10QSB 1 rvb_10qnov.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 SEPTEMBER 30, 2004 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 8, 2004 - 1,594,377 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 9 Item 3. Controls and Procedures. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Unregistered Sales of Equity 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 15 SIGNATURES 16 EXHIBITS 2
PART I FINANCIAL INFORMATION Item 1. Financial Statements RIVER VALLEY BANCORP Consolidated Condensed Balance Sheet September 30, December 31, 2004 2003 (Unaudited) ----------------------------------- (In Thousands, Except Share Amounts) Assets Cash and due from banks $ 4,729 $ 4,443 Interest-bearing demand deposits 5,395 8,069 ----------------------------------- Cash and cash equivalents 10,124 12,512 Investment securities available for sale 19,160 34,557 Loans held for sale 105 100 Loans 229,928 194,222 Allowance for loan losses 2,339 2,056 ----------------------------------- Net loans 227,589 192,166 Premises and equipment 6,201 5,980 Federal Home Loan Bank stock 3,250 2,176 Interest receivable 1,562 1,489 Cash surrender value life insurance 5,251 5,093 Other assets 986 1,003 ----------------------------------- Total assets $274,228 $255,076 =================================== Liabilities Deposits Non-interest-bearing $ 14,929 $ 11,828 Interest-bearing 163,464 168,126 ----------------------------------- Total deposits 178,393 179,954 Borrowings 72,217 50,000 Interest payable 348 381 Other liabilities 923 1,886 ----------------------------------- Total liabilities 251,881 232,221 ----------------------------------- 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 - 1,607,385and 1,646,680 shares Additional paid-in capital 8,392 8,705 Retained earnings 14,044 14,088 Shares acquired by stock benefit plans (167) (193) Accumulated other comprehensive income 78 255 ----------------------------------- Total shareholders' equity 22,347 22,855 ----------------------------------- Total liabilities and shareholders' equity $274,228 $255,076 =================================== See notes to consolidated condensed financial statements.
3
RIVER VALLEY BANCORP Consolidated Condensed Statement of Income (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, ------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------- (In Thousands, Except Share Amounts) Interest Income Loans receivable $ 9,055 $ 8,495 $ 3,199 $ 2,980 Investment securities 652 777 182 268 Interest-earning deposits and other 135 171 47 61 -------------------------------------------------------- Total interest income 9,842 9,443 3,428 3,309 -------------------------------------------------------- Interest Expense Deposits 2,056 2,492 691 773 Borrowings 1,956 1,526 722 572 -------------------------------------------------------- Total interest expense 4,012 4,018 1,413 1,345 -------------------------------------------------------- Net Interest Income 5,830 5,425 2,015 1,964 Provision for loan losses 266 360 72 180 -------------------------------------------------------- Net Interest Income After Provision for Loan Losses 5,564 5,065 1,943 1,784 -------------------------------------------------------- Other Income Net realized gains (losses) on sales of available-for-sale securities 24 (1) 15 1 Service fees and charges 1,323 1,040 461 356 Net gains on loan sales 342 1,450 80 471 Other income 264 168 79 96 -------------------------------------------------------- Total other income 1,953 2,657 635 924 -------------------------------------------------------- Other Expenses Salaries and employee benefits 2,348 2,022 791 689 Net occupancy and equipment expenses 840 602 361 213 Data processing fees 108 109 35 51 Advertising 170 196 53 65 Legal and professional fees 167 143 67 38 Amortization of mortgage servicing rights 141 475 4 306 Other expenses 826 859 185 123 -------------------------------------------------------- Total other expenses 4,600 4,406 1,496 1,485 -------------------------------------------------------- Income Before Income Tax 2,917 3,316 1,082 1,223 Income tax expense 1,117 1,290 436 473 -------------------------------------------------------- Net Income $ 1,800 $ 2,026 $ 646 $ 750 ======================================================== Basic earnings per share $ 1.12 $ 1.28 $ .41 $ .47 Diluted earnings per share 1.08 1.22 .39 .45 Dividends per share .53 .425 .18 .15 See notes to consolidated condensed financial statements.
4
RIVER VALLEY BANCORP Consolidated Condensed Statement of Comprehensive Income (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, ----------------------------------------------------------- 2004 2003 2004 2003 ----------------------------------------------------------- (In Thousands) Net income $ 1,800 $ 2,026 $ 646 $ 750 Other comprehensive income, net of tax Unrealized gains on securities available for sale Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $(107), $(18), $42 and $(127) (163) (30) 64 (193) Less: Reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of $10, $0, $6 and $0 14 (1) 9 1 ---------------------------------------------------------- (177) (29) 55 (194) ---------------------------------------------------------- Comprehensive income $ 1,623 $ 1,997 $ 701 $ 556 ========================================================== See notes to consolidated condensed financial statements.
