10QSB 1 rvb_10qnov.txt RIVER VALLEY FORM 10-QSB 09/30/03 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number: 0-21765 RIVER VALLEY BANCORP (Exact name of small business issuer as specified in its charter) Indiana 35-1984567 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 430 Clifty Drive Madison, Indiana 47250 (Address of principal executive offices) (812) 273-4949 (Issuer's telephone number) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: November 7, 2003 - 819,452 common shares. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ] RIVER VALLEY BANCORP FORM 10-QSB INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheet 3 Consolidated Condensed Statement of Income 4 Consolidated Condensed Statement of Comprehensive Income 5 Consolidated Condensed Statement of Cash Flows 6 Notes to Unaudited Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 10 Item 3. Controls and Procedures. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 CERTIFICATIONS 17 PART I FINANCIAL INFORMATION Item 1. Financial Statements
RIVER VALLEY BANCORP Consolidated Condensed Balance Sheet September 30, December 31, 2003 2002 (Unaudited) --------------------- --------------------- (In Thousands, Except Share Amounts) Assets Cash and due from banks $ 3,568 $ 5,094 Interest-bearing demand deposits 5,351 13,516 -------------------- ---------------------- Cash and cash equivalents 8,919 18,610 Investment securities available for sale 33,553 28,174 Loans held for sale 207 1,062 Loans, net of allowance for loan losses of $2,076, and $2,101 186,903 164,895 Premises and equipment 5,898 5,741 Federal Home Loan Bank stock 2,100 2,000 Interest receivable 1,612 1,467 Cash surrender value life insurance 5,043 1,326 949 745 Other assets -------------------- ---------------------- Total assets $ 245,184 $ 224,020 ==================== ====================== Liabilities Deposits Non-interest-bearing $ 11,659 $ 11,115 Interest-bearing 159,938 150,714 -------------------- ---------------------- Total deposits 171,597 161,829 Borrowings 49,000 40,000 Interest payable 213 459 Other liabilities 2,172 1,099 -------------------- ---------------------- Total liabilities 222,982 203,387 -------------------- ---------------------- Commitments and Contingencies Shareholders' Equity Preferred stock, without par value Authorized and unissued - 2,000,000 shares Common stock, without par value Authorized - 5,000,000 shares Issued and outstanding - 820,352 and 810,844 shares Additional paid-in capital 8,299 7,957 Retained earnings 13,813 12,654 Shares acquired by stock benefit plans (242) (339) Accumulated other comprehensive income 332 361 -------------------- ---------------------- Total shareholders' equity 22,202 20,633 -------------------- ---------------------- Total liabilities and shareholders' equity $ 245,184 $ 224,020 ==================== ====================== See notes to consolidated condensed financial statements.
RIVER VALLEY BANCORP Consolidated Condensed Statement of Income (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, -------------- -------------- ---------------- -------------- 2003 2002 2003 2002 -------------- -------------- ---------------- -------------- Interest Income (In Thousands, Except Share Amounts) Loans receivable $ 8,495 $ 8,712 $ 2,980 $ 2,953 Investment securities 777 658 268 218 Interest-earning deposits and other 171 158 61 71 -------------- --------------- --------------- -------------- Total interest income 9,443 9,528 3,309 3,242 -------------- --------------- --------------- -------------- Interest Expense Deposits 2,492 3,085 773 991 Borrowings 1,526 1,103 572 415 -------------- --------------- --------------- -------------- Total interest expense 4,018 4,188 1,345 1,406 -------------- --------------- --------------- -------------- Net Interest Income 5,425 5,340 1,964 1,836 Provision for loan losses 360 410 180 150 -------------- --------------- --------------- -------------- Net Interest Income After Provision for Loan Losses 5,065 4,930 1,784 1,686 -------------- --------------- --------------- -------------- Other Income Net realized gains (losses) on sales of available-for-sale securities (1) 6 1 0 Service fees and charges 1,040 1,016 356 369 Net gains on loan sales 1,450 643 471 493 Gain on sale of premises and equipment 0 352 0 0 Other income 168 81 96 17 -------------- --------------- --------------- -------------- Total other income 2,657 2,098 924 879 -------------- --------------- --------------- -------------- Other Expenses Salaries and employee benefits 2,022 1,789 689 632 Net occupancy and equipment expenses 602 601 213 199 Data processing fees 109 176 51 73 Advertising 196 145 65 59 Legal and professional fees 143 55 38 31 Amortization of mortgage servicing rights 475 285 150 147 Other expenses 859 759 279 296 -------------- --------------- --------------- -------------- Total other expenses 4,406 3,810 1,485 1,437 -------------- --------------- --------------- -------------- Income Before Income Tax 3,316 3,218 1,223 1,128 Income tax expense 1,290 1,274 473 446 -------------- --------------- --------------- -------------- Net Income $2,026 $1,944 $ 750 $ 682 ============== =============== =============== ============== Basic earnings per share $ 2.56 $ 2.50 $ .94 $ .87 Diluted earnings per share 2.44 2.40 .90 .84 Dividends per share
