10-Q 1 rvb_10qnov.htm FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 For the Quarterly Period Ended September 30, 2005

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(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, 2005 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 registrant specified in its charter)

Indiana
35-1984567
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

430 Clifty Drive
Madison, Indiana 47250
(Address of principal executive offices, including Zip Code)

(812) 273-4949
(Registrant’s telephone number, including area code)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [   ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]   No [X]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [   ]   No [X]

The number of shares of the Registrant’s common stock, without par value, outstanding as of September 30, 2005 was 1,588,987.



1

RIVER VALLEY BANCORP
FORM 10-Q

INDEX


 
Page No.
   
FORWARD LOOKING STATEMENT
3
     
PART I.
FINANCIAL INFORMATION
3
     
Item 1.
Financial Statements
3
     
 
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 of Financial Condition and Results of Operations
10
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
14
     
Item 4.
Controls and Procedures
15
     
PART II.
OTHER INFORMATION
16
     
Item 1.
Legal Proceedings
16
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16
Item 3.
Defaults Upon Senior Securities
16
Item 4.
Submission of Matters to a Vote of Security Holders
16
Item 5.
Other Information
16
Item 6.
Exhibits
16
     
SIGNATURES
17
     
EXHIBIT INDEX
18



2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RIVER VALLEY BANCORP
Consolidated Condensed Balance Sheets

   
September 30,
2005
(Unaudited)
  
December 31,
2004
  
   
(In Thousands, Except Share Amounts)
  
 Assets
          
Cash and due from banks
  
$
3,733
  
$
4,911
  
Interest-bearing demand deposits
   
5,052
    
7,526
  
Cash and cash equivalents
    
8,785
    
12,437
  
Investment securities available for sale
    
52,399
    
26,964
  
Loans held for sale
    
270
    
337
  
Loans
    
234,446
    
233,400
  
Allowance for loan losses
    
2,333
    
2,364
  
Net loans
   
232,113
    
231,036
  
Premises and equipment
    
8,289
    
6,798
  
Federal Home Loan Bank stock
    
4,050
    
3,281
  
Interest receivable
    
1,908
    
1,599
  
Cash surrender value life insurance
    
5,456
    
5,302
  
Other assets
    
1,232
    
1,673
  
Total assets
  
$
314,502
  
$
289,427
  
               
               
Liabilities
              
Deposits
              
Non-interest-bearing
  
$
20,084
  
$
5,066
  
Interest-bearing
    
169,193
    
155,472
  
Total deposits
    
189,277
    
170,538
  
Borrowings
    
99,990
    
94,600
  
Interest payable
    
459
    
382
  
Other liabilities
    
1,654
    
1,514
  
Total liabilities
    
291,380
    
267,034
  
               
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 - 1,588,987 and 1,584,377 shares
              
Additional paid-in capital
    
9,037
    
8,843
  
Retained earnings
   
14,608
    
13,800
  
Shares acquired by stock benefit plans
    
(273
)
  
(215
)
Accumulated other comprehensive income
   
(250
)
  
(35
)
Total shareholders’ equity
    
23,122
    
22,393
  
               
Total liabilities and shareholders’ equity
  
$
314,502
  
$
289,427
  
 
See notes to consolidated condensed financial statements.
3
RIVER VALLEY BANCORP
Consolidated Condensed Statements of Income
(Unaudited)

   
Nine Months Ended
  
Three Months Ended
  
   
September 30,
  
September 30,
  
   
2005
  
2004
  
2005
  
2004
  
 
  
(In Thousands, Except Share Amounts)
  