5
RIVER VALLEY BANCORP Consolidated Condensed Statement of Cash Flows (Unaudited) Nine Months Ended September 30, --------------------------- 2004 2003 --------------------------- (In Thousands) Operating Activities Net income $ 1,800 $ 2,026 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 266 360 Depreciation and amortization 433 375 Investment securities (gains) losses (24) 1 Loans originated for sale in the secondary market (15,798) (64,117) Proceeds from sale of loans in the secondary market 15,960 65,849 Gain on sale of loans (342) (1,450) Amortization of deferred loan origination cost 99 132 Amortization of expense related to stock benefit plans 248 291 Net change in: Interest receivable (73) (145) Interest payable (33) (104) Other adjustments (787) 596 --------------------------- Net cash provided by operating activities 1,749 3,814 --------------------------- Investing Activities Purchases of securities available for sale (3,132) (10,935) Proceeds from maturities of securities available for sale 14,034 3,067 Proceeds from sale of securities available for sale 4,211 2,349 Purchase of Federal Home Loan Bank stock (992) (48) Net change in loans (35,613) (21,927) Premiums paid on life insurance -- (3,635) Purchases of premises and equipment (654) (532) Proceeds from sale of real estate owned 0 43 --------------------------- Net cash used in investing activities (22,146) (31,618) --------------------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits (1,794) 11,375 Certificates of deposit 233 (1,607) Proceeds from borrowings 34,000 14,000 Repayment of borrowings (12,000) (5,000) Cash dividends (842) (616) Purchase of stock (1,679) (285) Stock options exercised 101 227 Acquisition of stock for stock benefit plans (34) 0 Advances by borrowers for taxes and insurance 24 19 --------------------------- Net cash provided by financing activities 18,009 18,113 --------------------------- Net Change in Cash and Cash Equivalents (2,388) (9,691) Cash and Cash Equivalents, Beginning of Period 12,512 18,610 --------------------------- Cash and Cash Equivalents, End of Period $ 10,124 $ 8,919 =========================== Additional Cash Flows and Supplementary Information Interest paid $ 4,045 $ 4,122 Income tax paid 673 1,041 See notes to consolidated condensed financial statements. 6
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, 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 nine and three-month periods ended September 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 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. 7
Nine Months Ended Nine Months Ended September 30, 2004 September 30, 2003 ------------------ ------------------ 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 $ 1,800 1,600,173 $1.12 $ 2,026 1,584,378 $1.28 ===== ===== Effect of dilutive RRP awards and stock options 72,289 77,498 -------------------------- ----------------------------- Diluted earnings per share Income available to common shareholders and assumed conversions $ 1,800 1,672,462 $1.08 $ 2,026 1,661,876 $1.22 ===================================== ======================================== Three Months Ended Three Months Ended September 30, 2004 September 30, 2003 ------------------ ------------------ 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 $ 646 1,589,574 $. 41 $ 750 1,591,906 $. 47 ===== ===== Effect of dilutive RRP awards and stock options 69,629 79,088 -------------------------- ----------------------------- Diluted earnings per share Income available to common shareholders and assumed conversions $ 646 1,659,203 $ .39 $ 750 1,670,994 $ .45 ===================================== ========================================
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, 2003 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. 8
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ---------------------------------------------------------------------------------- Net income, as reported $ 1,800 $ 2,026 $ 646 $ 750 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes 20 20 7 7 ------------------------------------------------------------------------ Pro forma net income $ 1,780 $ 2,006 $ 639 $ 743 ======================================================================== Earnings per share: Basic - as reported $ 1.12 $ 1.28 $ .41 $ .47 Basic - pro forma 1.11 1.27 .40 .47 Diluted - as reported 1.08 1.22 .39 .45 Diluted - pro forma 1.06 1.21 .39 .45
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 Company 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 financial statements to conform to the September 30, 2004 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 9 important factors that could cause such differences. These factors include regional and national economic conditions, changes in monetary and fiscal policies of the federal government, changes in levels of market interest rates, the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans, the change in state leadership and dominance by a different political party in the state legislature, demand for loan products and financial services, and the results the bank has with the new markets in Charlestown and Sellersburg, Indiana, and Carrollton, Kentucky. Critical Accounting Policies The notes to the consolidated financial statements contain a summary of the Company's significant accounting policies presented on pages 25 through 27 of the Annual Report to Shareholders for the year ended December 31, 2003. 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 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. 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 non-accrual 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. 10 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 and portions of northwestern Kentucky. 