See notes to consolidated condensed financial statements. RIVER VALLEY BANCORP Consolidated Condensed Statement of Comprehensive Income (Unaudited)
Nine Months Ended Three Months Ended September 30, September 30, --------------------------- --------------------------- 2003 2002 2003 2002 -------------- ------------ ------------- ------------ (In Thousands) Net income $2,026 $1,944 $750 $682 Other comprehensive income, net of tax Unrealized gains on securities available for sale Unrealized holding gains arising during the period, net of tax expense of ($18), $203, ($127) and $138. (30) 310 (194) 210 Less: Reclassification adjustment for gains included in net income, net of tax expense of $0, $2, $0 and $0. (1) 4 0 0 -------------- ------------ ------------- ------------ (29) 306 (194) 210 -------------- ------------ ------------- ------------ Comprehensive income $1,997 $2,250 $556 $892 ============== ============ ============= ============
See notes to consolidated condensed financial statements.
RIVER VALLEY BANCORP Consolidated Condensed Statement of Cash Flows (Unaudited) Nine Months Ended September 30, -------------------- ------------------- 2003 2002 -------------------- ------------------- (In Thousands) Operating Activities Net income $ 2,026 $ 1,944 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 360 410 Depreciation and amortization 375 381 Investment securities (gains) losses 1 (6) Loans originated for sale in the secondary market (64,117) (41,530) Proceeds from sale of loans in the secondary market 65,849 43,354 Gain on sale of loans (1,450) (643) Amortization of deferred loan origination cost 132 123 Amortization of expense related to stock benefit plans 291 290 Gain on sale of premises and equipment 0 (352) Net change in: Interest receivable (145) (89) Interest payable (104) (166) Other adjustments 596 (238) -------------------- ------------------- Net cash provided by operating activities 3,814 3,478 -------------------- ------------------- Investing Activities Purchases of securities available for sale (10,935) (11,049) Proceeds from maturities of securities available for sale 3,067 131 Proceeds from sale of securities available for sale 2,349 5,933 Purchase of Federal Home Loan Bank stock (48) (750) Net change in loans (21,927) (9,030) Premiums paid on life insurance (3,635) 0 Purchases of premises and equipment (532) (747) Proceeds from sale of premises and equipment 0 629 Proceeds from sale of real estate owned 43 30 -------------------- ------------------- Net cash used in investing activities (31,618) (14,853) -------------------- ------------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 11,375 5,960 Certificates of deposit (1,607) 9,886 Proceeds from borrowings 14,000 44,000 Repayment of borrowings (5,000) (30,500) Cash dividends (616) (386) Purchase of stock (285) (140) Stock options exercised 227 95 Acquisition of stock for stock benefit plans 0 (22) Advances by borrowers for taxes and insurance 19 21 -------------------- ------------------- Net cash provided by financing activities 18,113 28,914 -------------------- ------------------- Net Change in Cash and Cash Equivalents (9,691) 17,539 Cash and Cash Equivalents, Beginning of Period 18,610 5,641 -------------------- ------------------- Cash and Cash Equivalents, End of Period $ 8,919 $ 23,180 ==================== =================== Additional Cash Flows and Supplementary Information Interest paid $ 4,122 $ 4,354 Income tax paid 1,041 1,012
See notes to consolidated condensed financial statements. RIVER VALLEY BANCORP Notes to Unaudited Consolidated Condensed Financial Statements River Valley Bancorp (the "Corporation" or the "Company") is a unitary savings and loan holding company whose activities are primarily limited to holding the stock of River Valley Financial Bank ("River Valley" or the "Bank"). The Bank conducts a general banking business in southeastern Indiana which consists of attracting deposits from the general public and applying those funds to the origination of loans for consumer, residential and commercial purposes. River Valley's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of competitive factors, such as governmental monetary policy, that are outside of management's control. Note 1: Basis of Presentation The accompanying unaudited consolidated condensed financial statements were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation included in the Annual Report on Form 10-KSB for the year ended December 31, 2002. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the nine and three-month periods ended September 30, 2003, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Corporation as of December 31, 2002 has been derived from the audited consolidated balance sheet of the Corporation as of that date. Note 2: Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Note 3: 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.
