds
Knobs, Indiana (Floyd 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.





15







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. Historically, NOW and MMDAs have been relatively
stable sources of deposits. However, during 2008, transactional deposits, and
primarily NOW and MMDA deposits, shrank from $126.8 million at December 31, 2007
to $118.4 million at December 31, 2008, a reduction of $8.4 million, or 6.6%.
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. As customers pursued more stable deposit products
during 2008, certificate of deposit balances grew $36.5 million, or 39.3%, from
the balance of $92.9 million as of December 31, 2007 to $129.4 million at
December 31, 2008. As certificates of deposit repriced and new certificates were
added, the lower interest rates for these items caused a decline in the cost of
deposits and the widening of the interest spread, period to period.




An
analysis of the Company’s deposit accounts by type, maturity and rate at
December 31, 2008 is as follows:




Type of Account
                                                
                                                Minimum Opening Balance
                                                
                                                Balance at December 31,
      2008
                                                
                                                % of Deposits
                                                
                                                Weighted Average Rate(Dollars
      in thousands)Withdrawable:Non-interest
      bearing accounts
                                                
                                                
                                                $  
      100
                                                
                                                
                                                
                                                $ 
      21,393
                                                
                                                
                                                
                                                8.63
                                                %
                                                
                                                
                                                0.00
                                                %Savings
      accounts
                                                
                                                
                                                50
                                                
                                                
                                                
                                                27,338
                                                
                                                
                                                
                                                11.03
                                                
                                                
                                                
                                                1.00MMDA
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                14,859
                                                
                                                
                                                
                                                6.00
                                                
                                                
                                                
                                                1.84NOW
      accounts
                                                
                                                
                                                1,000
                                                
                                                
                                                
                                                54,787
                                                
                                                
                                                
                                                22.11
                                                
                                                
                                                
                                                1.31Total
      withdrawable
                                                
                                                
                                                
                                                
                                                
                                                
                                                118,377
                                                
                                                
                                                
                                                47.77
                                                
                                                
                                                
                                                1.04Certificates
      (original terms):I.R.A.
                                                
                                                
                                                $2,500
                                                
                                                
                                                
                                                $  
      7,115
                                                
                                                
                                                
                                                2.87
                                                %
                                                
                                                
                                                3.54
                                                %3
      month
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                30
                                                
                                                
                                                
                                                .01
                                                
                                                
                                                
                                                1.546
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                4,778
                                                
                                                
                                                
                                                1.93
                                                
                                                
                                                
                                                2.799
      month
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                2,618
                                                
                                                
                                                
                                                1.06
                                                
                                                
                                                
                                                3.2812
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                20,340
                                                
                                                
                                                
                                                8.21
                                                
                                                
                                                
                                                3.4115
      month
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                12,774
                                                
                                                
                                                
                                                5.16
                                                
                                                
                                                
                                                3.2118
      month
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                1,501
                                                
                                                
                                                
                                                0.61
                                                
                                                
                                                
                                                3.7124
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                4,749
                                                
                                                
                                                
                                                1.92
                                                
                                                
                                                
                                                4.0330
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                667
                                                
                                                
                                                
                                                0.27
                                                
                                                
                                                
                                                4.1836
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                3,270
                                                
                                                
                                                
                                                1.32
                                                
                                                
                                                
                                                4.0341
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                3,173
                                                
                                                
                                                
                                                1.28
                                                
                                                
                                                
                                                4.4248
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                2,487
                                                
                                                
                                                
                                                1.00
                                                
                                                
                                                
                                                4.5660
      months
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                3,732
                                                
                                                
                                                
                                                1.50
                                                
                                                
                                                
                                                4.24Jumbo
      certificates
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                62,166
                                                
                                                
                                                
                                                25.09
                                                
                                                
                                                
                                                3.74Total
      certificates
                                                
                                                
                                                
                                                
                                                
                                                
                                                129,400
                                                
                                                
                                                
                                                52.23
                                                
                                                
                                                
                                                3.65Total
      deposits
                                                
                                                
                                                
                                                
                                                
                                                
                                                $247,777
                                                
                                                
                                                
                                                100.00
                                                %
                                                
                                                
                                                2.40
                                                %




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




At
      December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006(In
      thousands)0.00
      to 1.00%
                                  
                                  $
                                  3,973
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -1.01
      to 2.00%
                                  
                                  
                                  28,895
                                  
                                  
                                  
                                  195
                                  
                                  
                                  
                                  2812.01
      to 3.00%
                                  
                                  
                                  46,010
                                  
                                  
                                  
                                  298
                                  
                                  
                                  
                                  3,9793.01
      to 4.00%
                                  
                                  
                                  45,856
                                  
                                  
                                  
                                  14,616
                                  
                                  
                                  
                                  23,0504.01
      to 5.00%
                                  
                                  
                                  4,666
                                  
                                  
                                  
                                  35,392
                                  
                                  
                                  
                                  45,2115.01
      to 6.00%
                                  
                                  
                                  -
                                  
                                  
                                  
                                  42,415
                                  
                                  
                                  
                                  29,480Total
                                  
                                  $
                                  129,400
                                  
                                  
                                  $
                                  92,916
                                  
                                  
                                  $
                                  102,001












16







The
following table represents, by various interest rate categories, the amounts of
time deposits maturing during each of the three years following
December 31, 2008. Matured certificates, which have not been renewed as of
December 31, 2008, have been allocated based upon certain rollover
assumptions.




Amounts
      at December 31, 2008 Maturing InOne Year or Less
              
              
              Two Years
              
              
              Three Years
              
              
              Greater
      Than Three Years(In
      thousands)0.00
      to 1.00%
              
              $
              3,419
              
              
              $
              408
              
              
              $
              4
              
              
              $
              1431.01
      to 2.00%
              
              
              27,180
              
              
              
              1,463
              
              
              
              230
              
              
              
              222.01
      to 3.00%
              
              
              38,326
              
              
              
              4,989
              
              
              
              2,151
              
              
              
              5433.01
      to 4.00%
              
              
              26,475
              
              
              
              5,823
              
              
              
              5,173
              
              
              
              8,3854.01
      to 5.00%
              
              
              2,304
              
              
              
              938
              
              
              
              558
              
              
              
              866Total
              
              $
              97,704
              
              
              $
              13,621
              
              
              $
              8,116
              
              
              $
              9,959






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, 2008.




At
      December 31, 2008Maturity Period
                                    
                                    (In
      thousands)Three
      months or less
                                    
                                    $
                                    22,224Greater
      than three months through six months
                                    
                                    
                                    14,253Greater
      than six months through twelve months
                                    
                                    
                                    13,809Over
      twelve months
                                    
                                    
                                    11,880Total
                                    
                                    $
                                    62,166




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, 2008
                  
                  
                  %
      of Deposits
                  
                  
                  Increase
      (Decrease) from 2007
                  
                  
                  Balance
      at December 31, 2007
                  
                  
                  %
      of Deposits
                  
                  
                  Increase
      (Decrease) from 2006
                  
                  
                  Balance
      at December 31, 2006
                  
                  
                  %
      of Deposits(Dollars
      in thousands)Withdrawable:Noninterest-bearing
      accounts
                  
                  $
                  21,393
                  
                  
                  
                  8.63
                  %
                  
                  $
                  2,774
                  
                  
                  $
                  18,619
                  
                  
                  
                  8.47
                  %
                  
                  $
                  (721
                  )
                  
                  $
                  19,340
                  
                  
                  
                  8.78
                  %Savings
      accounts
                  
                  
                  27,338
                  
                  
                  
                  11.03
                  
                  
                  
                  2,608
                  
                  
                  
                  24,730
                  
                  
                  
                  11.26
                  
                  
                  
                  621
                  
                  
                  
                  24,109
                  
                  
                  
                  10.95MMDA
                  
                  
                  14,859
                  
                  
                  
                  6.00
                  
                  
                  
                  (8,955
                  )
                  
                  
                  23,814
                  
                  
                  
                  10.84
                  
                  
                  
                  7,590
                  
                  
                  
                  16,224
                  
                  
                  
                  7.37NOW
      accounts
                  
                  
                  54,787
                  
                  
                  
                  22.11
                  
                  
                  
                  (4,816
                  )
                  
                  
                  59,603
                  
                  
                  
                  27.13
                  
                  
                  
                  1,039
                  
                  
                  
                  58,564
                  
                  
                  
                  26.59Total
      withdrawable
                  
                  
                  118,377
                  
                  
                  
                  47.77
                  
                  
                  
                  (8,389
                  )
                  
                  
                  126,766
                  
                  
                  
                  57.70
                  
                  
                  
                  8,529
                  
                  
                  
                  118,237
                  
                  
                  
                  53.69Certificates
      (original terms):I.R.A.
                  
                  
                  7,115
                  
                  
                  
                  2.87
                  
                  
                  
                  449
                  
                  
                  
                  6,666
                  
                  
                  
                  3.03
                  
                  
                  
                  (531
                  )
                  
                  
                  7,197
                  
                  
                  
                  3.273
      months
                  
                  
                  30
                  
                  
                  
                  0.01
                  
                  
                  
                  5
                  
                  
                  
                  25
                  
                  
                  
                  0.01
                  
                  
                  
                  13
                  
                  
                  
                  12
                  
                  
                  
                  -6
      months
                  
                  
                  4,778
                  
                  
                  
                  1.93
                  
                  
                  
                  (228
                  )
                  
                  
                  5,006
                  
                  
                  
                  2.28
                  
                  
                  
                  3,530
                  
                  
                  
                  1,476
                  
                  
                  
                  .679
      months
                  
                  
                  2,618
                  
                  
                  
                  1.06
                  
                  
                  
                  (534
                  )
                  
                  
                  3,152
                  
                  
                  
                  1.44
                  
                  
                  
                  848
                  
                  
                  
                  2,304
                  
                  
                  
                  1.0512
      months
                  
                  
                  20,340
                  
                  
                  
                  8.21
                  
                  
                  
                  9,647
                  
                  
                  
                  10,693
                  
                  
                  
                  4.87
                  
                  
                  
                  (2,320
                  )
                  
                  
                  13,013
                  
                  
                  
                  5.9115
      months
                  
                  
                  12,774
                  
                  
                  
                  5.16
                  
                  
                  
                  (9,385
                  )
                  
                  
                  22,159
                  
                  
                  
                  10.09
                  
                  
                  
                  6,570
                  
                  
                  
                  15,589
                  
                  
                  
                  7.0818
      months
                  
                  
                  1,501
                  
                  
                  
                  0.61
                  
                  
                  
                  (24
                  )
                  
                  
                  1,525
                  
                  
                  
                  0.69
                  
                  
                  
                  (1,137
                  )
                  
                  
                  2,662
                  
                  
                  
                  1.2124
      months
                  
                  
                  4,749
                  
                  
                  
                  1.92
                  
                  
                  
                  1,751
                  
                  
                  
                  2,998
                  
                  
                  
                  1.37
                  
                  
                  
                  (1,229
                  )
                  
                  
                  4,227
                  
                  
                  
                  1.9230
      months
                  
                  
                  667
                  
                  
                  
                  0.27
                  
                  
                  
                  (85
                  )
                  
                  
                  752
                  
                  
                  
                  0.34
                  
                  
                  
                  (1,091
                  )
                  
                  
                  1,843
                  
                  
                  
                  .8436
      months
                  
                  
                  3,270
                  
                  
                  
                  1.32
                  
                  
                  
                  2,247
                  
                  
                  
                  1,023
                  
                  
                  
                  0.47
                  
                  
                  
                  (1,499
                  )
                  
                  
                  2,522
                  
                  
                  
                  1.1441
      months
                  
                  
                  3,173
                  
                  
                  
                  1.28
                  
                  
                  
                  2,692
                  
                  
                  
                  481
                  
                  
                  
                  0.22
                  
                  
                  
                  481
                  
                  
                  
                  -
                  
                  
                  
                  -48
      months
                  
                  
                  2,487
                  
                  
                  
                  1.00
                  
                  
                  
                  897
                  
                  
                  
                  1,590
                  
                  
                  
                  0.72
                  
                  
                  
                  174
                  
                  
                  
                  1,416
                  
                  
                  
                  .6460
      months
                  
                  
                  3,732
                  
                  
                  
                  1.50
                  
                  
                  
                  (616
                  )
                  
                  
                  4,348
                  
                  
                  
                  1.98
                  
                  
                  
                  (3,850
                  )
                  
                  
                  8,198
                  
                  
                  
                  3.72Jumbo
      certificates
                  
                  
                  62,166
                  
                  
                  
                  25.09
                  
                  
                  
                  29,668
                  
                  
                  
                  32,498
                  
                  
                  
                  14.79
                  
                  
                  
                  (9,044
                  )
                  
                  
                  41,542
                  
                  
                  
                  18.86Total
      certificates
                  
                  
                  129,400
                  
                  
                  
                  52.23
                  
                  
                  
                  36,484
                  
                  
                  
                  92,916
                  
                  
                  
                  42.30
                  
                  
                  
                  (9,085
                  )
                  
                  
                  102,001
                  
                  
                  
                  46.31Total
      deposits
                  
                  $
                  247,777
                  
                  
                  
                  100.00
                  %
                  
                  $
                  28,095
                  
                  
                  $
                  219,682
                  
                  
                  
                  100.00
                  %
                  
                  $
                  (556
                  )
                  
                  $
                  220,238
                  
                  
                  
                  100.00
                  %










17







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, 2008, the Bank had
$90.0 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, 2008, 2007, and
2006.




At
      or for the Year Ended December 31,2008
              
              
              2007
              
              
              2006(Dollars
      in thousands)FHLB
      Advances and Other Borrowed Money:Outstanding
      at end of period
              
              $
              97,217
              
              
              $
              102,217
              
              
              $
              95,217Average
      balance outstanding for period
              
              
              100,467
              
              
              
              96,884
              
              
              
              86,635Maximum
      amount outstanding at any month-end during the period
              
              
              103,217
              
              
              
              102,217
              
              
              
              95,217Weighted
      average interest rate during the period
              
              
              4.83
              %
              
              
              4.83
              %
              
              
              4.72
              %Weighted
      average interest rate at end of period
              
              
              4.61
              %
              
              
              4.76
              %
              
              
              4.76
              %




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 1st 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. Income from
the Nevada investment subsidiary increased from $1.3 million for the year ended
December 31, 2007 to $1.5 million for the same period in 2008, an increase of
15.4%. This increase contributed to the decline in the effective tax rate,
period to period, as discussed in Item 7 - Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Comparison of Results of
Operations for the Years Ended December 31, 2008 and 2007.






18




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, 2008, the Bank employed 77 persons on a full-time basis and 20
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.




COMPETITION




The Bank
originates most of its loans to and accepts most of its deposits from residents
of Jefferson, Floyd and Clark Counties, Indiana, and Trimble 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, Floyd and Clark Counties in Indiana, and
Trimble, Carroll and Jefferson Counties 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 6-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.






19




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.




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.





20







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 Federal Reserve Board 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 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 Item 1 - Business - Regulation - Qualified Thrift Lender.
At December 31, 2008, 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.