 Interest Income
                  
Loans receivable
  
$
10,575
  
$
9,055
  
$
3,617
  
$
3,199
  
Investment securities
    
1,082
    
652
    
414
    
182
  
Interest-earning deposits and other
    
246
    
135
    
85
    
47
  
Total interest income
    
11,903
    
9,842
    
4,116
    
3,428
  
                           
Interest Expense
                          
Deposits
    
2,490
    
2,056
    
876
    
691
  
Borrowings
    
3,316
    
1,956
    
1,210
    
722
  
Total interest expense
    
5,806
    
4,012
    
2,086
    
1,413
  
                           
Net Interest Income
    
6,097
    
5,830
    
2,030
    
2,015
  
Provision for loan losses
    
216
    
266
    
72
    
72
  
Net Interest Income After Provision for Loan Losses
    
5,881
    
5,564
    
1,958
    
1,943
  
                           
Other Income
                          
Net realized gains (losses) on sales of available-for-sale securities
   
0
    
24
    
0
    
15
  
Service fees and charges
    
1,399
    
1,323
    
507
    
461
  
Net gains on loan sales
   
248
    
342
    
76
    
80
  
Other income
    
240
    
264
    
69
    
79
  
Total other income
    
1,887
    
1,953
    
652
    
635
  
                           
Other Expenses
                          
Salaries and employee benefits
    
2,721
    
2,348
    
883
    
791
  
Net occupancy and equipment expenses
    
858
    
840
    
312
    
361
  
Data processing fees
    
94
    
108
    
37
    
35
  
Advertising
    
189
    
170
    
72
    
53
  
Legal and professional fees
    
198
    
167
    
45
    
67
  
Amortization of mortgage servicing rights
    
100
    
141
    
18
    
4
  
Other expenses
    
977
    
826
    
380
    
185
  
Total other expenses
    
5,137
    
4,600
    
1,747
    
1,496
  
                           
Income Before Income Tax
   
2,631
    
2,917
    
863
    
1,082
  
Income tax expense
   
910
    
1,117
    
287
    
436
  
                           
Net Income
  
$
1,721
  
$
1,800
  
$
576
  
$
646
  
                           
Basic earnings per share
  
$
1.09
  
$
1.12
  
$
.36
  
$
.41
  
Diluted earnings per share
    
1.05
    
1.08
    
.35
    
.39
  
Dividends per share
    
.58
    
.53
    
.195
    
.18
  
 
See notes to consolidated condensed financial statements.
4
RIVER VALLEY BANCORP
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)

   
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
   
2005
  
2004
  
2005
  
2004
  
   
(In Thousands)
  
       
Net income
 
$
1,721
  
$
1,800
  
$
576
  
$
646
  
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 $(141), $(107), $(44) and $42.
    
(215
)
  
(163
)
  
(68
)
  
64
  
Less: Reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of $0, $10, $0 and $6.
          
14
          
9
  
     
(215
)
  
(177
)
  
(68
)
  
55
  
Comprehensive income
 
$
1,506
  
$
1,623
  
$
508
  
$
701
  


See notes to consolidated condensed financial statements.

5
RIVER VALLEY BANCORP
Consolidated Condensed Statements of Cash Flows
(Unaudited)

   
Nine Months Ended
  
   
September 30,
  
   
2005
  
2004
  
   
(In Thousands)
  
Operating Activities
          
Net income
  
$
1,721
  
$
1,800
  
Adjustments to reconcile net income to net cash provided by operating activities
              
Provision for loan losses
    
216
    
266
  
Depreciation and amortization
    
426
    
433
  
Loss on sale of premises and equipment
    
14
    
0
  
Investment securities gains
   
0
    
(24
)
Loans originated for sale in the secondary market
    
(11,615
)
  
(15,798
)
Proceeds from sale of loans in the secondary market
    
11,794
    
15,960
  
Gain on sale of loans
   
(248
)
  
(342
)
Amortization of deferred loan origination cost
    
91
    
99
  
Amortization of expense related to stock benefit plans
    
249
    
248
  
Net change in:
              
Interest receivable
    
(309
)
  
(73
)
Interest payable
    
77
    
(33
)
Other adjustments
   
419
    
(787
)
Net cash provided by operating activities
    
2,835
    
1,749
  
               
Investing Activities
              
Purchases of securities available for sale
    
(36,771
)
  
(3,132
)
Proceeds from maturities of securities available for sale
    
11,015
    
14,034
  
Proceeds from sale of securities available for sale
    
0
    
4,211
  
Purchase of Federal Home Loan Bank stock
    
(695
)
  
(992
)
Net change in loans
    
(1,328
)
  
(35,613
)
Purchases of premises and equipment
    
(1,931
)
  
(654
)
Proceeds from sale of foreclosed real estate
    
80
    
0
  
Net cash used in investing activities
    
(29,630
)
  
(22,146
)
               
Financing Activities
              
Net change in
              
Noninterest-bearing, interest-bearing demand and savings deposits
    
13,744
    
(1,794
)
Certificates of deposit
    
4,995
    
233
  
Short term borrowings
    
(8,610
)
      
Proceeds from borrowings
    
32,000
    
34,000
  
Repayment of borrowings
    
(18,000
)
  
(12,000
)
Cash dividends
   
(903
)
  
(842
)
Purchase of stock
    
-
    
(1,679
)
Stock options exercised
    
17
    
101
  
Acquisition of stock for stock benefit plans
    
(147
)
  
(34
)
Advances by borrowers for taxes and insurance
    
47
    
24
  
Net cash provided by financing activities
    
23,143
    
18,009
  
               
Net Change in Cash and Cash Equivalents
    
(3,652
)
  
(2,388
)
               