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 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, 2004 and December 31, 2003, mortgage servicing rights had carrying values of $886,000 and $854,000, respectively. The Bank's Insurance Agency On June 15, 2004, the Board of Directors of the Company approved the purchase by the Company of one unit of common stock of The Bank's Insurance Agency Holding Company LLC ("TBIAHC") and approved a Participating Agency Services Agreement between the Company and TBIAHC's wholly-owned subsidiary, The Bank's Insurance Agency LLC ("TBIA"), thereby joining TBIA as an affiliate bank. The Company's cost for the unit of common stock was $75,000, and the actual transfer of funds for payment occurred on September 28, 2004. The TBIA is an Indiana statewide agency under the direction of the Community Bankers Association of Indiana (CBAI) of which River Valley Financial Bank is a member. TBIAHC's sole business is to own and operate its subsidiary, TBIA, which will be in the business of soliciting, negotiating and selling insurance products though its affiliated members. All business will be conducted through TBIA, and TBIA will provide the clients of its affiliate banks a cost-effective and choice-based insurance distribution program. TBIA will act as an independent agent of multiple insurance companies, focusing on pre-selected products that bank customers are likely to need--including life, health and property and casualty coverages. TBIA will also provide marketing and administration agency distribution services to affiliate banks. Each affiliate bank of TBIA, including the Company, will enter into a contractual relationship with TBIA, whereby such affiliate banks will assign certain rights to their existing and future insurance client relationships to TBIA. In return, affiliate banks will be compensated in relation to their existing relationships and future clients referred to TBIA. Specifically, TBIA will remit to affiliate banks a certain portion of the commissions TBIA receives with respect to the policies and insureds referred to TBIA by that affiliate bank. To accomplish this arrangement, the Company became licensed with the Indiana Department of Insurance. Employees of the affiliate banks will not be licensed as insurance producers and therefore not able to directly solicit, negotiate and sell such products. It is expected that TBIA's insurance products will be offered to the Bank's clients in the last half of 2005. Financial Condition At September 30, 2004, the Corporation's consolidated assets totaled $274.2 million, an increase of $19.2 million, or 7.5% from December 31, 2003. The increase in assets resulted primarily from an increase in net loans receivable, 11 including loans held for sale, of $35.4 million, partially offset by the decrease of the investment portfolio of $15.4 million, which was funded by an increase in borrowed funds of $22.2 million. Liquid assets (i.e., cash and cash equivalents) decreased by $2.4 million from December 31, 2003, to a total of $10.1 million at September 30, 2004. The Corporation's consolidated allowance for loan losses totaled $2.1 million on December 31, 2003 and $2.3 million at September 30, 2004, which represented 1.1% and 1.0% of total loans respectively. Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) totaled $493,000 and $1,116,000 at December 31, 2003 and September 30, 2004, respectively. Although management believes that its allowance for loan losses at September 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 $178.4 million at September 30, 2004, a decrease of $1.6 million, or .9 %, compared to total deposits at December 31, 2003. The lack of growth for the nine-month period resulted from very competitive interest rates in some of our markets and the loss of approximately $6.0 million in public funds deposits. Borrowings totaled $50.0 million at December 31, 2003, and $72.2 million on September 30, 2004. The average cost of borrowings at September 30, 2004 was 3.99%, slightly down from 4.08% at December 31, 2003. Shareholders' equity totaled $22.3 million at September 30, 2004, a decrease of $508,000, or 2.2 % from $22.9 million at December 31, 2003. The decrease resulted primarily from the Corporation's cash dividends and stock repurchases. The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2004, the Bank's regulatory capital exceeded all applicable regulatory capital requirements. Comparison of Operating Results for the Nine Months Ended September 30, 2004 and 2003 General The Corporation's net income for the nine months ended September 30, 2004, totaled $1,800,000, a decrease of $226,000 or 11.2 % from the $2,026,000 reported for the period ended September 30, 2003. The decrease in income in the 2004 period was primarily attributable to a decrease in gains on loan sales of $1,108,000. The decrease was offset in part by an increase in service fees and charges of $283,000, an increase in net interest income of $405,000 and a decrease in other expenses of $194,000. Net Interest Income Total interest income for the nine months ended September 30, 2004 amounted to $9.8 million, an increase of $399,000, or 4.2%, from the comparable period in 2003, reflecting the effects of an increase in average interest-earning assets outstanding but also a decrease in the average loan rate of approximately 0.31%. Interest expense on deposits decreased by $436,000, or 17.5%, to a total of $2.1 million for the nine months ended September 30, 2004, due primarily to a decrease in the average rate paid on deposits outstanding year-to-year. Interest expense on borrowings totaled $2.0 million for the nine months ended September 30, 2004, an increase of $430,000, from the comparable period in 2003. 