21







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, 2008,
the Bank’s investment in stock of the FHLB of Indianapolis was $4.9 million. For
the fiscal year ended December 31, 2008, the FHLB of Indianapolis paid
approximately $183,400 in cash dividends to the Bank. Annualized, this income
would have a rate of 5.0%. Due to the various financial difficulties in the
financial industry, including the write-down in value of various mortgage-backed
securities held by the FHLB of Indianapolis, the dividend rate paid by the FHLB
of Indianapolis during the first quarter of 2009 was reduced by 75 basis points
from the rate paid for the prior quarter.




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.




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 by the Deposit Insurance Fund (“DIF”) of the FDIC up
to a maximum amount, which is generally $250,000 per depositor until January 1,
2010, subject to aggregation rules. The enactment of the Emergency Economic
Stabilization Act of 2008 (“EESA”) temporarily raised this amount from $100,000
to $250,000, but the limit will return to $100,000 after December 31,
2009.




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





22







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. The FDIC adopted final regulations that
set the designated reserve ratio for the DIF at 1.25% beginning January 1, 2007.
Federal law also provides for the possibility that the FDIC may pay dividends to
insured institutions once the DIF reserve ratio equals or exceeds 1.35% of
estimated insured deposits.




The Bank
is subject to deposit insurance assessments by the FDIC pursuant to its
regulations establishing a risk-related deposit insurance assessment system.
Under the risk-based assessment 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 assessment rate will be based on the insured institution’s ranking
in one of four risk categories. For 2008, assessments ranged from 5 to 43 basis
points of assessable deposits, and the Bank paid assessments at the rate of 5.56
basis points for each $100 of insured deposits.




Due to
losses incurred by the DIF in 2008 from failed institutions, and anticipated
future losses, the FDIC published a restoration plan in 2008 designed to
replenish the DIF. In order to implement the restoration plan, the FDIC proposes
to change both its risk-based assessment system and its base assessment rates.
For the first quarter of 2009, the FDIC has adopted an across-the-board 7 basis
point increase in the assessment range. The FDIC has also adopted further
refinements to its risk-based assessment, effective April 1, 2009, that make the
range of total base assessment rates 7 to 77 1/2 basis points, starting with the
quarter beginning April 1, 2009. The FDIC may adjust the scale uniformly from
one quarter to the next, except that no adjustment can exceed 3 basis points
from the base scale without notice and comment rulemaking. No institution may
pay a dividend if in default of the federal deposit insurance
assessment.




A
significant increase in the risk category of the Bank or adjustment to the base
assessment rates causing increased insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the Bank.
Management cannot predict what insurance assessment rates will be in the
future.




FDIC-insured
institutions remain subject to the requirement to pay quarterly debt service
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 are repaid between 2017 and 2019. During 2008, the FICO
assesment rate ranged between 1.10 and 1.14 basis points for each $100 of
insured deposits per quarter. For the first quarter of 2009, the FICO assessment
rate is 1.14 basis points.




As
another response to difficult economic conditions, the FDIC adopted an optional
Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing
transaction accounts would receive unlimited insurance coverage until December
31, 2009 and, for a fee, certain senior unsecured debt issued by institutions
and their holding companies between October 13, 2008 and June 30, 2009 would be
guaranteed by the FDIC through June 30, 2012. The Bank made the business
decision to participate in the unlimited noninterest bearing transaction account
coverage, and the Bank and the Company elected to participate in the unsecured
debt guarantee program. The assessments for such enhanced protection will total
85 basis points per $100 of insured deposits during 2009.




The FDIC
may terminate the deposit insurance of any insured depository institution if the
FDIC determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe and unsound condition
to continue operations or has violated any applicable law, regulation, order or
any condition imposed in writing by, or written agreement with, the FDIC. The
FDIC may also suspend deposit insurance temporarily during the hearing process
for a permanent termination of insurance if the institution has no tangible
capital.





23







On
February 27, 2009, the FDIC announced the imposition of a special assessment and
changes to assessment rates for the risk-based assessment system that will take
effect beginning April 1, 2009. The FDIC adopted an interim rule that imposes a
special assessment of 20 basis points as of June 30, 2009, which is to be
collected on September 30, 2009. Then, on March 5, 2009, FDIC Chairman Sheila
Bair announced that if Congress adopts legislation expanding the FDIC’s line of
credit with Treasury from $30 billion to $100 billion, the FDIC might have the
flexibility to reduce the special emergency assessment, possibly from 20 to 10
basis points. Assuming that deposit levels remain constant, we anticipate that
the special assessment for the Bank would total approximately $473,000 at the 20
basis points level, but if the FDIC is able to reduce the special assessment to
10 basis points, the Bank’s assessment would total approximately
$236,000.




The
FDIC’s rule also provides for the imposition of additional special assessments
of up to 10 basis points if necessary. The FDIC also announced an amendment to
the restoration plan to extend the period of the plan from five to seven
years.




While the
Company has not fully evaluated the impact the increased assessment rates and
the pending special assessment will have on the 2009 financial results, it is
anticipated the impact will be material to the 2009 results of
operations.




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 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, 2008, the Bank was in compliance
with all capital requirements imposed by law.





24







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, 2008, 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.




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.





25







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
“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.





26







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, 2008, the Bank had one
relationship of $4.9 million that exceeded the legal lending limit as of that
date, $4.8 million. That loan complied with the legal lending limit at the time
it was made, and is still a legally compliant loan, but currently exceeds the
lending limit because of a reduction in capital at the Bank level following a
dividend declaration by the Bank. While the current economic conditions can
quickly change lending relationships, at this time management does not believe
that the loans-to-one-borrower limits will have a significant impact on the
Bank’s business operations or earnings.




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, 2008, the Bank was in compliance
with its QTL requirement, with approximately 73.6% 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).





27







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 Federal Reserve Board 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 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. 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.





28







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.




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 certain cases, 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.





29







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-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.





30







RECENT
      LEGISLATIVE DEVELOPMENTS




In
response to recent unprecedented financial market turmoil, the Emergency
Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. EESA
authorizes the U.S. Treasury Department to provide up to $700 billion in funding
for the financial services industry. Pursuant to the EESA, the Treasury was
initially authorized to use $350 billion for the Troubled Asset Relief Program
(“TARP”). Of this amount, the Treasury allocated $250 billion to the TARP
Capital Purchase Program (“CPP”). The CPP allows financial institutions, like
the Company, to issue non-voting preferred stock to the Treasury in an amount
ranging between 1% and 3% of its total risk-weighted assets. On January 15,
2009, the second $350 billion of TARP monies was released to the Treasury. The
Secretary’s authority under TARP expires on December 31, 2009 unless the
Secretary certifies to Congress that extension is necessary provided that his
authority may not be extended beyond October 3, 2010. The Company has decided
not to participate in the TARP CPP, as discussed further in Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operation.




In
addition, on October 14, 2008, after receiving a recommendation from the boards
of the FDIC and the Board of Governors of the Federal Reserve System, and
consulting with the President, Secretary Paulson signed the systemic risk
exception to the Federal Deposit Insurance Act, enabling the FDIC to temporarily
provide a 100% guarantee of the senior debt of all FDIC-insured institutions and
their holding companies, as well as unlimited deposit insurance on funds in
non-interest bearing transaction deposit accounts under a Temporary Liquidity
Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is
available to those who opt in to one or both of the programs at a cost of 75
basis points per annum for senior unsecured debt and 10 basis points per annum
for non-interest bearing transaction deposits. The Bank made the business
decision to participate in the Transaction Account Guarantee Program, which
provides, without charge to depositors, a full guarantee on all non-interest
bearing transaction accounts through December 31, 2009. Also, the Bank and the
Company elected to participate in the Debt Guarantee Program, which provides for
the guarantee of eligible newly issued senior unsecured debt, although we do not
contemplate issuing any guaranteed debt under the program at this
time.




The
American Recovery and Reinvestment Act of 2009 (“ARRA”), signed into law on
February 17, 2009, amended the EESA as it applies to institutions that receive
financial assistance under TARP. ARRA, more commonly known as the economic
stimulus or economic recovery package, includes a wide variety of programs
intended to stimulate the economy and provide for extensive infrastructure,
energy, health, and education needs. In addition, ARRA imposes certain new
executive compensation and corporate expenditure limits on all current and
future TARP recipients until the institution has repaid the
Treasury.




In
addition, the Internal Revenue Service (“IRS”) has issued an unprecedented wave
of guidance in response to the credit crisis, including a relaxation of limits
on the ability of financial institutions that undergo an “ownership change” to
utilize their pre-change net operating losses and net unrealized built-in
losses. The relaxation of these limits may make significantly more attractive
the acquisition of financial institutions whose tax basis in their loan
portfolios significantly exceeds the fair market value of those
portfolios.




Before
and after EESA, there have been numerous actions by the Federal Reserve Board,
Congress, the Treasury, the FDIC, the IRS, the SEC and others to further the
economic and banking industry stabilization efforts. It remains unclear at this
time what further legislative and regulatory measures will be implemented
affecting the Company. To date, the Company or the Bank has elected to
participate only in the FDIC’s Debt Guarantee Program and Transaction Account
Guarantee Program. Both of these programs are part of the FDIC’s Temporary
Liquidity Guarantee Program and are further discussed in Item 1 - Business -
Regulation - Insurance of Deposits.





31







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 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.





32







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, 2008.


Description
      and Address
              Owned
      or Leased
              Year
      Opened
              
              Total
      Deposits(in thousands)
              
              
              Net
      Book Value of Property, Furniture & Fixtures
                  (in
      thousands)
              
              
              Approximate
      Square FootageLocations
      in Madison, Indiana:Downtown
      Office:233
      East Main Street
              Owned
              1952
              
              $
              38,961
              
              
              $
              359
              
              
              
              9,110Drive-Through
      Branch:401
      East Main Street
              Owned
              1984
              
              
              
              
              
              
              225
              
              
              
              420Hilltop
      Location:430
      Clifty Drive
              Owned
              1983
              
              
              169,412
              
              
              
              2,722
              
              
              
              18,696Wal-Mart
      Banking Center:567
      Ivy Tech Drive
              Leased
              1995
              
              
              7,405
              
              
              
              17
              
              
              
              517Location
      in Hanover, Indiana:10
      Medical Plaza Drive
              Owned
              1995
              
              
              9,918
              
              
              
              376
              
              
              
              1,344Location
      in Charlestown, Indiana:1025
      Highway 62
              Leased/Land
              2002
              
              
              3,265
              
              
              
              509
              
              
              
              1,500Location
      in Sellersburg, Indiana:Highway
      311
              Owned
              2005
              
              
              8,866
              
              
              
              2,695
              
              
              
              13,000Location
      in Floyds Knobs, Indiana3660
      Paoli Pike
              Leased
              2008
              
              
              6,256
              
              
              
              603
              
              
              
              3,000Location
      in Carrollton, Kentucky:1501
      Highland Avenue
              Leased
              2003
              
              
              3,694
              
              
              
              198
              
              
              
              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 $272,000 at
December 31, 2008.




The Bank
operates 13 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.





33




ITEM
      3.   LEGAL
PROCEEDINGS.




As
previously reported, most recently in the Form 10-Q for the quarter ended
September 30, 2008, 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 denied the
plaintiffs’ allegations but, as previously reported, the Bank, along with the
other trustee defendants, agreed to terms for a settlement of the plaintiffs’
claims. Pursuant to the settlement agreement, the Bank contributed $110,000 into
an escrow account established for the settlement fund. The settlement was
submitted to the court for approval, and the court signed a preliminary approval
order. At a final hearing on the approval order on January 23, 2009, the court
entered a final judgment approving the class action settlement. The judgment was
not appealed. The Bank has no further obligations under the settlement agreement
and has been released by the class members from all claims relating to the
Pre-Need Trust.




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.




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, 2008.




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 PresidentMark
      A. Goley
                        
                        
                        
                        Vice
      President of LendingWilliam
      H. Hensler
                        
                        
                        
                        Vice
      President – Wealth ManagementJohn
      Muessel
                        
                        
                        
                        Vice
      President – Trust
Officer




Matthew P. Forrester (age 52)
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 60)
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.





34







Vickie L. Grimes (age 53) 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 37)
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.




Mark A. Goley(age 53) has
served as Vice President of Loan Services since 1997. From 1989 to 1997, he
served as Senior Loan Officer for Citizens.




William H. Hensler (age 45)
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.




John Muessel(age 56) 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.





35







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 1,500,322 common shares of River Valley Bancorp outstanding at February 23,
2009, held of record by approximately 337 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 2006. 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
      Distributions2008December 31
              
              $
              15.88
              
              
              $
              11.24
              
              
              $
              0.210September
      30
              
              
              15.88
              
              
              
              13.25
              
              
              
              0.210June
      30
              
              
              16.50
              
              
              
              14.25
              
              
              
              0.210March
      31
              
              
              18.00
              
              
              
              13.79
              
              
              
              0.2102007December 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
              
              
              
              0.195




The high
and low sale prices for the Holding Company’s common shares between
December 31, 2008 and February 23, 2009, were $12.90 and $9.15,
respectively.




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





36







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
following table sets forth the number and prices paid for repurchased
shares.




Issuer
      Purchases of Equity SecuritiesMonth of Purchase
                
                Total
      Number of Shares Purchased
                
                
                Average
      Price Paid per Share
                
                
                Total
      Number of Shares Purchased as Part of Publicly Announced Plans orPrograms (2)
                
                
                Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
      Under the Plans orPrograms(2)October
      1 – October 31, 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -November
      1 – November 30, 2008
                
                
                139,559
                (1)
                
                $
                13.00
                
                
                
                -
                
                
                
                -December
      1 – December 31, 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                139,559
                
                
                
                -
                
                
                
                -
                
                
                
                -


_______________________


(1)
            These
      shares were repurchased on November 13, 2008, from one of the Company’s
      largest shareholders, Tontine Financial Partners, L.P. The purchase was
      carried out on the open market at a price per share of
    $13.00.


(2)
            We
      do not have in place a publicly announced plan or program to repurchase
      our common stock.





