10QSB 1 rvb_10qaug.txt 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 JUNE 30, 2004 [ ] 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: August 11, 2004 - 1,592,549 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 Sheets 3 Consolidated Condensed Statements of Income 4 Consolidated Condensed Statements of Comprehensive Income 5 Consolidated Condensed Statements 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 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 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 EXHIBITS 2
PART I FINANCIAL INFORMATION Item 1. Financial Statements RIVER VALLEY BANCORP Consolidated Condensed Balance Sheets June 30, December 31, 2004 2003 --------------------- -------------------- (In Thousands, Except Share Amounts) (Unaudited) Assets Cash and due from banks $ 3,438 $ 4,443 Interest-bearing demand deposits 3,706 8,069 --------------------- -------------------- Cash and cash equivalents 7,144 12,512 Investment securities available for sale 25,103 34,557 Loans held for sale 250 100 Loans 211,572 194,222 Allowance for loan losses 2,277 2,056 --------------------- -------------------- Net loans 209,295 192,166 Premises and equipment 6,287 5,980 Federal Home Loan Bank stock 2,800 2,176 Interest receivable 1,424 1,489 Cash surrender value life insurance 5,201 5,093 Other assets 956 1,003 --------------------- -------------------- Total assets $258,460 $255,076 ===================== ==================== Liabilities Deposits $ 14,261 $ 11,828 Non-interest-bearing Interest-bearing 157,196 168,126 --------------------- -------------------- Total deposits 171,457 179,954 Borrowings 63,217 50,000 Interest payable 241 381 Other liabilities 1,449 1,886 --------------------- -------------------- Total liabilities 236,364 232,221 --------------------- -------------------- 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 - 1,599,049 and 1,646,680 shares Additional paid-in capital 8,453 8,705 Retained earnings 13,800 14,088 Shares acquired by stock benefit plans (180) (193) Accumulated other comprehensive income 23 255 --------------------- -------------------- Total shareholders' equity 22,096 22,855 --------------------- -------------------- Total liabilities and shareholders' equity $ 258,460 $255,076 ===================== ==================== See notes to consolidated condensed financial statements. 3
RIVER VALLEY BANCORP Consolidated Condensed Statements of Income (Unaudited) Six Months Ended Three Months Ended June 30, June 30, -------------- -------------- ---------------- -------------- 2004 2003 2004 2003 -------------- -------------- ---------------- -------------- Interest Income (In Thousands, Except Share Amounts) Loans receivable $ 5,856 $ 5,515 2,945 2,740 Investment securities 470 509 214 271 Interest-earning deposits and other 88 110 47 41 -------------- --------------- --------------- -------------- Total interest income 6,414 6,134 3,206 3,052 -------------- --------------- --------------- -------------- Interest Expense Deposits 1,365 1,719 666 834 Borrowings 1,234 954 651 518 -------------- --------------- --------------- -------------- Total interest expense 2,599 2,673 1,317 1,352 -------------- --------------- --------------- -------------- Net Interest Income 3,815 3,461 1,889 1,700 Provision for loan losses 194 180 92 90 -------------- --------------- --------------- -------------- Net Interest Income After Provision for Loan Losses 3,621 3,281 1,797 1,610 -------------- --------------- --------------- -------------- Other Income Net realized gains (losses) on sales of available-for-sale securities 9 (2) 3 (2) Service fees and charges 862 684 442 344 Net gains on loan sales 262 979 156 487 Other income 185 72 97 35 -------------- --------------- --------------- -------------- Total other income 1,318 1,733 698 864 -------------- --------------- --------------- -------------- Other Expenses Salaries and employee benefits 1,557 1,333 799 676 Net occupancy and equipment expenses 479 389 240 202 Data processing fees 73 58 33 38 Advertising 117 131 66 58 Legal and professional fees 100 105 70 60 Other Expenses 778 905 428 362 -------------- --------------- --------------- -------------- Total other expenses 3,104 2,921 1,636 1,396 -------------- --------------- --------------- -------------- Income Before Income Tax 1,835 2,093 859 1,078 Income tax expense 681 817 314 398 -------------- --------------- --------------- -------------- Net Income $1,154 $1,276 $ 545 $ 680 ============== =============== =============== ============== Basic earnings per share $ .72 $ .81 $ .34 $ .43 Diluted earnings per share .69 .77 .33 .41 Dividends per share .35 .28 .18 .15 See notes to consolidated condensed financial statements. 4
RIVER VALLEY BANCORP Consolidated Condensed Statements of Comprehensive Income (Unaudited) Six Months Ended Three Months Ended June 30, June 30, ------------ ------------- ------------ ------------- 2004 2003 2004 2003 ------------ ------------- ------------ ------------- (In Thousands) Net income $1,154 $1,276 $545 $680 Other comprehensive income (loss), net of tax Unrealized gains on securities available for sale Unrealized holding gains arising during the period, net of tax expense (benefit) of $(149), $108, $(169) and $100 (277) 164 (277) 152 Less: Reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of $4, $(1), $1, and $(1) 5 (1) 2 (1) ------------ ----------- ------------ ------------- (232) 165 (279) 153 ------------ ----------- ------------ ------------- Comprehensive income $922 $1,441 $266 $833 ============ =========== ============ ============= See notes to consolidated condensed financial statements. 5