Nine Months Ended Nine Months Ended September 30, 2003 September 30, 2002 ------------------ ------------------ Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ------ -------- ------ ------ -------- ------ (In Thousands, Except Share Amounts) Basic earnings per share Income available to common shareholders $ 2,026 792,189 $ 2.56 $ 1,944 777,042 $ 2.50 =========== =========== Effect of dilutive RRP awards and stock options 38,749 31,738 ------------- --------------- ---------------- -------------- Diluted earnings per share Income available to common shareholders and assumed conversions $ 2,026 830,938 $ 2.44 $ 1,944 808,780 $ 2.40 ============= =============== =========== ================ ============== =========== Three Months Ended Three Months Ended September 30, 2003 September 30, 2002 ------------------ ------------------ Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ------ -------- ------ ------ -------- ------ (In Thousands, Except Share Amounts) Basic earnings per share Income available to common shareholders $ 750 795,953 $. 94 $ 682 780,124 $ .87 =========== =========== Effect of dilutive RRP awards and stock options 39,544 32,868 ------------- --------------- ---------------- -------------- Diluted earnings per share Income available to common shareholders and assumed conversions $ 750 835,497 $ .90 $ 682 812,992 $ .84 ============= =============== =========== ================ ============== ===========
Note 4: Stock Options The Company has a stock-based employee compensation plan, which is described more fully in Notes to Financial Statements included in the December 31, 2002 Annual Report to shareholders. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Nine Months Nine Months Three Months Three Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2003 2002 2003 2002 -------------------------------------------------------------- Net income, as reported $2,026 $1,944 $ 750 $ 682 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes 20 33 7 5 -------------------------------------------------------------- Pro forma net income $2,006 $1,911 $743 $677 ============================================================== Earnings per share: Basic - as reported $ 2.56 $2.50 $ .94 $ .87 Basic - pro forma 2.53 2.46 .93 .87 Diluted - as reported 2.44 2.40 .90 .84 Diluted - pro forma 2.41 2.36 .89 .83
Note 5: Effect of Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") recently adopted Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of SFAS No. 123, companies that adopted the fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a "ramp-up" effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, SFAS No. 148 provides two additional methods of transition that reflect an entity's full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. SFAS No. 148 also improves the clarity and prominence of disclosures about the proforma effects of using the fair value based method of accounting for stock-based compensation for all companies - regardless of the accounting method used - by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, SFAS No. 148 improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. In the past, companies were required to make proforma disclosures only in annual financial statements. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The FASB has stated it intends to issue a new statement on accounting for stock-based compensation and will require companies to expense stock options using a fair value based method at date of grant. The implementation for this proposed statement is not known. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 will change current practice in the accounting for and disclosure of guarantees. Guarantees meeting the characteristics described in FIN 45 are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also requires a guarantor to make new disclosures for virtually all guarantees even if the likelihood of the guarantor's having to make payments under the guarantee is remote. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying asset, liability, or an equity security of the guaranteed party such as financial standby letters of credit. Disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 31, 2002. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The guarantor's previous accounting for guarantees issued prior to the date of FIN 45 initial applications should not be revised or restated to reflect the provisions of FIN 45. The Company adopted FIN 45 on January 1, 2003. The adoption of FIN 45 does not currently have a material impact on the Company's consolidated financial statements. Note 6: Reclassifications Certain reclassifications have been made to the 2002 consolidated financial statements to conform to the September 30, 2003 presentation. Item 2. Management's Discussion and Analysis or Plan of Operation Forward Looking Statements This Quarterly Report on Form 10-QSB ("Form 10-QSB") 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-QSB and include statements regarding the intent, belief, outlook, estimate or expectations of the Corporation (as defined in the notes to the consolidated condensed financial statements), its directors or its officers primarily with respect to future events and the future financial performance of the Corporation. Readers of this Form 10-QSB 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-QSB identifies important factors that could cause such differences. These factors include 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; or regulatory changes. Critical Accounting Policies The notes to the consolidated financial statements contain a summary of the Company's significant accounting policies presented on pages 31 through 33 of the Annual Report to Shareholders for the year ended December 31, 2002. 