37







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 - 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 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Selected
      consolidated financial condition data:
              
              (In
      thousands)Total
      amount of:Assets
              
              $
              372,344
              
              
              $
              350,061
              
              
              $
              342,249
              
              
              $
              328,748
              
              
              $
              289,427Loans
      receivable - net
              
              
              285,304
              
              
              
              258,628
              
              
              
              241,887
              
              
              
              228,885
              
              
              
              230,513Cash
      and cash equivalents
              
              
              10,033
              
              
              
              8,137
              
              
              
              11,808
              
              
              
              17,730
              
              
              
              12,437Investment
      securities
              
              
              52,284
              
              
              
              58,999
              
              
              
              65,150
              
              
              
              59,609
              
              
              
              26,964Deposits
              
              
              247,777
              
              
              
              219,682
              
              
              
              220,238
              
              
              
              206,733
              
              
              
              170,538FHLB
      advances and other borrowings
              
              
              97,217
              
              
              
              102,217
              
              
              
              95,217
              
              
              
              96,782
              
              
              
              94,600Shareholders’
      equity
              
              
              24,540
              
              
              
              25,677
              
              
              
              24,147
              
              
              
              23,018
              
              
              
              22,393







Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Summary
      of consolidated income data:
                  
                  (In
      thousands, except share data)Total
      interest income
                  
                  $
                  20,335
                  
                  
                  $
                  20,558
                  
                  
                  $
                  18,910
                  
                  
                  $
                  16,298
                  
                  
                  $
                  13,545Total
      interest expense
                  
                  
                  10,876
                  
                  
                  
                  12,334
                  
                  
                  
                  11,053
                  
                  
                  
                  8,155
                  
                  
                  
                  5,617Net
      interest income
                  
                  
                  9,459
                  
                  
                  
                  8,224
                  
                  
                  
                  7,857
                  
                  
                  
                  8,143
                  
                  
                  
                  7,928Provision
      for losses on loans
                  
                  
                  1,080
                  
                  
                  
                  562
                  
                  
                  
                  264
                  
                  
                  
                  288
                  
                  
                  
                  338Net
      interest income after provision for losses on loans
                  
                  
                  8,379
                  
                  
                  
                  7,662
                  
                  
                  
                  7,593
                  
                  
                  
                  7,855
                  
                  
                  
                  7,590Other
      income
                  
                  
                  3,212
                  
                  
                  
                  2,992
                  
                  
                  
                  2,516
                  
                  
                  
                  2,500
                  
                  
                  
                  2,518General,
      administrative and other expense
                  
                  
                  8,383
                  
                  
                  
                  7,675
                  
                  
                  
                  7,323
                  
                  
                  
                  7,094
                  
                  
                  
                  6,342Income
      before income tax expense
                  
                  
                  3,208
                  
                  
                  
                  2,979
                  
                  
                  
                  2,786
                  
                  
                  
                  3,261
                  
                  
                  
                  3,766Income
      tax expense
                  
                  
                  713
                  
                  
                  
                  770
                  
                  
                  
                  841
                  
                  
                  
                  1,175
                  
                  
                  
                  1,419Net
      income
                  
                  $
                  2,495
                  
                  
                  $
                  2,209
                  
                  
                  $
                  1,945
                  
                  
                  $
                  2,086
                  
                  
                  $
                  2,347Basic
      earnings per share
                  
                  $
                  1.54
                  
                  
                  $
                  1.36
                  
                  
                  $
                  1.21
                  
                  
                  $
                  1.32
                  
                  
                  $
                  1.48Diluted
      earnings per share
                  
                  $
                  1.53
                  
                  
                  $
                  1.34
                  
                  
                  $
                  1.18
                  
                  
                  $
                  1.27
                  
                  
                  $
                  1.42
  38


Year
      Ended December 31,Selected
      financial ratios and other data:
                
                2008
                
                2007
                
                2006
                
                2005
                
                2004Interest
      rate spread during period
                
                
                2.73
                %
                
                
                2.50
                %
                
                
                2.53
                %
                
                
                2.79
                %
                
                
                3.13
                %Net
      yield on interest-earning assets (1)
                
                
                2.81
                
                
                
                2.56
                
                
                
                2.55
                
                
                
                2.82
                
                
                
                3.19Return
      on assets (2)
                
                
                .69
                
                
                
                .64
                
                
                
                .59
                
                
                
                .63
                
                
                
                .88Return
      on equity (3)
                
                
                9.71
                
                
                
                8.92
                
                
                
                8.27
                
                
                
                9.06
                
                
                
                10.46Equity
      to assets (4)
                
                
                6.59
                
                
                
                7.21
                
                
                
                7.06
                
                
                
                7.00
                
                
                
                7.73Average
      interest-earning assets to average interest-bearing
      liabilities
                
                
                102.14
                
                
                
                101.49
                
                
                
                100.68
                
                
                
                101.29
                
                
                
                102.51Non-performing
      assets to total assets (4)
                
                
                .35
                
                
                
                .57
                
                
                
                .33
                
                
                
                .61
                
                
                
                0.76Allowance
      for loan losses to total loans outstanding (4)
                
                
                .82
                
                
                
                .83
                
                
                
                .89
                
                
                
                1.00
                
                
                
                1.02Allowance
      for loan losses to non-performing loans (4)
                
                
                226.22
                
                
                
                120.99
                
                
                
                195.33
                
                
                
                132.80
                
                
                
                107.41Net
      charge-offs to average total loans outstanding
                
                
                .32
                
                
                
                .21
                
                
                
                .17
                
                
                
                0.14
                
                
                
                0.01General,
      administrative and other expense to average assets (5)
                
                
                2.34
                
                
                
                2.23
                
                
                
                2.19
                
                
                
                2.29
                
                
                
                2.38Dividend
      payout ratio
                
                
                54.90
                
                
                
                60.45
                
                
                
                66.53
                
                
                
                61.02
                
                
                
                50.70Number
      of full service offices (4)
                
                
                8
                
                
                
                7
                
                
                
                7
                
                
                
                7
                
                
                
                6





(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, 2008, 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.





39







Effect
of Current Events




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




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




In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, the government has responded with a number of new and amended
regulatory provisions. Many of these provisions directly or indirectly impact
the Company, including the EESA, TARP and the related CPP program, and changes
to the federal deposit insurance program. Many of these new regulations and
their effect on the Company are discussed in Item 1 - Business -
Regulation.




Although
the Company’s fundamental banking practices and policies have protected it from
the significant write-downs and disruption being experienced in the industry,
the Company will continue to monitor and enhance its stability in this uncertain
environment. In November 2008, although the Bank met all applicable regulatory
capital requirements and remained well capitalized, the Company made a
preliminary determination that obtaining additional capital pursuant to the CPP
for contribution in whole or in part to the Bank might become advisable. As a
result, the Company filed an initial application pursuant to the CPP with its
regulator, the OTS, seeking approval to sell $8,100,000 in preferred stock to
the Treasury (which equalled approximately 3% of its total risk weighted assets
as of September 30, 2008). The Company received preliminary approval of its
application, and the Company called a Special Meeting of Shareholders on March
10, 2009, to consider whether to amend the Company’s Articles of Incorporation
in a manner that would permit the Company to issue preferred stock to the
Treasury or similar investors.




Although
the shareholders approved the amendment of the Articles of Incorporation, which
became effective on March 13, 2009, the Board of Directors, after careful
consideration, has determined the Company will decline to participate in the
TARP’s CPP.




Institutions
like the Company were expected and encouraged by their regulators to apply for
capital infusions through the CPP, even though the Bank is “well capitalized” by
regulatory standards. After the Treasury announced the CPP as part of its
emergency legislation, the applications were due less than a month after release
of the application guidelines. Many companies, like us, applied for the funds as
a way to preserve the option while engaging in a more thorough review of the
advantages and consequences. This review has been complicated by ongoing
adoption of new legislation and new regulations that will apply to recipients of
the TARP money, many of which stipulations conflict with each other or are
unclear. In fact, after the changes implemented as recently as February 17,
2009, with the adoption of the American Recovery and Reinvestment Act of 2009,
companies that have already closed and accepted TARP money have been given the
option of returning the money and leaving the program.





40







The Board
of Directors, after evaluating many factors affecting the Company’s
capitalization, including the state of the national and local economy, our loan
quality, and our general conservative banking practices, among other things, has
determined that the Company will not participate in the TARP’s CPP.




EESA
followed, and has been followed by, numerous actions by the Federal Reserve,
Congress, Treasury, the SEC and others to address the current liquidity and
credit crisis that has followed the sub-prime meltdown that commenced in 2007.
These measures include homeowner relief that encourage loan restructuring and
modification; the establishment of significant liquidity and credit facilities
for financial institutions and investment banks; the lowering of the federal
funds rate, including two 50 basis point decreases in October of 2008; emergency
action against short selling practices; a temporary guaranty program for money
market funds; the establishment of a commercial paper funding facility to
provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.




It is not
clear at this time what impact the EESA, the TARP CPP, the Temporary Liquidity
Guarantee Program, ARRA and other liquidity and funding initiatives, whether
previously announced or that may be initiated in the future, will have on the
financial markets and the other difficulties described above, including the
extreme levels of volatility and limited credit availability currently being
experienced, or on the U.S. banking and financial industries and the broader
U.S. and global economies. Further adverse effects could have an adverse effect
on the Company and its business.




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




The Current Economic Environment
Poses Challenges For Us and Could Adversely Affect Our Financial Condition and
Results of Operations.We are operating in a challenging and uncertain
economic environment, including generally uncertain national conditions and
local conditions in our markets. The capital and credit markets have been
experiencing volatility and disruption for more than 12 months. The volatility
and disruption has reached unprecedented levels. The risks associated with our
business become more acute in periods of a slowing economy or slow growth.
Financial institutions continue to be affected by sharp declines in the real
estate market and constrained financial markets. While we are taking steps to
decrease and limit our exposure to problem loans, we nonetheless retain direct
exposure to the residential and commercial real estate markets, and we are
affected by these events.




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





41







Impact of Recent and Future
Legislation. Congress and the Treasury Department have recently adopted
legislation and taken actions to address the disruptions in the financial system
and declines in the housing market. See Item 1 - Business - Regulation - Recent
Legislative Developments. It is not clear at this time what impact EESA, TARP,
ARRA and other liquidity and funding initiatives of the Treasury and other bank
regulatory agencies that have been previously announced, and any additional
programs that may be initiated in the future, will have on the financial markets
and the financial services industry. The extreme levels of volatility and
limited credit availability currently being experienced could continue to affect
the U.S. banking industry and the broader U.S. and global economies, which will
have an effect on all financial institutions, including the Company. The actual
impact that EESA, ARRA and related measures undertaken to alleviate the credit
crisis will have on the financial markets is unknown. The failure of such
measures to help stabilize the financial markets, and a continuation or
worsening of current financial market conditions, could materially and adversely
affect our business, financial condition, results of operations, access to
credit or the trading price of our common stock. Finally, there can be no
assurance regarding the specific impact that such measures may have on us and no
assurance whether or to what extent we will be able to benefit from such
programs.




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




Additional Increases in Insurance
Premiums. The FDIC insures the Bank’s deposits up to certain limits. The
FDIC charges us premiums to maintain the Deposit Insurance Fund. The Bank
elected to participate in the FDIC’s Temporary Liquidity Guarantee Program,
which will increase its insurance premiums by 85 basis points per annum with
respect to the Bank’s deposits. Current economic conditions have increased
expectations for bank failures. The FDIC takes control of failed banks and
ensures payment of deposits up to insured limits using the resources of the
Deposit Insurance Fund. The FDIC has designated the Deposit Insurance Fund
long-term target reserve ratio at 1.25 percent of insured deposits. Due to
recent bank failures, the FDIC insurance fund reserve ratio has fallen below
1.15 percent, the statutory minimum. The FDIC has developed a restoration plan
that will uniformly increase insurance assessments by 7 basis points
(annualized) effective January 1, 2009. Effective April 1, 2009, the plan also
has made changes to the deposit insurance assessment system resulting in
increases in the assessment range for insured institutions. Further increases in
premium assessments would increase the Company’s expenses. Also, the FDIC has
announced a 20 basis point special assessment payable in September 2009
(possibly to be reduced to a 10 basis point assessment), as well as the
possibility of additional special assessments of up to 10 basis points after
June 2009, as necessary. See Item 1 - Business - Regulation - Insurance of
Deposits.




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




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





42







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




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




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




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




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




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




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




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







43







Concentrations of Real Estate Loans
Could Subject the Company to Increased Risks in the Event of a Real Estate
Recession or Natural Disaster. A significant portion of the Company’s
loan portfolio is secured by real estate. The real estate collateral in each
case provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended. A
weakening of the real estate market in our primary market area could result in
an increase in the number of borrowers who default on their loans and a
reduction in the value of the collateral securing their loans, which in turn
could have an adverse effect on our profitability and asset quality. If we are
required to liquidate the collateral securing a loan to satisfy the debt during
a period of reduced real estate values, our earnings and capital could be
adversely affected. Historically, Indiana and Kentucky have experienced, on
occasion, significant natural disasters, including tornadoes and floods. The
availability of insurance for losses for such catastrophes is limited. Our
operations could also be interrupted by such natural disasters. Acts of nature,
including tornadoes and floods, which may cause uninsured damage and other loss
of value to real estate that secures our loans or interruption in our business
operations, may also negatively impact our operating results or financial
condition.




Critical
Accounting Policies




Note 1 to
the Consolidated Financial Statements contains a summary of the Company’s
significant accounting policies for the year ended December 31, 2008.
Certain of these policies are important to the portrayal of the Company’s
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Management believes that its critical accounting policies include
determining the allowance for loan losses 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.





44







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.




An
unallocated reserve is maintained to recognize the imprecision in estimating and
measuring loss when evaluating reserves for individual loans or pools of loans.
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 Clark, Floyd and Jefferson counties
in southeastern Indiana and portions of northeastern Kentucky adjacent to that
market. When evaluating the adequacy of allowance, consideration is given to
this regional geographic concentration and the closely associated effect
changing economic conditions have on the 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.




As the
national economy worsened, the Bank aggressively managed delinquencies, with
overall delinquencies 30 or more days past due as of December 31, 2008 at 1.07%,
compared to 1.48% at the same date in 2007. Non-performing loans as of December
31, 2008 were $1.0 million, compared to $1.8 million at the same date in 2007,
and non-performing loans as a percent of total loans were .37% and .71%
respectively for those periods. Foreclosures were actively processed and at
December 31, 2008, the Bank held $259,000 in Real Estate Owned, as compared to
$184,000 at the same date a year earlier.




In
anticipation of an unavoidable decline in the local economy, the Bank increased
its analysis of problem loans and established higher levels of specific reserves
for potential losses. Net charge offs for the year ended December 31, 2008 were
$924,000 as compared to $530,000 for the same period in 2007. The major portion
of the year to year increase was the charge off of one relationship totaling
$453,000.





45







Valuation
of 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 income recorded from loan servicing in
the consolidated income statement. As of December 31, 2008, mortgage servicing
rights had a carrying value of $239,000.




Discussion
of Changes in Financial Condition from December 31, 2007 to
December 31, 2008




At
December 31, 2008, River Valley’s consolidated assets totaled $372.3
million, representing an increase of $22.3 million, or 6.4%, over the
December 31, 2007 total. The increase in assets was primarily attributable
to growth in the loan portfolio, from $258.6 million at December 31, 2007 to
$285.3 million at the same date in 2008, a growth of $26.7 million or 10.3%.
Asset growth was funded by similar growth in deposits with total deposits at
December 31, 2008 of $247.8 million, an increase of $28.1 million, or 12.8%,
compared to total deposits at December 31, 2007. Savings and demand deposits
decreased by $8.4 million, or 6.6%, during 2008, while certificates of deposit
experienced significant growth of $36.5 million, or 39.3%, for 2008. Total
certificates of deposit at December 31, 2008 totaled $129.4 million compared to
$92.9 million for 2007. Strong growth on both sides of the balance sheet point
to the effectiveness of the Bank’s expansion into new markets in Floyd and Clark
Counties in Indiana, and continued strong market share in the Jefferson County,
Indiana area.