RIVER VALLEY BANCORP Consolidated Condensed Statements of Cash Flows (Unaudited) Six Months Ended June 30, ------------------ ------------------- 2004 2003 ------------------ ------------------- Operating Activities (In Thousands) Net income $ 1,154 $ 1,276 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 194 180 Depreciation and amortization 283 245 Investment securities (gains) losses (9) 2 Loans originated for sale in the secondary market (12,596) (44,760) Proceeds from sale of loans in the secondary market 12,571 43,724 Gain on sale of loans (262) (979) Amortization of deferred loan origination cost 151 94 Amortization of expense related to stock benefit plans 210 200 Net change in: Interest receivable 65 108 Interest payable (140) (86) Other adjustments (118) 2 ------------------ ------------------- Net cash provided by operating activities 1,503 6 ------------------ ------------------- Investing Activities Purchases of securities available for sale (1,147) (8,006) Proceeds from maturities of securities available for sale 6,016 1,183 Proceeds from sale of securities available for sale 4,196 1,098 Purchase of Federal Home Loan Bank stock (571) - Net change in loans (17,337) (11,685) Premiums paid on life insurance - (3,639) Purchases of premises and equipment (590) (403) ------------------ ------------------- Net cash used in investing activities (9,433) (21,452) ------------------ ------------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits (4,337) 9,356 Certificates of deposit (4,160) (2,201) Proceeds from borrowings 23,000 11,000 Repayment of borrowings (10,000) (4,000) Cash dividends (555) (385) Purchase of stock (1,455) (205) Stock options exercised 78 69 Acquisition of stock for stock benefit plans (34) - Advances by borrowers for taxes and insurance 25 (3) ------------------ ------------------- Net cash provided by financing activities 2,562 13,631 ------------------ ------------------- Net Change in Cash and Cash Equivalents (5,368) (7,815) Cash and Cash Equivalents, Beginning of Period 12,512 18,610 ------------------ ------------------- Cash and Cash Equivalents, End of Period $ 7,144 $ 10,795 ================== =================== Additional Cash Flows and Supplementary Information Interest paid $ 2,739 $ 2,759 Income tax paid 499 624 See notes to consolidated condensed financial statements. 6
RIVER VALLEY BANCORP Notes to Unaudited Consolidated Condensed Financial Statements River Valley Bancorp (the "Corporation") 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 included 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, 2003. 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 six and three month periods ended June 30, 2004, 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, 2003 has been derived from the audited consolidated balance sheet of the Corporation as of that date. Note 2: Principles of Consolidation The consolidated condensed financial statements include the accounts of the Corporation and its subsidiary, the Bank, and the Bank's subsidiary, Madison First Service Corporation ("First Service"). 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. 7
Six Months Ended Six Months Ended June 30, 2004 June 30, 2003 ------------- ------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ (Dollar Amounts In Thousands, Except Share Amounts) Basic earnings per share Income available to common shareholders $1,154 1,606,296 $.72 $1,276 1,575,309 $.81 =========== ========== Effect of dilutive RRP awards and stock options 73,618 81,834 ------------- -------------- -------------- --------------- Diluted earnings per share Income available to common shareholders and assumed conversions $ 1,154 1,679,914 $.69 $ 1,276 1,657,143 $.77 ============= ============== =========== ============== =============== ========== Three Months Ended Three Months Ended June 30, 2004 June 30, 2003 ------------- ------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ (Dollar Amounts In Thousands, Except Share Amounts) Basic earnings per share Income available to common shareholders $ 545 1,599,284 $ .34 $680 1,582,718 $ .43 =========== ========== Effect of dilutive RRP awards and stock options 70,747 80,540 ------------- -------------- -------------- --------------- Diluted earnings per share Income available to common shareholders and assumed conversions $545 1,670,031 $ .33 $680 1,663,258 $ .41 ============= ============== =========== ============== =============== ==========
Note 4: Stock Options The Corporation has a stock-based employee compensation plan, which is described more fully in Notes to Financial Statements included in the December 31, 2003 Annual Report to shareholders. The Corporation 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 Corporation 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. 8