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 provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provision charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous mortgage and consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customers financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of identification and estimation of losses for larger non-homogeneous credits and the sensitivity assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. 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 income statement. As of September 30, 2003 and December 31, 2002, mortgage servicing rights had carrying values of $572,000 and $540,000, respectively. Financial Condition At September 30, 2003, the Corporation's assets totaled $245.2 million, an increase of $21.2 million, or 9.4% from December 31, 2002. The increase in assets resulted primarily from an increase in net loans receivable, including loans held for sale, of $21.2 million and an increase of approximately $5.4 million in investments, which was funded by an increase in deposits of $9.8 million and an increase in borrowed funds of $9.0 million. Liquid assets (i.e., cash and cash equivalents) decreased by $9.7 million from December 31, 2002, to a total of $8.9 million at September 30, 2003. The Corporation's consolidated allowance for loan losses totaled $2.1 million on December 31, 2002 and $2.0 million at September 30, 2003, which represented 1.3% and 1.1% of total loans respectively. Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) totaled $1,000,000 and $637,000 at December 31, 2002 and September 30, 2003, respectively. Although management believes that its allowance for loan losses at September 30, 2003, was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation's results of operations. Deposits totaled $171.6 million at September 30, 2003, an increase of $9.8 million, or 6.1%, compared to total deposits at December 31, 2002. The growth for the nine-month period resulted from competitive interest rates and other marketing strategies. Advances from the Federal Home Loan Bank totaled $40.0 million at December 31, 2002, and $42.0 million on September 30, 2003. The average cost of Federal Home Loan Bank advances at September 30, 2003 was 4.15%, slightly down from 4.87% at December 31, 2002. Shareholders' equity totaled $22.2 million at September 30, 2003, an increase of $1.6 million, or 7.6 % from $20.6 million at December 31, 2002. The increase resulted primarily from the Corporation's net income, offset by cash dividends and stock repurchases. The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2003, the Bank's regulatory capital exceeded all applicable regulatory capital requirements. On March 13, 2003, the Corporation formed the RIVR Statutory Trust I, a statutory trust formed under Connecticut law ("RIVR Trust I"). On March 26, 2003, RIVR Trust I 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 Corporation for $217,000. The aggregate proceeds of $7,217,000 were used by RIVR Trust I to purchase $7,217,000 in Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures from the Corporation. 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 Corporation has guaranteed payment of amounts owed by RIVR Trust I to holders of the Capital Securities. The proceeds of the offering will be used for general corporate purposes of the Corporation, including the repurchase of the Corporation's shares from time to time. Comparison of Operating Results for the Nine Months Ended September 30, 2003 and 2002 General The Corporation's net income for the nine months ended September 30, 2003, totaled $2,026,000, an increase of $82,000 or 4.2 % from the $1,944,000 reported for the period ended September 30, 2002. The increase in income in the 2003 period was primarily attributable to an increase in net interest income of $85,000 and an increase in net gain on loan sales of $807,000. These increases were offset by an increase in salaries and employee benefits of $233,000, an increase in amortization of mortgage servicing rights of $190,000 and an increase in other expenses of $100,000. In addition, the Corporation recorded a gain on sale of premises and equipment of $352,000 during the nine months ended September 30, 2002. Net Interest Income Total interest income for the nine months ended September 30, 2003 amounted to $9.4 million, a decrease of $86,000, or 0.9%, from the comparable period in 2002, reflecting the effects of an increase in average interest-earning assets outstanding but also a decrease in the average loan rate of approximately 0.86%. Interest expense on deposits decreased by $593,000, or 19.2%, to a total of $2.5 million for the nine months ended September 30, 2003, due primarily to a decrease in the average rate paid on deposits outstanding year-to-year. Interest expense on borrowings totaled $1.5 million for the nine months ended September 30, 2003, an increase of $423,000, from the comparable period in 2002. This increase resulted primarily from an increase in average borrowings year-to-year. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $85,000, or 1.6%, for the nine months ended September 30, 2003, as compared to the same period in 2002. 