Liquid
assets (i.e., cash,
federal funds sold, interest-earning deposits and certificates of deposit)
increased slightly by $1.9 million from December 31, 2007 levels to a total
of $10.0 million at December 31, 2008.




Investment
securities totaled $52.3 million at December 31, 2008, a decrease of $6.7
million from the $59.0 million at December 31, 2007. Maturities in the
investment portfolio were used to fund loan growth. In September of 2005 the
Company formed an investment subsidiary in Nevada with the sole purpose of
holding investment securities, as interest on these investments is not subject
to state taxation. This has resulted in tax savings for the
Company.




Investments
reported in the financial statements of the Company are held both at the Bank
level and at the Bank’s Nevada subsidiaries. The Company evaluates all
investments for other than temporary impairment quarterly. 2008 brought detailed
scrutiny of the Company’s investments, and in particular of asset quality and
changes in the fair values of the individual investments. The Company securities
are valued at fair value by a pricing service whose prices can be corroborated
by recent security trading activities. The Company’s portfolio is comprised of
the following:




Agency
investments, which includes AAA-rated Federal Home Loan Mortgage (FHLMC),
Federal National Mortgage Association (FNMA) and Federal Home Loan Bank (FHLB)
investments, at an average book yield of 4.89%, were at an unrealized gain
position at December 31, 2008. The total carrying value of $13.4 million
represents 25.6% of the total investment portfolio.




Collateralized
Mortgage Obligations, which includes FHLMC REMICs, at an average book yield of
6.35%, were at an unrealized gain position at December 31, 2008. The total
carrying value of $8.0 million represents 15.3% of the total investment
portfolio.





46







Mortgage
backed securities, which includes FHLMC Gold pools and FNMA pools, at an average
book yield of 5.34% were at an unrealized gain position at December 31, 2008.
The total carrying value of $11.0 million represents 21.0% of the total
investment portfolio.




Municipal
securities from a variety of sources, with an average tax equivalent yield of
5.67%, were at a net unrealized loss position at December 31, 2008. These
investments were rated Baa or better with 80% of these bonds rated A or better.
Two-thirds of these investments are general obligation (GO) bonds and the
remainder are revenue bonds. The total carrying value of $16.3 million
represents 31.2% of the total investment portfolio. At December 31, 2008, 50
municipal securities were at an unrealized loss position with gross unrealized
losses totaling $677,000. While these investments were at a net unrealized loss
at December 31, 2008, none of these investments was at an unrealized loss for 12
consecutive months or more. In addition, we are not aware of any credit quality
issues. Management has the ability and intent to hold these securities to
recovery, which may be maturity. Management has concluded that the impairment of
these securities is temporary at December 31, 2008 and is primarily a function
of current rates and market conditions.




Corporate
investments, rated A2 or better, with an average book yield of 3.97%, were at a
net unrealized loss position at December 31, 2008, but none was at an unrealized
loss for 12 consecutive months or more. Corporate investments, with total
carrying value of $3.6 million represent 7.0% of the total investment portfolio.
Corporate investments included three, or $2.56 million, of corporate obligations
and two, or $1.08 million, of inactively traded Trust Preferred issues. The
corporate obligations with a fair value of $2.56 million had an amortized cost
of $2.61 million at December 31, 2008. The corporate obligations were rated A2,
Aaa and A2 at December 31, 2008. Management has concluded that the impairment of
these securities is temporary at December 31, 2008 and is primarily a function
of current rates and market conditions. Both issues of Trust Preferred are pools
of financial institution and insurance trust debt. Since these issues are not
actively traded, and represent some potential risk to the Company simply by
virtue of their attributes, they are discussed individually below.




In
November 2007, the Company purchased $1.0 million face value of ALESC 9A A2A
class preferred trust stock at a price of $88.81. At December 31, 2008, this
investment was priced by a third party pricing service, at $35.00, a market
value of $350,000 and an amortized cost on that date of $890,000. The net
unrealized loss on this investment at December 31, 2008 was $540,000. The
Company has reviewed the pricing analytics reports for this investment and has
determined that the decline in the market price of this investment is temporary
and indicates thin trading activity, rather than a true decline in the value of
the investment. Factors considered in reaching this determination included the
class or “tranche” held by the Company, A2A, the current collateral position of
the tranche, projected cash flows as of December 31, 2008 and the credit rating
of Aaa. In February 2008, the Company purchased $1.0 million face value of
PRETSL XXVII LTD preferred trust stock at a price of $90.198. At December 31,
2008, this investment was priced by a third party pricing service, at $73.33, a
market value of $733,000 and an amortized cost on that date of $900,000. The net
unrealized loss on this investment at December 31, 2008 was $167,000. The
Company has reviewed the pricing analytics reports for this investment and has
determined that the decline in the market price of this investment is temporary
and indicates thin trading activity, rather than a true decline in the value of
the investment. Factors considered in reaching this determination included the
class or “tranche” held by the Company, A-1, the current collateral position of
the tranche, the projected cash flows as of December 31, 2008 and the credit
rating of Aaa. Management has the ability and intent to hold these securities to
recovery, which may be maturity. Based upon these factors, management has
determined these securities are not other than temporarily
impaired.





47







As
discussed above, loans receivable, excluding loans held for sale, totaled $285.3
million at December 31, 2008, an increase of $26.7 million from the $258.6
million total at December 31, 2007. Despite concerns in the real estate
markets in general, there were strong increases in consumer loans for one- to
four-family residential owner-occupied property loans ($10.2 million),
commercial real estate loans ($9.3 million), loans for land and developed
building lots ($7.0 million) and commercial purpose loans, most specifically
loans to small businesses and local schools ($1.0 million) originated during
2008, reflecting the strength in being a community based financial institution.
Construction lending dropped, a reflection of the depressed national
construction market, as did consumer lending. Loan growth was funded partially
by called and matured investments but primarily by increases in deposits for the
period.




Over the
same period, interest receivable on interest-earning assets decreased by
$209,000, or 8.7%, relecting the drop in interest rates resulting from the
reductions of the Prime rate by the Federal Reserve. Most radically affected by
the drops in the Prime interest rate were commercial loans and home equity lines
of credit which change directly with the Prime rate. The average yield on loans
at December 31, 2008 was 6.07%, a decrease of 0.94% from the rate of 7.01% at
December 31, 2007.




River
Valley’s consolidated allowance for loan losses totaled approximately $2.4
million for the year ended December 31, 2008 and $2.2 million for the year ended
December 31, 2007. The total allowance increased with only a slight change in
the allowance as a percent of loans outstanding, .82% at December 31, 2008 as
compared to .83% for the same date in 2007. The loan growth experienced in 2008
should represent limited exposure to the allowance for loan losses due to the
tightening of underwriting standards. The risk due to growth in these
economically challenging times was mitigated by selective underwriting of the
borrower and collateral securing the debt. For example, growth in commercial
loans not secured by real estate was primarily due to one loan of $1.5 million
made to a school system. Growth in commercial real estate and land loans
included: a loan of $4.5 million for a commercial complex in New Albany, Indiana
with solid tenants of a medical nature, at an approximate loan to value of 64%;
a loan of $1.7 million for an existing commerical strip, in a rapidly developing
area, at an approximate loan to value of 39.5%; a loan of $1.4 million to a long
time customer of the Bank originated in the second quarter of 2008 and currently
paid down to $1.0 million; and a loan of $1.3 million for commercial real estate
in southern Indiana at an approximate loan to value of 57%. The Bank is
conservative in its lending practices and does not originate the type of loans
publicized as “sub-prime” and therefore does not anticipate delinquencies other
than those normally associated with the economic trends of the Bank’s market
areas. As of December 31, 2008 those trends remained stable despite national
declines. The expense for the provision for loan losses increased to $1.1
million in 2008, an increase of 92.2% over the 2007 provision expense of
$562,000.




Non-performing
loans (defined as loans delinquent greater than 90 days and loans on non-accrual
status) totaled $1.0 million and $1.8 million at December 31, 2008 and
2007, respectively, an increase of $780,000. With the exception of a few loans
delinquent due to administrative delays in refinancing, the Bank’s
non-performing loans represent loans in the lengthy process of foreclosure, for
which appropriate specific loss reserves have been established.




Although
management believes that its allowance for loan losses at December 31,
2008, is 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.
Management is diligent in monitoring delinquent loans and in analyzing the
factors affecting the allowance. At December 31, 2008, the Bank held three
pieces of repossessed real estate valued at $259,000, as compared to two pieces
with a combined value of $184,000 at December 31, 2007.




Borrowings
totaled $97.2 million at December 31, 2008 versus $102.2 million on December 31,
2007. Of total borrowings, $90.0 million and $95.0 million represent Federal
Home Loan Bank (“FHLB”) advances with average rates of 4.61% and 4.64% at the
respective dates. The Bank has experienced a slower drop in the overall cost of
funds as a result of these longer term borrowing rates, which average slightly
less than 1% over the highest paying certificate of deposit rate for the
Bank.





48







Shareholders’
equity totaled $24.5 million at December 31, 2008, a slight decrease of
$1.1 million, or 4.4%, from the $25.7 million total at December 31, 2007. A
significant factor in this decease was the repurchase of 139,559 shares of
Company stock in November from a shareholder at a purchase price of $13.00 per
share ($1.8 million). Other factors contributing to the change in shareholders’
equity included dividends paid during the period of $1.3 million, a net change
in the unrealized loss position on available for sale securities of $.5 million,
and net income of $2.5 million.






Comparison
of Results of Operations for the Years Ended December 31, 2008 and
2007




General




River
Valley’s net income for the year ended December 31, 2008, totaled $2.5
million, an increase of $286,000, or 13.0 %, from net income of $2.2 million
reported for the same period in 2007. The increase in net income was primarily
attributable to growth in interest-earning assets, loans in particular, and
improvement in the spread on interest-bearing items, with net interest income
increasing by 15.0% year to year, and in non-interest income, most specifically
income from the gain on loan sales to the secondary market, which increased by
121.2% over 2007 levels. Income tax expense decreased despite the overall
increase in income, with a drop in the effective tax rate from 25.9% in 2007 to
22.2% in 2008, a dollar drop of $57,000. Income from municipal investments held
at the Company’s Nevada subsidiaries and increases in the cash surrender value
of bank owned life insurance contributed to this drop in the effective tax
rate.




Net
Interest Income




Total
interest income for the year ended December 31, 2008, amounted to $20.3
million, a slight decrease of $224,000, or 1.1%, from the 2007 total. The
average balance of interest-earning assets outstanding year-to-year increased by
$16.1 million, but due to the dramatic decreases in interest rates during 2008,
the yield on those assets decreased from an average yield of 6.40% in 2007 to
6.03% in 2008. Interest income on loans totaled $17.5 million for 2008, a slight
increase of approximately $180,000, or 1.0%, from the $17.3 million reported for
2007. Interest income on investments, FHLB stock and interest-earning deposits
decreased by $403,000, or 12.6%. While drops in the yields on these assets had
some effect, this decrease was primarily due to decreases in the average
balances of these assets.




Total
interest expense for the period ended December 31, 2008 exhibited significant
declines with a decrease of $1.4 million, or 11.4%, from $12.3 million at
December 31, 2007, to $10.9 million at December 31, 2008. Interest expense on
deposits alone decreased by $1.6 million, or 21.2%, to a total of $6.0 million
for the year ended December 31, 2008. This was due to the interest rates
decreases, despite strong deposit growth over the period. Repricing of
certificates of deposits, and growth in those types of deposits, fueled the
overall rate decrease. The cost of deposits decreased from 3.90% in 2007 to
3.30% in fiscal 2008. Interest expense on borrowings totaled $4.8 million for
the year ended December 31, 2008, an increase of $161,000 from 2007
resulting primarily from the 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 2008 by $1.2 million, or 15.0%, compared to
2007. The interest rate spread increased by 23 basis points from 2.50% in 2007
to 2.73% in 2008, while the net interest margin increased from 2.56% in 2007 to
2.81% at the end of 2008.





49







Provision
for Losses on Loans




A
provision for losses on loans is charged to income to bring the total allowance
for loan losses to a level considered appropriate by management based upon
historical experience, the volume and type of lending conducted by the Bank, 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 $1.1 million provision for losses on loans in
2008, an increase of $518,000 or 92.2%, compared to the $560,000 provision
recorded in 2007. 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 and economy. The increase in the
provision year-to-year was predicated primarily on estimated losses with impact
for the current local economic environment.




Non-performing
loans for the period ended December 31, 2008 were $1.0 million, a decrease
of $780,000, or 44.4%, from the $1.8 million recorded as of fiscal year ended
2007. The decrease reflects the charge off of some long standing problem loans
and aggressive management of past due accounts.




While
management believes that the allowance for losses on loans is adequate at
December 31, 2008, there can be no assurance that the loan loss allowance
will be adequate to cover losses in the future. Management continues to be
conservative in its underwriting, as discused above, in its classification of
problem loans and in establishing realistic reserves for potential losses on
loans. As of December 31, 2008, the local economy remained relatively stable, as
exhibited by employer activity and delinquency figures, despite grim national
trends.




Other
Income




Other
income amounted to $3.2 million for the year ended December 31, 2008, an
increase of $356,000, or 13.8%, compared to 2007. This increase was fueled
primarily by sales of one- to four-family residential loans to the secondary
market and gains on the sale of investments during the period offset by losses
on sales of foreclosed property. Unlike interest income, “Other Income” is not
always readily predictable and is subject to variations depending on outside
influences.




General,
Administrative and Other Expense




General,
administrative and other expense totaled $8.4 million for the year ended
December 31, 2008, an increase of $844,000, or 10.7%, over the 2007 total.
Increases in personnel and occupancy costs relative to the opening of the Floyds
Knobs, Indiana branch contributed to this increase, along with data processing
costs relative to ATM usage, and loan administration costs, which mirror loan
growth and loan sales, and increases in the FDIC assessment. Decreases in
professional fees from the higher fees reported in 2007 (which higher 2007 fees
were a result of implementation of Sarbanes-Oxley, as well as additional costs
arising from the litigation described in Part I, Item 3, of this Form 10-K) and
in the amortization expense relative to servicing rights on mortgages sold to
Freddie Mac (FM) (due to declines in FM sales over the past three years) offset
some of the expense increase.




Income
Taxes




The
provision for income taxes decreased by $57,000, or 7.4%, to a total of $713,000
for the year ended December 31, 2008, as compared to $770,000 for the same
period in 2007. The effective tax rate for the year ended December 31, 2008 was
22.2% as compared to 25.9% for the same period in 2007. The decrease continues
to reflect the effect of tax-exempt income from municipal investments held at
the Bank’s Nevada subsidiary, and the cash surrender value of bank owned life
insurance.





50




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.




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.





51







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.




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.





52







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.