Six Months Six Months Three Months Three Months Ended Ended Ended Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------------------------------------------------------ Net income, as reported $1,154 $1,276 $ 545 $ 680 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes 13 13 7 6 ------------------------------------------------------------ Pro forma net income $1,141 $1,263 $ 538 $ 674 ============================================================ Earnings per share: Basic - as reported $ .72 $.81 $ .34 $ .43 Basic - pro forma .71 .80 .34 .43 Diluted - as reported .69 .77 .33 .41 Diluted - pro forma .68 .76 .32 .41
Note 5: Accounting Changes In previous financial statements and reports, the Corporation had consolidated RIVR Statutory Trust I ("Trust") through which it has issued trust preferred securities ("TPS") and reported the TPS as "guaranteed preferred beneficial interests in the Company's subordinated debentures" in the consolidated balance sheets. The Financial Accounting Standards Board ("FASB") had previously issued FASB Interpretation No. 46 ("FIN 46") and, in December 2003, issued a revision to FIN 46 to clarify certain provisions which affected the accounting for TPS. As a result of the provisions in FIN 46, the Trust should be deconsolidated, with the Corporation accounting for its investment in the Trust as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense. During 2003, the Corporation classified the TPS as debt and the dividends as interest but eliminated its common stock investment and dividends received from the Trust. FIN 46 permits and encourages restatement of prior period results. The prior period financial information has not been adjusted to give effect to the revised provisions of FIN 46 as the changes are not material to the financial statements and would have had no effect on previously reported net interest margin, net income or earnings per share. Note 6: Reclassifications Certain reclassifications have been made to the 2003 consolidated condensed financial statements to conform to the June 30, 2004 presentation. 9 Item 2: Management's Discussion and Analysis Forward Looking Statement 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 Corporation's significant accounting policies presented on pages 31 through 33 of the Annual Report to Shareholders for the year ended December 31, 2003. Certain of these policies are important to the portrayal of the Corporation's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses 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 general economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due. The allowance for loan losses represents management's estimate of probable losses inherent in the Corporation's loan portfolios. In determining the appropriate amount of the allowance for loan losses, management makes numerous assumptions, estimates and assessments. The Corporation's strategy for credit risk management includes conservative, centralized credit policies, and uniform underwriting criteria for all loans as well as an overall credit limit for each customer significantly below legal lending limits. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit quality reviews and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality. The Corporation's allowance consists of three components: probable losses estimated from individual reviews of specific loans, probable losses estimated from historical loss rates, and probable losses resulting from economic or other deterioration above and beyond what is reflected in the first two components of the allowance. Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation. Included in the review of individual loans are those that are impaired as provided in 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 Corporation evaluates the collectibility of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations. Homogenous loans, such as consumer installment and residential mortgage loans are not individually risk graded. Rather, standard credit scoring systems are used to assess credit risks. Reserves are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category. 10 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 Corporation'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 quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The Corporation's primary market area for lending is southeastern Indiana. When evaluating the adequacy of allowance, consideration is given to this regional geographic concentration and the closely associated effect changing economic conditions have on the Corporation's customers. The Corporation 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. Valuation of Mortgage Servicing Rights The Corporation recognizes the right 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 June 30, 2004 and December 31, 2003, mortgage servicing rights had carrying values of $852,000 and $854,000, respectively. 11 Financial Condition At June 30, 2004, the Corporation's consolidated assets totaled $258.5 million, an increase of $3.4 million, or 1.3%, from December 31, 2003. The increase in assets resulted from an increase in net loans receivable. Liquid assets (i.e., cash and interest earning deposits) decreased by $5.4 million from December 31, 2003 levels, to a total of $7.1 million at June 30, 2004. Investment securities decreased by $9.5 million, or 27.5%, to a total of $25.1 million at June 30, 2004. Net loans receivable were $209.3 million at June 30, 2004, an increase of $17.1 million, or 8.9%, from $192.2 million at December 31, 2003. The increases were funded mostly by decreases in investments and cash and interest earning deposits of $14.9 million. The Corporation's allowance for loan losses totaled $2.1 million at December 31, 2003 and $2.3 million at June 30, 2004, which represented approximately 1.1% of total loans. Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) totaled $.5 million and $1.1 million at December 31, 2003 and June 30, 2004, respectively. Although management believes that its allowance for loan losses at June 30, 2004, 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 $171.5 million at June 30, 2004, a decrease of $8.5 million, or 4.7%, compared to total deposits at December 31, 2003. The decrease for the six-month period resulted from disbursement of local tax funds. River Valley collects local property taxes as a service, which is then disbursed as needed by county authorities. Advances from the Federal Home Loan Bank totaled $50.0 million at December 31, 2003 and $56.0 million at June 30, 2004. These advances had a positive effect on the bottom line during the first and second quarters due to a decline in their interest rates. The average cost of Federal Home Loan Bank advances at June 30, 2004 was 3.99%. Stockholders' equity totaled $22.1 at June 30, 2004, a decrease of $.8 million, or 3.5%, from $22.9 million at December 31, 2003. The decrease resulted primarily from the Corporation's dividends paid and stock repurchases. We increased our dividend by 5.9 % from December 31, 2003, paying $0.18 per share to the holders of record on June 25, 2004, payable on July 9, 2004. This, in addition to the 2 for 1 stock split this past January, demonstrates our conviction that River Valley Financial Bank will sustain its growth and strong performance. The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At June 30, 2004, the Bank's regulatory capital exceeded all applicable regulatory capital requirements. Comparison of Operating Results for the Six Months Ended June 30, 2004 and 2003 General The Corporation's net income for the six months ended June 30, 2004, totaled $1,154,000, a decrease of $122,000 or 9.6% from the $1,276,000 reported for the period ended June 30, 2003. The decrease in income was not totally unexpected by management. The historical lows in mortgage interest rates contributed to a significant volume of mortgage originations and sales in 2003. The fee income associated with the refinance boom in 2003 made it difficult to realize a comparable income in the same period of 2004. The reality of 2004, with depressed margins, marginally higher operating expenses, and lower mortgage origination fees explains the variance. Going forward, River Valley has positioned itself to take advantage of the coming economic forecast. Net Interest Income Total interest income for the six months ended June 30, 2004 amounted to $6.4 million, an increase of $.3 million, or 4.9%, above the comparable period in 2003, reflecting the effects of a $17.4 million increase in our loan portfolio. The loan yield went from 6.4% for the 2003 period to 5.9% for the 2004 period to offset part of the $17.4 million portfolio growth income. Interest expense on deposits decreased by $354,000, or 20.6%, to a total of $1.4 million for the six months ended June 30, 2004, due primarily to a decrease in the average cost of deposits. There was also a decrease in the average balance of deposits outstanding year-to-year. Interest expense on borrowings totaled $1,234,000 for the six months ended June 30, 2004, an increase of $280,000 from the comparable period in 2003. The increase resulted primarily from an increase in average borrowings year-to-year. 12 As a result of the foregoing changes in interest income and interest expense, net interest income increased by $354,000 or 10.2%, for the six months ended June 30, 2004, as compared to the comparable period in 2003. 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 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 $194,000 provision for losses on loans for the six months ended June 30, 2004, compared to the $180,000 amount recorded in the 2003 period. The 2004 provision amount was predicated on the increase in the balance of the loan portfolio, coupled with the decrease in the level of delinquent loans year-to-year. While management believes that the allowance for losses on loans is adequate at June 30, 2004, 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 decreased by $415,000, or 24.0%, for the six months ended June 30, 2004, as compared to the same period in 2003, due primarily to the $717,000 decrease in gain on sale of loans. This decrease was partially offset by a gain in service fees and charges of $178,000 due to new programs and services introduced in late 2003. Other Expense Other expense increased by $183,000, or 6.3%, during the six months ended June 30, 2004, as compared to the same period in 2003. The increase was due primarily to the increase in salary/benefit expense. This increase was the result of the increase in employees to service an increased asset base and expanded branch network. Income Taxes The provision for income taxes totaled $681,000 for the six months ended June 30, 2004, an decrease of $136,000, or 16.6%, as compared to the same period in 2003. The effective tax rates were 37.1% and 39.0% for the six months ended June 30, 2004 and 2003, respectively. Comparison of Operating Results for the Three Months Ended