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 payment, general economic conditions, particularly as such conditions relate to the Bank's market area, and other factors related to the collectibility of the Bank's loan portfolio. As a result of such analysis, management recorded a $360,000 provision for losses on loans for the nine months ended September 30, 2003, compared to the $410,000 amount recorded in the 2002 period. The 2003 provision amount was predicated on the increase in the balance of the loan portfolio, coupled with the level of delinquent loans year-to-year. While management believes that the allowance for losses on loans is adequate at September 30, 2003, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future. Other Income Other income increased by $559,000, during the nine months ended September 30, 2003, as compared to the same period in 2002. The increase was due primarily to an $807,000 increase in gain on sale of loans. This gain, however, was offset partially by the $352,000 gain on sale of premises that occurred in 2002. Other Expense Other expense increased by $596,000, or 15.6 %, during the nine months ended September 30, 2003, as compared to the same period in 2002. The increase was due primarily to a $233,000 increase in salaries and benefits, an increase in loan volume/administrative expense (both portfolio and sales volume) and general expense increases due to growth. Income Taxes The provision for income taxes totaled $1.3 million for the nine months ended September 30, 2003, an increase of $16,000, or 1.3%, as compared to the same period in 2002. The effective tax rates were 38.9% and 39.6% for the nine months ended September 30, 2003 and 2002, respectively. Comparison of Operating Results for the Three Months Ended September 30, 2003 and 2002 General The Corporation's net income for the three months ended September 30, 2003, totaled $750,000, an increase of $68,000, or 10.0% from the $682,000 of net income reported in the comparable 2002 period. The increase in earnings in the 2003 period was primarily attributable to an increase in net interest income of $128,000 and an increase in other income of $45,000, offset by an increase in other expenses of $48,000 and income taxes of $27,000. Net Interest Income Total interest income for the three months ended September 30, 2003 amounted to $3.3 million, a increase of $67,000, or 2.1%, from the comparable quarter in 2002, reflecting the effects of an increase in average interest-earning assets outstanding, coupled with a decrease in the yield year-to-year. Interest income on loans totaled $3.0 million for the three months ended September 30, 2003, remaining approximately the same from the comparable 2002 quarter. Interest expense on deposits decreased by $218,000, or 22.0%, to a total of $773,000 for the quarter ended September 30, 2003, due primarily to a decrease in the average rate of deposits outstanding. Interest expense on borrowings totaled $572,000 for the three months ended September 30, 2003, an increase of $157,000 over the comparable quarter in 2002. This increase resulted from an increase in average borrowings outstanding from year-to-year. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $128,000, or 7.0%, for the three months ended September 30, 2003, as compared to the same quarter in 2002. 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 the Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Bank's market area, and other factors related to the collectibility of the Bank's loan portfolio. As a result of such analysis, management recorded a $180,000 provision for losses on loan for the three months ended September 30, 2003, compared to the $150,000 recorded in the 2002 period. While management believes that the allowance for losses on loans is adequate at September 30, 2003, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future. Other Income Other income increased by $45,000, for the three months ended September 30, 2003, as compared to the same period in 2002, due primarily to an increase in other miscellaneous income. Other Expense Other expenses increased by $48,000, or 3.3%, during the three months ended September 30, 2003, compared to the same period in 2002. The increase was due primarily to the increase in loan volume/administrative expense (portfolio and sales volume) and general expense increases due to growth. Income Taxes The provision for income taxes totaled $473,000 for the three months ended September 30, 2003, an increase of $27,000, or 6.1%, as compared to the same period in 2002. This increase resulted primarily from an increase in net income before income taxes of $95,000, or 8.4%. The effective tax rates were 38.7% and 39.5% for the three months ended September 30, 2003 and 2002, respectively. Off-balance Sheet Arrangements As of the date of this Report, 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 an entity unconsolidated with the Company is a party 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. Other The Securities and Exchange Commission maintains a Web site that contains reports, proxy information statements, and other information regarding registrants that file electronically with the Commission, including the Corporation. The address is http://www.sec.gov. Item 3. Controls and Procedures. A. 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 regulations promulgated under the Securities Exchange Act of 1934, as amended), as of the end of the most recent fiscal quarter covered by this quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company would be made known to such officers by others within the Company on a timely basis. B. Changes in internal controls. There were no significant 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 has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 31(1)CEO Certification required by 17 C.F.R. Section 240.13a-14(a) 31(2)CFO Certification required by 17 C.F.R. Section 240.13a-14(a) 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: (i) On August 19, 2003, a press release concerning the results of operations of the Corporation for the period ended June 30, 2003 was filed under Items 7 and 12 on Form 8-K. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RIVER VALLEY BANCORP Date: November 14, 2003 By: /s/ Matthew P. Forrester --------------------------------------- Matthew P. Forrester President and Chief Executive Officer Date: November 14 , 2003 By: /s/ Larry C. Fouse --------------------------------------- Larry C. Fouse Vice President of Finance