Year
      Ended December 31,2008
                
                
                2007
                
                
                2006Average
      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
                
                $
                5,073
                
                
                $
                136
                
                
                
                2.68
                %
                
                $
                5,765
                
                
                $
                351
                
                
                
                6.09
                %
                
                $
                5,807
                
                
                $
                286
                
                
                
                4.93
                %Other
      securities (1)
                
                
                41,009
                
                
                
                1,803
                
                
                
                4.40
                
                
                
                57,632
                
                
                
                2,505
                
                
                
                4.35
                
                
                
                63,258
                
                
                
                2,557
                
                
                
                4.04Mortgage-backed
      securities (1)
                
                
                13,231
                
                
                
                686
                
                
                
                5.18
                
                
                
                2,605
                
                
                
                142
                
                
                
                5.45
                
                
                
                74
                
                
                
                4
                
                
                
                5.41Loans
      receivable (2)
                
                
                273,007
                
                
                
                17,527
                
                
                
                6.42
                
                
                
                250,420
                
                
                
                17,347
                
                
                
                6.93
                
                
                
                234,886
                
                
                
                15,865
                
                
                
                6.75FHLB
      stock
                
                
                4,813
                
                
                
                183
                
                
                
                3.80
                
                
                
                4,575
                
                
                
                213
                
                
                
                4.66
                
                
                
                4,113
                
                
                
                198
                
                
                
                4.81Total
      interest-earning assets
                
                
                337,133
                
                
                
                20,335
                
                
                
                6.03
                
                
                
                320,997
                
                
                
                20,558
                
                
                
                6.40
                
                
                
                308,138
                
                
                
                18,910
                
                
                
                6.14Non-interest
      earning assets, net of allowance for loan losses
                
                
                21,871
                
                
                
                
                
                
                
                
                
                
                
                22,624
                
                
                
                
                
                
                
                
                
                
                
                23,590Total
      assets
                
                $
                359,004
                
                
                
                
                
                
                
                
                
                
                $
                343,621
                
                
                
                
                
                
                
                
                
                
                $
                331,728Liabilities/shareholder
      equityInterest-bearing
      liabilities:Savings
      deposits
                
                $
                40,593
                
                
                $
                535
                
                
                
                1.32
                %
                
                $
                42,081
                
                
                $
                1,105
                
                
                
                2.63
                %
                
                $
                41,228
                
                
                $
                963
                
                
                
                2.34
                %Interest-bearing
      demand (3)
                
                
                67,649
                
                
                
                607
                
                
                
                0.90
                
                
                
                75,509
                
                
                
                1,839
                
                
                
                2.44
                
                
                
                74,492
                
                
                
                1,826
                
                
                
                2.45Certificates
      of deposit
                
                
                121,247
                
                
                
                4,892
                
                
                
                4.03
                
                
                
                101,800
                
                
                
                4,709
                
                
                
                4.63
                
                
                
                103,706
                
                
                
                4,175
                
                
                
                4.03FHLB
      advances and other borrowings
                
                
                100,583
                
                
                
                4,842
                
                
                
                4.81
                
                
                
                96,884
                
                
                
                4,681
                
                
                
                4.83
                
                
                
                86,635
                
                
                
                4,089
                
                
                
                4.72Total
      interest-bearing liabilities
                
                
                330,072
                
                
                
                10,876
                
                
                
                3.30
                
                
                
                316,274
                
                
                
                12,334
                
                
                
                3.90
                
                
                
                306,061
                
                
                
                11,053
                
                
                
                3.61Other
      liabilities
                
                
                3,240
                
                
                
                
                
                
                
                
                
                
                
                2,575
                
                
                
                
                
                
                
                
                
                
                
                2,142Total
      liabilities
                
                
                333,312
                
                
                
                
                
                
                
                
                
                
                
                318,849
                
                
                
                
                
                
                
                
                
                
                
                308,203Total
      equity
                
                
                25,692
                
                
                
                
                
                
                
                
                
                
                
                24,772
                
                
                
                
                
                
                
                
                
                
                
                23,525Total
      liabilities and equity
                
                $
                359,004
                
                
                
                
                
                
                
                
                
                
                $
                343,621
                
                
                
                
                
                
                
                
                
                
                $
                331,728Net
      interest earning assets
                
                $
                7,061
                
                
                
                
                
                
                
                
                
                
                $
                4,723
                
                
                
                
                
                
                
                
                
                
                $
                2,077Net
      interest income
                
                
                
                
                
                $
                9,459
                
                
                
                
                
                
                
                
                
                
                $
                8,224
                
                
                
                
                
                
                
                
                
                
                $
                7,857Interest
      rate spread (4)
                
                
                
                
                
                
                
                
                
                
                2.73
                %
                
                
                
                
                
                
                
                
                
                
                2.50
                %
                
                
                
                
                
                
                
                
                
                
                2.53
                %Net
      yield on weighted average interest-earning assets (5)
                
                
                
                
                
                
                
                
                
                
                2.81
                %
                
                
                
                
                
                
                
                
                
                
                2.56
                %
                
                
                
                
                
                
                
                
                
                
                2.55
                %Average
      interest-earning assets to average bearing liabilities
                
                
                
                
                
                
                
                
                
                
                102.14
                %
                
                
                
                
                
                
                
                
                
                
                101.49
                %
                
                
                
                
                
                
                
                
                
                
                100.68
                %





(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 $20,995, $19,359, and
      $20,405.


(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.





53




Rate/Volume
Table




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




Year
      Ended December 31,2008
      vs. 2007
              
              
              2007
      vs. 2006Volume
              
              
              Increase
      (decrease)due to Rate
              
              
              Total
              
              
              Volume
              
              
              Increase
      (decrease)due to Rate
              
              
              Total(In
      thousands)Interest-earning
      assets:Interest-earning
      deposits and other
              
              $
              (27
              )
              
              $
              (218
              )
              
              $
              (245
              )
              
              $
              20
              
              
              $
              60
              
              
              $
              80Investment
      securities
              
              
              (180
              )
              
              
              22
              
              
              
              (158
              )
              
              
              (99
              )
              
              
              185
              
              
              
              86Loans
      receivable, net
              
              
              1,501
              
              
              
              (1,321
              )
              
              
              180
              
              
              
              1,069
              
              
              
              413
              
              
              
              1,482Total
              
              
              1,294
              
              
              
              (1,517
              )
              
              
              (223
              )
              
              
              990
              
              
              
              658
              
              
              
              1,648Interest-bearing
      liabilities:Deposits
              
              
              619
              
              
              
              (2,238
              )
              
              
              (1,619
              )
              
              
              (88
              )
              
              
              777
              
              
              
              689FHLB
      advances and other borrowings
              
              
              178
              
              
              
              (17
              )
              
              
              161
              
              
              
              493
              
              
              
              99
              
              
              
              592Total
              
              
              797
              
              
              
              (2,255
              )
              
              
              (1,458
              )
              
              
              405
              
              
              
              876
              
              
              
              1,281Net
      change in interest income
              
              $
              497
              
              
              $
              738
              
              
              $
              1,235
              
              
              $
              585
              
              
              $
              (218
              )
              
              $
              367




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, 2008 and December 31, 2007, 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.





54




As
      of December 31, 2008(Dollars
      in thousands)





Change
      in Interest Rates (basis points)
                                  
                                  Estimated
      NPV
                                  
                                  Amount
      of Change
                                  
                                  Percent+
                                  300
                                  
                                  $32,864
                                  
                                  
                                  $1,075
                                  
                                  
                                  +3
                                  %+
                                  200
                                  
                                  33,336
                                  
                                  
                                  1,548
                                  
                                  
                                  +5
                                  %+
                                  100
                                  
                                  33,053
                                  
                                  
                                  1,264
                                  
                                  
                                  +4
                                  %—
                                  
                                  31,789
                                  
                                  
                                  —
                                  
                                  
                                  —-
                                  100
                                  
                                  29,011
                                  
                                  
                                  (2,778
                                  )
                                  
                                  -9
                                  %-
                                  200
      (1)-
                                  300
      (1)







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)





(1)
            At
      December 31, 2008 and at December 31, 2007, the OTS did not provide
      information as to interest rate risk for a 300 point decrease. As of
      December 31, 2008 they also did not provide information as to interest
      rate risk for a 200 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.





55







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, 2008, River Valley
Financial Bank had commitments to originate loans totaling $7.8 million and in
addition, had undisbursed loans in process, unused lines of credit and standby
letters of credit totaling $29.5 million. At such date, River Valley Financial
Bank had $5.3 million 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, 2008, 2007 and 2006:




Year
      Ended December 31,2008
              
              
              2007
              
              
              2006(In
      thousands)Cash
      flows from operating activities
              
              $
              4,690
              
              
              $
              2,537
              
              
              $
              3,542Cash
      flows from investing activities:Purchase
      of securities
              
              
              (23,914
              )
              
              
              (18,181
              )
              
              
              (23,139
              )Proceeds
      from maturities of securities
              
              
              19,949
              
              
              
              16,483
              
              
              
              7,012Proceeds
      from sales of securities
              
              
              10,016
              
              
              
              8,910
              
              
              
              10,933Net
      loan originations
              
              
              (28,273
              )
              
              
              (17,715
              )
              
              
              (14,384
              )Other
              
              
              (521
              )
              
              
              (662
              )
              
              
              (861
              )Cash
      flows from financing activities:Net
      increase (decrease) in deposits
              
              
              28,095
              
              
              
              (556
              )
              
              
              13,505Net
      increase (decrease) in borrowings
              
              
              (5,000
              )
              
              
              7,000
              
              
              
              (1,565
              )Purchase
      of stock
              
              
              (1,821
              )
              
              
              (183
              )
              
              
              (46
              )Other
              
              
              (1,325
              )
              
              
              (1,304
              )
              
              
              (919
              )Net
      increase (decrease) in cash and cash equivalents
              
              $
              1,896
              
              
              $
              (3,671
              )
              
              $
              (5,922
              )




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.





56







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 $1.5
million at December 31, 2008.




River
Valley Financial exceeded all of its regulatory capital requirements at
December 31, 2008. The following table summarizes River Valley Financial’s
regulatory capital requirements and regulatory capital at December 31,
2008:




OTS
      Requirement
                
                
                Actual
      AmountPercent
      of Assets
                
                
                Amount
                
                
                Percent
      of Assets (1)
                
                
                Amount
                
                
                Amount
      of Excess(Dollars
      in thousands)Tangible
      capital
                
                
                1.50
                %
                
                $
                5,571
                
                
                
                8.11
                %
                
                $
                30,113
                
                
                $
                24,542Core
      capital (2)
                
                
                4.00
                %
                
                
                14,857
                
                
                
                8.11
                
                
                
                30,113
                
                
                
                15,256Risk-based
      capital
                
                
                8.00
                %
                
                
                22,445
                
                
                
                11.28
                
                
                
                31,635
                
                
                
                9,190





(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.





57







ITEM
      8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY
  DATA.










River
Valley Bancorp




December
31, 2008 and 2007














Contents









Report
      of Independent Registered Public Accounting Firm
              59Consolidated
      Financial StatementsBalance
      Sheets
              60Statements
      of Income
              61Statements
      of Comprehensive Income
              62Statements
      of Stockholders’ Equity
              63Statements
      of Cash Flows
              64Notes
      to Financial Statements
              65










58





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, 2008 and 2007, and the related consolidated statements of
income, comprehensive income, shareholders’ equity and cash flows for each of
the years then ended. The Company's management is responsible for these
financial statements. 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 audits 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. Our audits also included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and 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, 2008, and 2007, and the results of its operations and its cash
flows for each of the years then ended in conformity with accounting principles
generally accepted in the United States of America.





As
discussed in Note 17, the Company changed its method of accounting for fair
value measurements in accordance with Statement of Financial Accounting
Standards No. 157 in 2008.












Indianapolis,
Indiana


March 16,
2009












59





River
Valley Bancorp


Consolidated
Balance Sheets


December
31, 2008 and 2007


















2008
                  
                  
                  2007(In
      Thousands, Except Share Amounts)AssetsCash
      and due from banks
                  
                  $
                  3,645
                  
                  
                  $
                  5,131Interest-bearing
      demand deposits
                  
                  
                  6,388
                  
                  
                  
                  3,006Cash
      and cash equivalents
                  
                  
                  10,033
                  
                  
                  
                  8,137Investment
      securities available for sale
                  
                  
                  52,284
                  
                  
                  
                  58,999Loans
      held for sale
                  
                  
                  130
                  
                  
                  
                  312Loans,
      net of allowance for loan losses of $2,364 and $2,208
                  
                  
                  285,304
                  
                  
                  
                  258,628Premises
      and equipment
                  
                  
                  7,704
                  
                  
                  
                  7,631Real
      estate, held for sale
                  
                  
                  259
                  
                  
                  
                  184Federal
      Home Loan Bank stock
                  
                  
                  4,850
                  
                  
                  
                  4,750Interest
      receivable
                  
                  
                  2,187
                  
                  
                  
                  2,396Cash
      value of life insurance
                  
                  
                  7,871
                  
                  
                  
                  7,552Other
      assets
                  
                  
                  1,722
                  
                  
                  
                  1,472Total
      assets
                  
                  $
                  372,344
                  
                  
                  $
                  350,061LiabilitiesDepositsNoninterest-bearing
                  
                  $
                  21,393
                  
                  
                  $
                  18,619Interest-bearing
                  
                  
                  226,384
                  
                  
                  
                  201,063Total
      deposits
                  
                  
                  247,777
                  
                  
                  
                  219,682Borrowings
                  
                  
                  97,217
                  
                  
                  
                  102,217Interest
      payable
                  
                  
                  704
                  
                  
                  
                  724Other
      liabilities
                  
                  
                  2,106
                  
                  
                  
                  1,761Total
      liabilities
                  
                  
                  347,804
                  
                  
                  
                  324,384Commitments
      and ContingenciesStockholders’
      EquityPreferred
      stock, no par valueAuthorized
      and unissued - 2,000,000 sharesCommon
      stock, no par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding - 1,500,322 and 1,634,931 shares
                  
                  
                  7,409
                  
                  
                  
                  9,160Retained
      earnings
                  
                  
                  17,384
                  
                  
                  
                  16,237Accumulated
      other comprehensive gain (loss)
                  
                  
                  (253
                  )
                  
                  
                  280Total
      stockholders’ equity
                  
                  
                  24,540
                  
                  
                  
                  25,677Total
      liabilities and stockholders’ equity
                  
                  $
                  372,344
                  
                  
                  $
                  350,061











60





River
Valley Bancorp


Consolidated
Statements of Income


Years
Ended December 31, 2008 and 2007




2008
                
                
                2007(In
      Thousands, Except Per Share Amounts)Interest
      IncomeLoans
      receivable
                
                $
                17,527
                
                
                $
                17,347Investment
      securities
                
                
                2,489
                
                
                
                2,647Interest-earning
      deposits and other
                
                
                319
                
                
                
                564Total
      interest income
                
                
                20,335
                
                
                
                20,558Interest
      ExpenseDeposits
                
                
                6,034
                
                
                
                7,653Borrowings
                
                
                4,842
                
                
                