June 30, 2004 and 2003 General The Corporation's net income for the three months ended June 30, 2004, totaled $545,000, a decrease of $135,000, or 19.9%, from the $680,000 of net income reported in the comparable 2003 period. The decrease in earnings in the 2004 period was primarily attributable to a decrease in net gains on loan sales of $331,000, and is offset in part by an increase in service fees and charges of $98,000. Net Interest Income Total interest income for the three months ended June 30, 2004 amounted to $3.2 million, an increase of $154,000, or 5.1%, from the comparable quarter in 2003, reflecting the effects of an increase in average balance of loans year to year. Interest income on loans totaled $2.9 million for the three months ended June 30, 2004, an increase of approximately $205,000, or 7.5%, from the comparable 2003 quarter. Interest expense on deposits decreased by $168,000, or 20.1%, to a total of $.7 million for the quarter ended June 30, 2004, due primarily to a decrease in the average cost of deposits. Interest expense on borrowings totaled $651,000 for the three months ended June 30, 2004, an increase of $133,000 over the comparable quarter in 2003. The increase resulted primarily 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 $189,000, or 11.1%, for the three months ended June 30, 2004, as compared to the same quarter in 2003. 13 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 $92,000 provision for losses on loans for the three months ended June 30, 2004, compared to the $90,000 recorded in the 2003 period. While management believes that the allowance for losses on loans is adequate at June 30, 2004, 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 decreased by $166,000 for the three months ended June 30, 2004, as compared to the same period in 2003, due primarily to a $331,000 decrease in gain on loan sales, offset to some extent by an increase in service fees and charges of $98,000 for the three months ended June 30, 2004, as compared to the same period in 2003. Other Expense Other expense increased by $240,000, or 17.2%, during the three months ended June 30, 2004, compared to the same period in 2003. This increase resulted primarily from the increase in loan volume/administrative expense, both balance sheet and off-balance sheet volume, and general expense increases due to growth. Income Taxes The provision for income taxes totaled $314,000 for the three months ended June 30, 2004, a decrease of $84,000, or 21.1%, as compared to the same period in 2003. This decrease resulted primarily from a decrease in net income before income taxes of $219,000, or 20.3%. The effective tax rates were 36.6% and 36.9% for the three months ended June 30, 2004 and 2003, respectively. 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 Corporation's chief executive officer and chief financial officer, after evaluating the effectiveness of the Corporation's disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of regulations promulgated under the Securities Exchange Act of 1934, as amended), as of the end of the most recent fiscal quarter covered by this quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Corporation's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Corporation would be made known to such officers by others within the Corporation on a timely basis. B. Changes in internal controls. There were no significant changes in the Corporation's internal control over financial reporting identified in connection with the Corporation's evaluation of controls that occurred during the Corporation's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds and Issuers Purchases of Equity Securities. Purchases of common stock made by or on be half of the Corporation during the three months ended June 30, 2004, are set forth below:
Total Number of Maximum Number of Shares Purchased as Shares That May Total Number of Average Part of Publicly Yet be Purchased Period Shares Purchased Price announce Plan Under the Plan ----------------------------------------------------------------------------------------------------------- April 2004 14,500 $22.38 14,500 * May 2004 ---- -- --- * June 2004 8,800 $21.18 8,800 * * Up to 10 % of total shares outstanding may be repurchased at a given time by the Corporation.
Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to Vote of Security Holders. On April 21, 2004, the Annual Meeting of the Corporation's shareholders was held. Two directors were elected to the following terms and by the following votes: For Votes Withheld --- -------------- Jonnie L. Davis (three-year term) 1,434,059 6,247 Charles J. McKay (three-year term) 1,432,962 7,344 Directors continuing in office are Robert W. Anger, Matthew P. Forrester, Michael J. Hensley, Fred W. Koehler, and L. Sue Livers. 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 April 22, 2004, a press release regarding the Corporation's results of operations for the period ended March 31, 2004 was filed under Items 7 and 12 on Form 8-K. 15 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: August 16, 2004 By: /s/ Matthew P. Forrester --------------- ------------------------------------- Matthew P. Forrester President and Chief Executive Officer Date: August 16, 2004 By: /s/ Larry C. Fouse --------------- ------------------------------------- Larry C. Fouse Vice President of Finance 16