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 $405,000, or 7.5%, for the nine months ended September 30, 2004, as compared to the same 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 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 12 analysis, management recorded a $266,000 provision for losses on loans for the nine months ended September 30, 2004, compared to the $360,000 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 level of delinquent loans year-to-year. While management believes that the allowance for losses on loans is adequate at September 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 $704,000, during the nine months ended September 30, 2004, as compared to the same period in 2003. The decrease was due primarily to a $1,108,000 decrease in gains on sale of loans. This decrease, however, was offset partially by the $283,000 increase in service fees and charges due to new programs and services introduced in late 2003. Other Expense Other expense increased by $194,000, or 4.4%, during the nine months ended September 30, 2004, as compared to the same period in 2003. The increase was due primarily to a $326,000 increase in salaries and benefits and a $238,000 increase in net occupancy and equipment expense resulting from an expanded branch network. These increases were in part offset by a decrease in amortization of mortgage servicing rights which was adjusted each period based on the valuation results. Income Taxes The provision for income taxes totaled $1.1 million for the nine months ended September 30, 2004, a decrease of $173,000, or 13.4%, as compared to the same period in 2003. The effective tax rates were 38.3% and 38.9% for the nine months ended September 30, 2004 and 2003, respectively. Comparison of Operating Results for the Three Months Ended September 30, 2004 and 2003 General The Corporation's net income for the three months ended September 30, 2004, totaled $646,000, a decrease of $104,000, or 13.9% from the $750,000 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 $391,000, offset in part by an increase in service fees and charges of $105,000, an increase in net interest income of $51,000 and a decrease in the provision for loan losses of $108,000. Net Interest Income Total interest income for the three months ended September 30, 2004 amounted to $3.4 million, a increase of $119,000, or 3.6%, from the comparable quarter in 2003, 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 $3.2 million for the three months ended September 30, 2004, an increase of $219,000, or 7.3 %, from the comparable quarter in 2003, reflecting the effects of an increase in average balance of loans year-to-year. Interest expense on deposits decreased by $82,000, or 10.6%, to a total of $691,000 for the quarter ended September 30, 2004, due primarily to a decrease in the average rate of deposits outstanding. Interest expense on borrowings totaled $722,000 for the three months ended September 30, 2004, an increase of $150,000 over the comparable quarter in 2003. 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 $51,000, or 2.6%, for the three months ended September 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 $72,000 provision for losses on loan for the three months ended September 30, 2004, compared to the $180,000 recorded in the 2003 period. While management believes that the allowance for losses on loans is adequate at September 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 $289,000, for the three months ended September 30, 2004, as compared to the same period in 2003, due primarily to a decrease in net gains on loan sales. Other Expense Other expenses increased by $11,000, or .7%, during the three months ended September 30, 2004, compared to the same period in 2003. The increase was due primarily to the increase in general expense due to growth. Income Taxes The provision for income taxes totaled $436,000 for the three months ended September 30, 2004, a decrease of $37,000, or 7.8%, as compared to the same period in 2003. This decrease resulted primarily from a decrease in net income before income taxes of $141,000, or 29.8%. The effective tax rates were 40.3% and 38.7% for the three months ended September 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 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. In connection with the Bank's 2004 examination by the Office of Thrift Supervision (the "OTS"), 14 the OTS uncovered certain failures on the part of the Bank to comply with the Bank Secrecy Act, the Flood Disaster Protection Act(the "FDPA"), the Homeowners' Protection Act and the Truth in Lending Act. The OTS made clear that the Bank had already made substantial corrective actions to improve its compliance programs and systems. Nonetheless, because of the Bank's alleged failure to comply with the FDPA with respect to four loans, the OTS assessed civil monetary penalties against the Bank of $1,400. The Bank executed a Stipulation and Consent to the issuance of a cease and desist order and assessment of the $1,400 in civil money penalties with respect to these matters. Management believes it has now taken all necessary steps to resolve these compliance issues. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Purchases of common stock made by or on behalf of the Corporation during the three months ended September 30, 2004 are set forth below: Total Number of Maximum Number of Total Number Shares Purchased as Shares That May of Shares Average Part of Publicly Yet be Purchased Period Purchased Price Announced Plan Under the Plan -------------------------------------------------------------------------------- July 2004 6,500 $22.25 6,500 * August 2004 3,500 22.46 3,500 * September 2004 ----- ------ ----- -- * 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. None. Item 5. Other Information. None. Item 6. Exhibits. Exhibit 10 Employment Agreement between River Valley Financial Bank and Gregory T. Siegrist Exhibit 31(1) CEO Certification required by 17 C.F.R. Section 240.13a-14(a) Exhibit 31(2) CFO Certification required by 17 C.F.R. Section 240.13a-14(a) Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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: November 15, 2004 By: /s/ Matthew P. Forrester ---------------------------------------- Matthew P. Forrester President and Chief Executive Officer Date: November 15, 2004 By: /s/ Larry C. Fouse ---------------------------------------- Larry C. Fouse Vice President of Finance 16