                4,681Total
      interest expense
                
                
                10,876
                
                
                
                12,334Net
      Interest Income
                
                
                9,459
                
                
                
                8,224Provision
      for loan losses
                
                
                1,080
                
                
                
                562Net
      Interest Income After Provision for Loan Losses
                
                
                8,379
                
                
                
                7,662Other
      IncomeService
      fees and charges
                
                
                2,111
                
                
                
                2,138Net
      realized gains (losses) on sales of available-for-sale
      securities
                
                
                52
                
                
                
                (21
                )Net
      gains  on loan sales
                
                
                230
                
                
                
                104Interchange
      fee income
                
                
                290
                
                
                
                136Increase
      in cash value of life insurance
                
                
                320
                
                
                
                330Trust
      operations income
                
                
                157
                
                
                
                194Other
      income
                
                
                52
                
                
                
                111Total
      other income
                
                
                3,212
                
                
                
                2,992Other
      ExpensesSalaries
      and employee benefits
                
                
                4,807
                
                
                
                4,198Net
      occupancy and equipment expenses
                
                
                1,245
                
                
                
                1,184Data
      processing fees
                
                
                378
                
                
                
                178Advertising
                
                
                379
                
                
                
                332Mortgage
      servicing rights
                
                
                164
                
                
                
                295Office
      supplies
                
                
                142
                
                
                
                123Professional
      fees
                
                
                217
                
                
                
                400Other
      expenses
                
                
                1,051
                
                
                
                965Total
      other expenses
                
                
                8,383
                
                
                
                7,675Income
      Before Income Tax
                
                
                3,208
                
                
                
                2,979Income
      tax expense
                
                
                713
                
                
                
                770Net
      Income
                
                $
                2,495
                
                
                $
                2,209Basic
      Earnings per Share
                
                $
                1.54
                
                
                $
                1.36Diluted
      Earnings per Share
                
                $
                1.53
                
                
                $
                1.34







61





River
Valley Bancorp


Consolidated
Statements of Comprehensive Income


Years
Ended December 31, 2008 and 2007









2008
                    
                    
                    2007(In
      Thousands)Net
      Income
                    
                    $
                    2,495
                    
                    
                    $
                    2,209Other
      comprehensive income(loss), net of
      taxUnrealized
      gains (losses) on securities available for saleUnrealized
      holding gains (losses) arising during the period, net of tax benefit
      (expense) of $267 and  ($324)
                    
                    
                    (501
                    )
                    
                    
                    595Less:  Reclassification
      adjustment for gains (losses) included in net income, net of tax benefit
      (expense) of ($20) and  $8
                    
                    
                    32
                    
                    
                    
                    (13
                    )(533
                    )
                    
                    
                    608Comprehensive
      Income
                    
                    $
                    1,962
                    
                    
                    $
                    2,817











62





River
Valley Bancorp


Consolidated
Statements of Stockholders’ Equity


Years
Ended December 31, 2008 and 2007









AccumulatedOtherComprehensiveCommon
                      
                      
                      Retained
                      
                      
                      IncomeShares
                      
                      
                      Stock
                      
                      
                      Earnings
                      
                      
                      (Loss)
                      
                      
                      TotalBalances,
      January 1, 2007
                      
                      
                      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
                      
                      
                      
                      25,677Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,495
                      
                      
                      
                      
                      
                      
                      
                      2,495Unrealized
      losses on securities, net of reclassification adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (533
                      )
                      
                      
                      (533
                      )Cash
      dividends ($.84 per share)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,348
                      )
                      
                      
                      
                      
                      
                      
                      (1,348
                      )Exercise
      of stock options
                      
                      
                      4,950
                      
                      
                      
                      8
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8Stock
      option expense
                      
                      
                      
                      
                      
                      
                      4
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4Amortization
      of expense related to stock compensation plans
                      
                      
                      
                      
                      
                      
                      58
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      58Purchase
      of stock
                      
                      
                      (139,559
                      )
                      
                      
                      (1,821
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,821
                      )Balances,
      December 31, 2008
                      
                      
                      1,500,322
                      
                      
                      $
                      7,409
                      
                      
                      $
                      17,384
                      
                      
                      $
                      (253
                      )
                      
                      $
                      24,540










63





River
Valley Bancorp


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2008 and 2007




2008
                
                
                2007(In
      Thousands)Operating
      ActivitiesNet
      income
                
                $
                2,495
                
                
                $
                2,209Items
      not requiring (providing) cashProvision
      for loan losses
                
                
                1,080
                
                
                
                562Depreciation
      and amortization
                
                
                603
                
                
                
                601Deferred
      income tax
                
                
                79
                
                
                
                (27
                )Investment
      securities (gain) loss
                
                
                (52
                )
                
                
                21Loans
      originated for sale in the secondary market
                
                
                (9,827
                )
                
                
                (6,303
                )Proceeds
      from sale of loans in the secondary market
                
                
                10,121
                
                
                
                6,040Gain
      on sale of loans
                
                
                (230
                )
                
                
                (104
                )Amortization
      of deferred loan origination cost
                
                
                122
                
                
                
                125Issuance
      of ESOP shares
                
                
                —
                
                
                
                175Amortization
      of expense related to stock benefit plans
                
                
                58
                
                
                
                24Net
      change inInterest
      receivable
                
                
                209
                
                
                
                (62
                )Interest
      payable
                
                
                (20
                )
                
                
                19Other
      adjustments
                
                
                52
                
                
                
                (743
                )Net
      cash provided by operating activities
                
                
                4,690
                
                
                
                2,537Investing
      ActivitiesPurchase
      of FHLB stock
                
                
                (100
                )
                
                
                (350
                )Purchases
      of securities available for sale
                
                
                (23,914
                )
                
                
                (18,181
                )Proceeds
      from maturities of securities available for sale
                
                
                19,949
                
                
                
                16,483Proceeds
      from sales of securities available for sale
                
                
                10,016
                
                
                
                8,910Net
      change in loans
                
                
                (28,273
                )
                
                
                (17,715
                )Purchases
      of premises and equipment
                
                
                (689
                )
                
                
                (415
                )Proceeds
      from sale of real estate acquired through foreclosure
                
                
                262
                
                
                
                103Other
      investing activities
                
                
                6
                
                
                
                —Net
      cash used in investing activities
                
                
                (22,743
                )
                
                
                (11,165
                )Financing
      ActivitiesNet
      change inNoninterest-bearing,
      interest-bearing demand and savings deposits
                
                
                (8,389
                )
                
                
                8,529Certificates
      of deposit
                
                
                36,484
                
                
                
                (9,085
                )Proceeds
      from borrowings
                
                
                37,000
                
                
                
                36,000Repayment
      of borrowings
                
                
                (42,000
                )
                
                
                (29,000
                )Cash
      dividends
                
                
                (1,376
                )
                
                
                (1,299
                )Purchase
      of stock
                
                
                (1,821
                )
                
                
                (183
                )Proceeds
      from exercise of stock options
                
                
                8
                
                
                
                103Advances
      by borrowers for taxes and insurance
                
                
                43
                
                
                
                (18
                )Acquisition
      of stock for stock benefit plans
                
                
                —
                
                
                
                (107
                )Tax
      benefit on stock options exercised
                
                
                —
                
                
                
                17Net
      cash provided by financing activities
                
                
                19,949
                
                
                
                4,957Net
      Change in Cash and Cash Equivalents
                
                
                1,896
                
                
                
                (3,671
                )Cash
      and Cash Equivalents, Beginning of Year
                
                
                8,137
                
                
                
                11,808Cash
      and Cash Equivalents, End of Year
                
                $
                10,033
                
                
                $
                8,137Additional
      Cash Flows InformationInterest
      paid
                
                $
                10,896
                
                
                $
                12,315Income
      tax paid
                
                
                937
                
                
                
                770Transfer
      of loans to real estate held for sale
                
                
                395
                
                
                
                287







64





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


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




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.







65





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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.




Loansthat management has the
intent and ability to hold for the foreseeable future or until maturity or
payoffs are reported at their outstanding principal balances adjusted for any
charge-offs, the allowance for loan losses, any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Generally, loans are placed
on non-accrual status at 90 days past due and interest is considered a loss,
unless the loan is well-secured and in the process of collection.




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




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




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




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




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







66





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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 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.




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 13. The Company accounts for this plan under the recognition and
measurement principles of Statement of Financial Accounting Standards (SFAS) No.
123(R), Share-Based
Payment.




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 2004.




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 2007 consolidated financial statements have been made to conform
to the 2008 presentation.




Current Economic Conditions
present financial institutions with unprecedented circumstances and challenges
which in some cases have resulted in large declines in the fair values of
investments and other assets, constraints on liquidity and significant credit
quality problems, including severe volatility in the valuation of real estate
and other collateral supporting loans. The financial statements have been
prepared using values and information currently available to the
Company.







67





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses, capital that
could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.




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, 2008 was
$740,000.




Note
      3:   Investment
Securities




2008Amortized
      Cost
                              
                              
                              Gross
      Unrealized Gains
                              
                              
                              Gross
      Unrealized Losses
                              
                              
                              Fair
      ValueAvailable
      for saleFederal
      agencies
                              
                              $
                              12,900
                              
                              
                              $
                              462
                              
                              
                              $
                              —
                              
                              
                              $
                              13,362State
      and municipal
                              
                              
                              16,978
                              
                              
                              
                              31
                              
                              
                              
                              677
                              
                              
                              
                              16,332Mortgage
      and other asset-backed securities
                              
                              
                              18,376
                              
                              
                              
                              573
                              
                              
                              
                              —
                              
                              
                              
                              18,949Corporate
                              
                              
                              4,414
                              
                              
                              
                              7
                              
                              
                              
                              780
                              
                              
                              
                              3,641Total
      investment securities
                              
                              $
                              52,668
                              
                              
                              $
                              1,073
                              
                              
                              $
                              1,457
                              
                              
                              $
                              52,2842007Amortized
      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
                              
                              
                              $
                              58,999








68





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







The
amortized cost and fair value of securities available for sale at December 31,
2008, 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
                    
                    $
                    1,997
                    
                    
                    $
                    2,021One
      to five years
                    
                    
                    8,903
                    
                    
                    
                    9,034Five
      to ten years
                    
                    
                    9,066
                    
                    
                    
                    8,923More
      than ten years
                    
                    
                    14,326
                    
                    
                    
                    13,35734,292
                    
                    
                    
                    33,335Mortgage
      and other asset-backed securities
                    
                    
                    18,376
                    
                    
                    
                    18,949Totals
                    
                    $
                    52,668
                    
                    
                    $
                    52,284





Securities
with a carrying value of $3,087,000 and $6,011,000 were pledged at
December 31, 2008 and 2007 to secure FHLB advances. Securities with a
carrying value of $15,779,000 and $17,004,000 were pledged at December 31,
2008 and 2007 to secure certain deposits and for other purposes as permitted or
required by law.




Proceeds
from sales of securities available for sale during 2008 and 2007 were
$10,016,000 and $8,910,000, respectively. Gross gains of $52,000 and $11,000 and
gross losses of $0 and $32,000 resulting from sales of available for sale
securities were realized for 2008 and 2007 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, 2008 and 2007, were $16,524,000 and $21,094,000, which is
approximately 31.6 percent and 35.7 percent of the Company’s investment
portfolio. Included in corporate securities at December 31, 2008 are two pooled
trust preferred issues with individual unrealized losses of $540,000 and
$168,000, respectively. These two securities are rated Aaa by Moodys indicating
these securities are considered of high quality and of very low credit risk.
Management believes that the decline in the market value is due primarily to the
interest rates, maturity dates (beyond 10 years) and thin trading
activity.




Management
has the ability and intent to hold securities with unrealized losses to
recovery, which may be maturity. Based on evaluation of available evidence,
including recent changes in market interest rates, management believes that any
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.







69





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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, 2008 and
December 31, 2007:




2008Less
      than 12 Months
                        
                        
                        12
      Months or More
                        
                        
                        TotalDescription
      of Securities
                        
                        Fair
      Value
                        
                        
                        Unrealized
      Losses
                        
                        
                        Fair
      Value
                        
                        
                        Unrealized
      Losses
                        
                        
                        Fair
      Value
                        
                        
                        Unrealized
      LossesState
      and Municipal
                        
                        $
                        13,400
                        
                        
                        $
                        (677
                        )
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        13,400
                        
                        
                        $
                        (677
                        )Corporate
      Securities
                        
                        
                        3,124
                        
                        
                        
                        (780
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,124
                        
                        
                        
                        (780
                        )Total
      temporarily impaired securities
                        
                        $
                        16,524
                        
                        
                        $
                        (1,457
                        )
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        16,524
                        
                        
                        $
                        (1,457
                        )
  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
                                
                                
                                $
                                81







Note
      4:   Loans and
Allowance




2008
                
                
                2007Residential
      real estateOne-to-four
      family residential
                
                $
                128,215
                
                
                $
                118,113Multi-family
      residential
                
                
                9,924
                
                
                
                10,274Construction
                
                
                10,999
                
                
                
                14,319Nonresidential
      real estate and land
                
                
                88,956
                
                
                
                81,064Commercial
                
                
                46,397
                
                
                
                34,649Consumer
      and other
                
                
                5,058
                
                
                
                6,036289,549
                
                
                
                264,455Unamortized
      deferred loan costs
                
                
                503
                
                
                
                494Undisbursed
      loans in process
                
                
                (2,384
                )
                
                
                (4,113
                )Allowance
      for loan losses
                
                
                (2,364
                )
                
                
                (2,208
                )Total
      loans
                
                $
                285,304
                
                
                $
                258,628










70





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









2008
                
                
                2007Allowance
      for loan lossesBalances,
      January 1
                
                $
                2,208
                
                
                $
                2,176Provision
      for losses
                
                
                1,080
                
                
                
                562Recoveries
      on loans
                
                
                124
                
                
                
                136Loans
      charged off
                
                
                (1,048
                )
                
                
                (666
                )Balances,
      December 31
                
                $
                2,364
                
                
                $
                2,208







Information
on impaired loans is summarized below.




2008
                
                
                2007Impaired
      loans with an allowance
                
                $
                3,268
                
                
                $
                668Impaired
      loans for which the discounted cash flows or collateralvalue exceeds
      the carrying value of the loan
                
                
                2,704
                
                
                
                3,516$
                5,972
                
                
                $
                4,184Allowance
      for impairment loans (included in the Company’sallowance for loan
      losses)
                
                $
                772
                
                
                $
                461







2008
                
                
                2007Average
      balance of impaired loans
                
                $
                3,825
                
                
                $
                3,748Interest
      income recognized on impaired loans
                
                
                257
                
                
                
                225Cash-basis
      interest included above
                
                
                93
                
                
                
                33







At
December 31, 2008 and 2007, the Company had non-accruing loans totaling
$1,045,000 and $1,825,000, respectively. At December 31, 2008 and 2007, there
were no accruing loans delinquent 90 days or more.









Note
      5:   Premises and
Equipment




2008
                
                
                2007Land
                
                $
                1,503
                
                
                $
                1,503Buildings
                
                
                6,972
                
                
                
                6,507Equipment
                
                
                3,744
                
                
                
                3,621Construction
      in progress
                
                
                10
                
                
                
                63Total
      cost
                
                
                12,229
                
                
                
                11,694Accumulated
      depreciation and amortization
                
                
                (4,525
                )
                
                
                (4,063
                )Net
                
                $
                7,704
                
                
                $
                7,631












71





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









Note
      6:   Deposits




2008
                  
                  
                  2007Demand
      deposits
                  
                  $
                  91,039
                  
                  
                  $
                  102,036Savings
      deposits
                  
                  
                  27,338
                  
                  
                  
                  24,730Certificates
      and other time deposits of $100,000 or more
                  
                  
                  62,166
                  
                  
                  
                  32,498Other
      certificates and time deposits
                  
                  
                  67,234
                  
                  
                  
                  60,418Total
      deposits
                  
                  $
                  247,777
                  
                  
                  $
                  219,682





Certificates and other time deposits maturing
      in2009
                                        
                                        $
                                        97,7042010
                                        
                                        
                                        13,6212011
                                        
                                        
                                        8,1162012
                                        
                                        
                                        8,2822013
                                        
                                        
                                        1,535Thereafter
                                        
                                        
                                        142$
                                        129,400




Note
      7:   Borrowings




2008
                
                
                2007Federal
      Home Loan Bank advances
                
                $
                90,000
                
                
                $
                95,000Subordinated
      debentures
                
                
                7,217
                
                
                
                7,217Total
      borrowings
                
                $
                97,217
                
                
                $
                102,217





Maturities
by year for advances at December 31, 2008 are $17,000,000 in 2009, $24,000,000
in 2010, $17,000,000 in 2011, $17,000,000 in 2012, $2,000,000 in 2013 and
$13,000,000 in 2014 and thereafter. The weighted-average interest rate at
December 31, 2008 and 2007 was 4.61% and 4.64%.




The
Federal Home Loan Bank advances are secured by loans and investment securities
totaling $186,286,000 at December 31, 2008. 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 statutory trust
formed under the laws of the State of Connecticut. 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.







72





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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
$75,666,000 and $78,010,000 at December 31, 2008 and 2007,
respectively.




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.




2008
                  
                  
                  2007Mortgage
      Servicing RightsBalances,
      January 1
                  
                  $
                  284
                  
                  
                  $
                  525Servicing
      rights capitalized
                  
                  
                  119
                  
                  
                  
                  54Amortization
      of servicing rights
                  
                  
                  (164
                  )
                  
                  
                  (295
                  )Balances,
      December 31
                  
                  $
                  239
                  
                  
                  $
                  284







Note
      9:Income Tax




2008
                    
                    
                    2007Income
      tax expense (benefit)Currently
      payableFederal
                    
                    $
                    578
                    
                    
                    $
                    719State
                    
                    
                    56
                    
                    
                    
                    78DeferredFederal
                    
                    
                    81
                    
                    
                    
                    (30
                    )State
                    
                    
                    (2
                    )
                    
                    
                    3Total
      income tax expense
                    
                    $
                    713
                    
                    
                    $
                    770Reconciliation
      of federal statutory to actual tax expense (benefit)Federal
      statutory income tax at 34%
                    
                    $
                    1,091
                    
                    
                    $
                    1,013Effect
      of state income taxes
                    
                    
                    36
                    
                    
                    
                    53Tax
      exempt interest
                    
                    
                    (243
                    )
                    
                    
                    (197
                    )Cash
      value of life insurance
                    
                    
                    (109
                    )
                    
                    
                    (112
                    )Other
                    
                    
                    (62
                    )
                    
                    
                    13Actual
      tax expense
                    
                    $
                    713
                    
                    
                    $
                    770Effective
      tax rate
                    
                    
                    22.2
                    %
                    
                    
                    25.9
                    %












73





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(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:




2008
                
                
                2007AssetsAllowance
      for loan losses
                
                $
                906
                
                
                $
                862Deferred
      compensation
                
                
                339
                
                
                
                322Pensions
      and employee benefits
                
                
                —
                
                
                
                —Purchase
      accounting adjustments
                
                
                40
                
                
                
                46Securities
      available for sale
                
                
                131
                
                
                
                —Investment
      valuation allowance
                
                
                102
                
                
                
                103Other
                
                
                22
                
                
                
                26Total
      assets
                
                
                1,540
                
                
                
                1,359LiabilitiesDepreciation
      and amortization
                
                
                (619
                )
                
                
                (479
                )Loan
      fees
                
                
                (193
                )
                
                
                (193
                )Pensions
      and employee benefits
                
                
                (22
                )
                
                
                (20
                )Mortgage
      servicing rights
                
                
                (92
                )
                
                
                (111
                )Federal
      Home Loan Bank stock dividends
                
                
                (100
                )
                
                
                (102
                )Prepaid
      expenses
                
                
                (143
                )
                
                
                (137
                )Securities
      available for sale
                
                
                —
                
                
                
                (155
                )Other
                
                
                (24
                )
                
                
                (22
                )Total
      liabilities
                
                
                (1,193
                )
                
                
                (1,219
                )$
                347
                
                
                $
                140







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.




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.







74





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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




2008
                    
                    
                    2007Commitments
      to extend credit
                    
                    $
                    36,294
                    
                    
                    $
                    30,565Standby
      letters of credit
                    
                    
                    942
                    
                    
                    
                    1,258







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, 2008 and 2007 was $117,000
and $115,000.




Future
minimum lease payments under the leases are:




2009
                
                $
                2092010
                
                
                1802011
                
                
                1772012
                
                
                1782013
                
                
                184Thereafter
                
                
                2,007Total
      minimum lease payments
                
                $
                2,935







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, 2008, the stockholder’s equity of the Bank was $30,448,000 of
which approximately $29,212,000 was restricted from dividend distribution to the
Company.







75





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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.




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, 2008 and 2007,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 2008 that
management believes have changed the Bank’s classification.




Actual
                          
                          
                          Required
      for Adequate Capital
                          
                          
                          To
      Be Well CapitalizedAmount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio2008Total
      risk-based capital (to risk-weighted assets)
                          
                          $
                          31,635
                          
                          
                          
                          11.28
                          %
                          
                          $
                          22,445
                          
                          
                          
                          8.00
                          %
                          
                          $
                          28,057
                          
                          
                          
                          10.00
                          %Tier
      1 capital (to risk-weighted assets)
                          
                          
                          30,113
                          
                          
                          
                          10.73
                          %
                          
                          
                          11,223
                          
                          
                          
                          4.00
                          %
                          
                          
                          16,834
                          
                          
                          
                          6.00
                          %Core
      capital (to adjusted total assets)
                          
                          
                          30,113
                          
                          
                          
                          8.11
                          %
                          
                          
                          14,857
                          
                          
                          
                          4.00
                          %
                          
                          
                          18,571
                          
                          
                          
                          5.00
                          %Core
      capital (to adjusted tangible assets)
                          
                          
                          30,113
                          
                          
                          
                          8.11
                          %
                          
                          
                          7,428
                          
                          
                          
                          2.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ATangible
      capital (to adjusted total assets)
                          
                          
                          30,113
                          
                          
                          
                          8.11
                          %
                          
                          
                          5,571
                          
                          
                          
                          1.50
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/A2007Total
      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/A










76





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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 $156,000 and $200,000 for the
years ended December 31, 2008 and 2007.




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 $92,000 and $73,000 for the years ended December
31, 2008 and 2007.




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 $82,000 and $79,000 for the years ended December 31, 2008 and
2007.




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, 2008 and 2007 was $151,000 and $175,000, respectively. At
December 31, 2008, the ESOP had 152,443 allocated shares, no suspense shares and
no committed-to-be released shares. At December 31, 2008 and 2007, the fair
value of the 152,443 and 137,733 allocated shares held by the ESOP was
$1,913,000 and $1,970,000, respectively.




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. Over the life of the plan, the RRP has
purchased 80,990 shares of the Company’s common stock in the open market and had
400 shares forfeited back into the fund. The total of 81,390 shares have all
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 $53,000 and $37,000 for the years ended
December 31, 2008 and 2007.




Unvested
RRP shares at December 31, 2008:




Number
      of Shares
                  
                  
                  Grant
      Date Fair ValueBeginning
      of year
                  
                  
                  9,000
                  
                  
                  $
                  19.96Granted
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  (2,550
                  )
                  
                  
                  20.62End
      of year
                  
                  
                  6,450
                  
                  
                  $
                  19.69










77





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







Unearned
compensation at December 31, 2008 related to RRP shares is $127,000 and will be
recognized over a weighted average period of 2.5 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, 2008
                
                $
                2,255Change
      in composition
                
                
                —New
      loans, including renewals
                
                
                1,042Payments,
      etc., including renewals
                
                
                966Balances,
      December 31, 2008
                
                $
                2,331







Deposits
from related parties held by the Bank at December 31, 2008 and 2007 totaled
$1,346,000 and $985,000.




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.












78





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









2008Volatility
      factors of expected market price of common stock
                  
                  
                  25.00
                  %Dividend
      yields
                  
                  
                  5.07
                  %Weighted
      average expected life of options
                  
                  5.7
      yearsRisk-free
      rate
                  
                  
                  3.75
                  %







A summary
of option activity under the Plan as of December 31, 2008, and changes during
the years then ended, is presented below:




Shares
                
                
                Weighted-Average
      Exercise Price
                
                
                Weighted-Average
      Remaining Contractual Term
                
                
                Aggregate
      Intrinsic ValueOutstanding,
      beginning of year
                
                $
                42,900
                
                
                $
                9.59Granted
                
                
                19,000
                
                
                
                14.56Exercised
                
                
                7,350
                
                
                
                6.32Forfeited
      or expired
                
                
                —Outstanding,
      end of year
                
                $
                54,550
                
                
                $
                11.76
                
                
                
                5.01
                
                
                $
                136,000Exercisable,
      end of year
                
                $
                34,550
                
                
                $
                9.92
                
                
                
                2.41
                
                
                $
                136,000







The
weighted average grant-date value of options granted during 2008 was
$2.25.




The total
intrinsic value of options exercised during the years ended December 31, 2008
and 2007 was $72,000 and $150,000 respectively.




As of
December 31, 2008 and 2007, there was $37,000 and $1,000 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 4.35 years.




During
2008 and 2007 the Company recognized $3,500 and $1,500 of share-based
compensation expense with no tax benefit related to the share based compensation
expense.







79





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







Note
      16:   Earnings Per
Share




Earnings
per share have been computed based upon the weighted average common shares
outstanding. Unearned Employee Stock Ownership Plan shares have been excluded
from the computation of average common shares outstanding.




2008
                        
                        
                        2007
                        
                        
                        2006Income
                        
                        
                        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
                        
                        $
                        2,495
                        
                        
                        
                        1,621,070
                        
                        
                        $
                        1.54
                        
                        
                        $
                        2,209
                        
                        
                        
                        1,624,512
                        
                        
                        $
                        1.34
                        
                        
                        $
                        1,945
                        
                        
                        
                        1,607,319
                        
                        
                        $
                        1.21Effect
      of Dilutive Stock Options
                        
                        
                        
                        
                        
                        
                        14,418
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        25,779
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        38,857Diluted
      Earnings Per ShareIncome
      available to common stockholders and assumed conversions
                        
                        $
                        2,495
                        
                        
                        
                        1,635,488
                        
                        
                        $
                        1.53
                        
                        
                        $
                        2,209
                        
                        
                        
                        1,650,291
                        
                        
                        $
                        1.36
                        
                        
                        $
                        1,945
                        
                        
                        
                        1,646,176
                        
                        
                        $
                        1.18







Options
to purchase 5,000 shares of common stock at an exercise price of $22.25 per
share were outstanding for the periods ending December 31, 2008 and 2007.
Options to purchase 19,000 shares of common stock at $14.56 per share were
outstanding for the period ending December 31, 2008. Neither group of options
were included in the computation of diluted earnings per share because the
option price was greater than the average market price of the common
shares.









Note
      17:   Disclosures About Fair Value of Financial
      Instruments




Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (FAS 157). FAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. FAS 157 has been applied prospectively as of the beginning of
the period.




FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. FAS 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:






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




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




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







80





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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






Available-for-Sale
Securities




Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted market
prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows. Level 2 securities include collateralized mortgage obligations,
mortgage backed securities, federal agency securities and certain municipal
securities. In certain cases where Level 1 or Level 2 inputs are not available,
securities are classified within Level 3 of the hierarchy and includes pooled
trust preferred securities which are less liquid securities.




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the FAS 157 fair value hierarchy in which
the fair value measurements fall at December 31, 2008 (in
thousands).




Fair
      Value Measurements UsingFair
      Value
              
              
              Quoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Input
                (Level
      3)Available-for-sale
      securities
              
              $
              52,284
              
              
              $
              —
              
              
              $
              51,201
              
              
              $
              1,083







The
following is a reconciliation of the beginning and ending balances of recurring
fair value measurements recognized in the accompanying balance sheet using
significant unobservable (Level 3) inputs for the year ended December 31,
2008 (in thousands):







81





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









Beginning
      balance
                
                $
                888Total
      realized and unrealized gains and lossesAmortization
      included in net income
                
                
                2Unrealized
      (losses) included in other comprehensive income
                
                
                (542
                )Purchases,
      issuances and settlements including paydowns
                
                
                1,793Transfers
      in (out) of Level 3
                
                
                (1,058
                )Ending
      balance
                
                $
                1,083Total
      gains or losses for the period included in net income attributable to the
      change in unrealized gains or losses related to assets and liabilities
      still held at the reporting date
                
                $
                —





There
were no realized or unrealized gains or losses included in net income for the
period from January 1, 2008, through December 31, 2008.




At
January 1, 2008, Level 3 securities include a pooled trust preferred security.
The fair value on this security is calculated using a combination of observable
and unobservable assumptions as a quoted market price is not readily available.
This security remains in Level 3 at December 31, 2008. During 2008, a second
pooled trust preferred security was purchased. As of September 30, 2008, the
security was included in Level 2 and was priced based on broker quotes for
similar securities. At December 31, 2008, trading of these types of securities
was only conducted on a distress sale or forced liquidation basis. As a result,
the Company is now measuring the fair value using discounted cash flow
projections and has included the security in Level 3. During the second quarter
of 2008, a collateralized mortgage obligation (CMO) was purchased and is
included in Level 3. At September 30, 2008, the Company was able to price this
CMO using observable inputs and security was transferred to Level
2.




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




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
non-recurring basis and the level within the FAS 157 fair value hierarchy in
which the fair value measurements fall at December 31, 2008 (in
thousands).







82





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









Fair
      Value Measurements UsingFair
      Value
                    
                    
                    Quoted
      Prices in Active Markets for Identical Assets
                      (Level
      1)
                    
                    
                    Significant
      Other Observable Inputs
                      (Level
      2)
                    
                    
                    Significant
      Unobservable Inputs
                      (Level
      3)Impaired
      loans
                    
                    $
                    2,512
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    2,512Mortgage
      servicing rights
                    
                    
                    119
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    119




Impaired
Loans




Impaired
loans are carried at the present value of estimated future cash flows using the
loan’s existing rate, or the fair value of collateral if the loan is collateral
dependent. Loans are evaluated for impairment quarterly. During 2008, certain of
these impaired loans were impaired for the first time, partially charged-off or
re-evaluated, resulting in a remaining balance for these loans, net of specific
allowance, of $2,512,000. This valuation would be considered Level 3. Level 3
inputs for impaired loans included current and prior appraisals, discounting
factors, the borrowers’ financial results and other considerations including
expected cash flows.




Mortgage
Servicing Rights




Mortgage
servicing rights are initially recorded at fair value and are subsequently
reported at amortized cost and periodically evaluated for impairment as
described in SFAS No. 156, Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140.New mortgage
servicing rights recorded during the current accounting period are recorded at
fair value and are disclosed as a nonrecurring measurement.




Mortgage
servicing rights recorded as an asset during the year ended December 31, 2008
totaled $119,000. Mortgage servicing rights do not trade in an active, open
market with readily observable prices. Accordingly, fair values of new mortgage
servicing rights are estimated using discounted cash flow models. Due to the
nature of the valuation inputs, recording initial mortgage servicing rights are
classified within Level 3 of the hierarchy.




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




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




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




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.







83





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







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.




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




2008
                      
                      
                      2007CarryingAmount
                      
                      
                      Fair
      Value
                      
                      
                      Carrying Amount
                      
                      
                      Fair ValueAssetsCash
      and cash equivalents
                      
                      $
                      10,033
                      
                      
                      $
                      10,033
                      
                      
                      $
                      8,137
                      
                      
                      $
                      8,137Investment
      securities available for sale
                      
                      
                      52,284
                      
                      
                      
                      52,284
                      
                      
                      
                      58,999
                      
                      
                      
                      58,999Loans
      including loans held for sale, net
                      
                      
                      285,434
                      
                      
                      
                      290,367
                      
                      
                      
                      258,940
                      
                      
                      
                      261,584Interest
      receivable
                      
                      
                      2,187
                      
                      
                      
                      2,187
                      
                      
                      
                      2,396
                      
                      
                      
                      2,396Stock
      in FHLB
                      
                      
                      4,850
                      
                      
                      
                      4,850
                      
                      
                      
                      4,750
                      
                      
                      
                      4,750LiabilitiesDeposits
                      
                      
                      247,777
                      
                      
                      
                      251,608
                      
                      
                      
                      219,682
                      
                      
                      
                      220,379FHLB
      advances
                      
                      
                      90,000
                      
                      
                      
                      96,163
                      
                      
                      
                      95,000
                      
                      
                      
                      96,649Other
      borrowings
                      
                      
                      7,217
                      
                      
                      
                      7,225
                      
                      
                      
                      7,217
                      
                      
                      
                      7,210Interest
      payable
                      
                      
                      704
                      
                      
                      
                      704
                      
                      
                      
                      724
                      
                      
                      
                      724Advance
      payments by borrowers for taxes and insurance
                      
                      
                      110
                      
                      
                      
                      110
                      
                      
                      
                      67
                      
                      
                      
                      67Off-Balance
      Sheet Assets (Liabilities)Commitments
      to extend credit
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Standby
      letters of credit
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —











84





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(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 Sheets2008
                
                
                2007AssetsCash
      and due from banks
                
                $
                993
                
                
                $
                2,820Investment
      in common stock of the Bank
                
                
                30,448
                
                
                
                30,274Investment
      in RVB Trust I
                
                
                217
                
                
                
                217Other
      assets
                
                
                448
                
                
                
                442Total
      assets
                
                $
                32,106
                
                
                $
                33,753LiabilitiesBorrowings
                
                $
                7,217
                
                
                $
                7,217Dividends
      payable
                
                
                315
                
                
                
                343Other
      liabilities
                
                
                34
                
                
                
                516Total
      liabilities
                
                
                7,566
                
                
                
                8,076Stockholders’
      Equity
                
                
                24,540
                
                
                
                25,677Total
      liabilities and stockholders’ equity
                
                $
                32,106
                
                
                $
                33,753







Condensed
      Statements of
Income2008
                  
                  
                  2007IncomeDividends
      from the Bank
                  
                  $
                  2,200
                  
                  
                  $
                  2,000Other
      income
                  
                  
                  25
                  
                  
                  
                  57Total
      income
                  
                  
                  2,225
                  
                  
                  
                  2,057ExpensesInterest
      expense
                  
                  
                  452
                  
                  
                  
                  462Other
      expenses
                  
                  
                  221
                  
                  
                  
                  215Total
      expenses
                  
                  
                  673
                  
                  
                  
                  677Income
      before income tax and equity in undistributed income of
      subsidiary
                  
                  
                  1,552
                  
                  
                  
                  1,380Income
      tax benefit
                  
                  
                  293
                  
                  
                  
                  242Income
      before equity in undistributed income of subsidiary
                  
                  
                  1,845
                  
                  
                  
                  1,622Equity
      in undistributed income of the Bank
                  
                  
                  650
                  
                  
                  
                  587Net
      Income
                  
                  $
                  2,495
                  
                  
                  $
                  2,209










85





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)









Condensed Statements of Cash Flows2008
                
                
                2007Operating
      ActivitiesNet
      income
                
                $
                2,495
                
                
                $
                2,209Items
      not providing cash
                
                
                (1,133
                )
                
                
                (282
                )Net
      cash provided by operating activities
                
                
                1,362
                
                
                
                1,927Financing
      ActivitiesPurchase
      of stock
                
                
                (1,821
                )
                
                
                (183
                )Proceeds
      from exercise of stock options
                
                
                8
                
                
                
                103Tax
      benefit on stock options exercised
                
                
                0
                
                
                
                17Cash
      dividends
                
                
                (1,376
                )
                
                
                (1,299
                )Net
      cash used in financing activities
                
                
                (3,189
                )
                
                
                (1,362
                )Net
      Change in Cash and Cash Equivalents
                
                
                (1,827
                )
                
                
                565Cash
      and Cash Equivalents at Beginning of Year
                
                
                2,820
                
                
                
                2,255Cash
      and Cash Equivalents at End of Year
                
                $
                993
                
                
                $
                2,820







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 Share2008March
                
                $
                5,161
                
                
                $
                2,926
                
                
                $
                2,235
                
                
                $
                200
                
                
                $
                615
                
                
                $
                .38
                
                
                $
                .37June
                
                
                4,968
                
                
                
                2,659
                
                
                
                2,309
                
                
                
                200
                
                
                
                589
                
                
                
                .36
                
                
                
                .36September
                
                
                5,142
                
                
                
                2,689
                
                
                
                2,453
                
                
                
                245
                
                
                
                645
                
                
                
                .39
                
                
                
                .39December
                
                
                5,120
                
                
                
                2,601
                
                
                
                2,519
                
                
                
                435
                
                
                
                646
                
                
                
                .41
                
                
                
                .41$
                20,391
                
                
                $
                10,875
                
                
                $
                9,516
                
                
                $
                1,080
                
                
                $
                2,495
                
                
                $
                1.54
                
                
                $
                1.532007March
                
                $
                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
                
                
                $
                1.34










86





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







Note
      20:   Recent Accounting
  Pronouncements




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115, which was effective for the Company on January 1, 2008. The fair
value option established by this Statement permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings (or another performance indicator if
the business entity does not report earnings) at each subsequent reporting date.
The fair value option a) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method; b)
is irrevocable (unless a new election date occurs); and c) is applied only to
entire instruments and not to portions of instruments. Management did not elect
the fair value option for any financial assets or liabilities.




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which
replaces SFAS No. 141, Business Combinations. This
Statement retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting (formerly referred to as purchase method) is
used for all business combinations and that an acquirer is identified for each
business combination. This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as of the date that the acquirer achieves
control. This Statement requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values. This Statement requires the
acquirer to recognize acquisition-related costs and restructuring costs
separately from the business combination as period expense. This Statement
requires that loans acquired in a purchase business combination be the present
value of amounts to be received. Valuation allowances should reflect only those
losses incurred by the investor after acquisition. This Statement is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.




Management
has evaluated the provisions of this statement, but currently is not involved in
acquisition activity. Management does not anticipate that the provisions of this
statement would have any impact on the financial position or results of
operation of the Company.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment to ARB No. 51. This
Statement establishes new accounting and reporting standards that require the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. The
Statement also requires the amount of consolidated net income attributable to
the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income. This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Management has evaluated the provisions
of this statement. There is no ownership interest other than the parent company
and therefore, management does not anticipate that the provisions of this
statement will have any impact on the financial position or results of operation
of the Company.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133.This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about a) how and why an entity uses derivative instruments,
b)







87





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and c) how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Management is currently in the process of determining what effect the
provisions of this statement will have on the Company’s consolidated financial
statements.




Note
      21:   Subsequent Event: Economic Recovery
      Programs




On
November 13, 2008, the Company filed an initial application pursuant to the
TARP’s Capital Purchase Program (“CPP”) with its regulator, the OTS, seeking
approval to sell $8,100,000 in preferred stock to the Treasury (which equalled
approximately 3% of its total risk weighted assets as of September 30,
2008).




The
Company received preliminary approval of its application, and the Company called
a Special Meeting of Shareholders on March 10, 2009, to consider whether to
amend the Company’s Articles of Incorporation to permit the sale of preferred
stock to the Treasury or similar investors. Although the shareholders approved
the amendment, which became effective on March 13, 2009, the Board of Directors
determined that the Company will not participate in the TARP’s CPP, as more
fully discussed in Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operation.




The
American Recovery and Reinvestment Act of 2009 (“ARRA”), signed into law on
February 17, 2009, amended the EESA as it applies to institutions that received
financial assistance under TARP. ARRA, more commonly known as the economic
stimulus or economic recovery package, includes a wide variety of programs
intended to stimulate the economy and provide for extensive infrastructure,
energy, health, and education needs. In addition, ARRA imposes certain new
executive compensation and corporate expenditure limits on all current and
future TARP recipients until the institution has repaid the
Treasury.




Before
and after EESA and ARRA, there have been numerous actions by the Federal Reserve
Board, Congress, the Treasury, the FDIC, the IRS, the SEC and others to further
the economic and banking industry stabilization efforts. It remains unclear at
this time what further legislative and regulatory measures will be implemented
affecting the Company. To date, the Company or the Bank has elected to
participate only in the FDIC’s Debt Guarantee Program, which provides for the
guarantee of eligible newly issued senior unsecured debt of participating
entities, and the FDIC’s Transaction Account Guarantee Program, which provides,
without charge to depositors, a full guarantee on all non-interest bearing
transaction accounts held by any depositor, regardless of dollar amount, through
December 31, 2009. Both of these programs are part of the FDIC’s Temporary
Liquidity Guarantee Program and are further discussed in Item 1 –
Business - Regulation - Insurance of Deposits.




In
February 2009, the Board of Directors of the FDIC voted to amend the restoration
plan for the Deposit Insurance Fund (“DIF”). The amended restoration plan
extended the period of time to raise the DIF reserve ratio to 1.15 percent from
five to seven years. The amended restoration plan also includes a final rule
that sets assessment rates. Under this final rule, beginning on April 1, 2009
the Company expects the FDIC premium assessed to the Company to
increase.







88





River
Valley Bancorp


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007


(Table
Dollar Amounts in Thousands, Except Per Share Amounts)







The Board
of the FDIC also adopted an interim rule imposing a 20 basis point special
assessment on insured institutions as of June 30, 2009 which will be payable on
September 30, 2009. The interim rule would also allow the assessment of
additional special assessments of up to 10 basis points after June 30, 2009 as
deemed necessary. On March 5, 2009, FDIC Chairman Sheila Bair announced that if
Congress adopts legislation expanding the FDIC’s line of credit with Treasury
from $30 billion to $100 billion, the FDIC might have the flexibility to reduce
the special emergency assessment, possibly from 20 to 10 point basis points.
Assuming the legislation passes and the FDIC reduces the special assessment to
10 basis points, we anticipate that the special assessment for the Bank would
total approximately $236,000, based on current deposit levels.




While the
Company has not fully evaluated the impact the increased assessment rates and
the pending special assessment will have on the 2009 financial results, it is
anticipated the impact will be material to the 2009 results of
operations.












89






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, 2008. 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, 2008, 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.






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.





90





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 15, 2009 (the “2009 Proxy
Statement”) with the caption “Proposal 1 - 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 2009 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 2009 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 March
30, 2004, 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, 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 2009 Proxy Statement with the
captions “Proposal 1 - Election of Directors,” “Corporate Governance,”
“Executive Compensation,” and “Compensation of Directors for 2008.”






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




Information
required by this item is incorporated by reference to the sections of the 2009
Proxy Statement with the captions “Principal Holders of Common Stock” and
“Proposal 1 - 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
                
                
                34,550
                (1)
                
                $
                11.76
                
                
                
                21,508Equity
      compensation plans not approved by security holders
                
                
                —
                (2)
                
                
                —
                (3)
                
                
                —Total
                
                
                34,550
                
                
                $
                11.76
                
                
                
                21,508
 
 (1)
      River Valley Bancorp Stock Option Plan.(2)
      River Valley Bancorp Recognition and Retention Plan and Trust (“RRP”). Column (a)
      includes 6,450 shares granted to management but not yet vested. In
      addition, 74,540 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.










91







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 2009 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 2009 Proxy
Statement with the captions “Accountants,” and “Accountant’s Fees.”






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).







92





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
      17, 2009
            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
      17, 2009Matthew
      P. Forrester
              
              President
      and Chief Executive Officer
              ))(2)
      Principal Financial and Accounting Officer:
              
              
              )
                ))/s/
      Vickie L. Grimes
              
              
              )
              March
      17, 2009Vickie
      L. Grimes
              
              Treasurer
              ))(3)
      The Board of Directors:
              
              
              ))/s/
      Robert W. Anger
              
              
              )
              March
      17, 2009Robert
      W. Anger
              
              Director
              )))/s/
      Matthew P. Forrester
              
              
              )
              March
      17, 2009Matthew
      P. Forrester
              
              Director
              )))/s/
      Michael J. Hensley
              
              
              )
              March
      17, 2009Michael
      J. Hensley
              
              Director
              )))/s/
      Fred W. Koehler
              
              
              )
              March
      17, 2009Fred
      W. Koehler
              
              Director
              )))/s/
      L. Sue Livers
              
              
              )
              March
      17, 2009L.
      Sue Livers
              
              Director
              )))/s/
      Charles J. McKay
              
              
              )
              March
      17, 2009Charles
      J. McKay
              
              Director
              )













EXHIBIT
INDEX







Exhibit
      No.
                                            
                                            Description3
                                            (1)
                                            
                                            Registrant’s
      Articles of Incorporation(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(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








94








Exhibit
      No.
                                            
                                            Description(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(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








95








Exhibit
      No.
                          
                          Description(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.











96