Cash and Cash Equivalents, Beginning of Period
    
12,437
    
12,512
  
               
Cash and Cash Equivalents, End of Period
  
$
8,785
  
$
10,124
  
               
Additional Cash Flows and Supplementary Information
              
Interest paid
  
$
5,729
  
$
4,045
  
Income tax paid
    
880
    
673
  
 
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-Q 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, 2004. 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, 2005, 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, 2004 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 subsidiary, the Bank, and the Bank’s subsidiary, Madison First Services 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


   
Nine Months Ended
September 30, 2005
  
Nine Months Ended
September 30, 2004
  
   
Income
  
Weighted
Average
Shares
  
Per Share
Amount
  
Income
  
Weighted
Average
Shares
  
Per Share
Amount
  
   
(In Thousands, Except Share Amounts)
  
Basic earnings per share
                         
Income available to common shareholders
  
$
1,721
    
1,578,958
  
$
1.09
  
$
1,800
    
1,600,173
  
$
1.12
  
                                       
Effect of dilutive RRP awards and stock options
          
61,387
                
72,289
        
Diluted earnings per share
                                      
Income available to common shareholders and assumed conversions
  
$
1,721
    
1,640,345
  
$
1.05
  
$
1,800
    
1,672,462
  
$
1.08
  


   
Three Months Ended
September 30, 2005
  
Three Months Ended
September 30, 2004
  
   
Income
  
Weighted
Average
Shares
  
Per Share
Amount
  
Income
  
Weighted
Average
Shares
  
Per Share
Amount
  
   
(In Thousands, Except Share Amounts)
  
Basic earnings per share
                         
Income available to common shareholders
  
$
576
    
1,584,073
  
$
. 36
  
$
646
    
1,589,574
  
$
. 41
  
                                       
Effect of dilutive RRP awards and stock options
          
60,084
                
69,629
        
Diluted earnings per share
                                      
Income available to common shareholders and assumed conversions
  
$
576
    
1,644,157
  
$
.35
  
$
646
    
1,659,203
  
$
.39
  


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, 2004 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
September 30,
2005
  
Nine Months Ended
September 30,
2004
  
Three Months Ended
September 30,
2005
  
Three Months Ended
September 30,
2004
  
 
Net income, as reported
  
$
1,721
  
$
1,800
  
$
576
  
$
646
  
 
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes
    
10
    
20
    
2
    
7
  
 
Pro forma net income
  
$
1,711
  
$
1,780
  
$
574
  
$
639
  
 
Earnings per share:
                          
 
Basic - as reported
  
$
1.09
  
$
1.12
  
$
.36
  
$
.41
  
 
Basic - pro forma
    
1.08
    
1.11
    
.36
    
.40
  
 
Diluted - as reported
    
1.05
    
1.08
    
.35
    
.39
  
 
Diluted - pro forma
    
1.04
    
1.06
    
.35
    
.39
  

In December, 2004, the Financial Accounting Standards Board (FASB) issued an amendment to SFAS 123(SFAS 123R) which eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair value-based method. SFAS 123R will be effective for the Company beginning January 1, 2006. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date.

As of the required effective date, the Company will apply SFAS 123R using either the modified version of prospective application or the modified version of retrospective application. Under prospective transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for either recognition or pro forma disclosures. For periods before the required effective date, a company may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS 123.

The Company is currently evaluating the effect of the recognition and measurement provisions of SFAS 123R but believes the adoption of SFAS 123R will not result in a material impact on the Company’s results of operation or financial condition.


Note 5:  Reclassifications

Certain reclassifications have been made to the 2004 consolidated condensed financial statements to conform to the September 30, 2005 presentation.



9

Note 6:  Recent Accounting Developments

In June, 2005 the FASB Board decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the FASB staff to issue a staff position (FSP) which will be retitled FSP 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The final FSP will supersede EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” FSP FAS 115-1 will replace guidance in EITF Issue 03-1 on loss recognition with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. FSP FAS 115-1 will clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made.

FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company has consistently followed the loss recognition guidance in SFAS No. 115, so the adoption of FSP FAS 115-1 will not have any significant impact on the Company's financial condition or results of operation.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q ("Form 10-Q") 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-Q 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-Q 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-Q 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 24 through 26 of the Annual Report to Shareholders for the year ended December 31, 2004. 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.


10

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.

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, 2005 and December 31, 2004, mortgage servicing rights had carrying values of $896,000 and $860,000, respectively.

11

Financial Condition

At September 30, 2005, the Corporation’s consolidated assets totaled $314.5 million, an increase of $25.1 million, or 8.7% from December 31, 2004. The increase in assets resulted primarily from an increase in the investment portfolio of $25.4 million, partially offset by the decrease of liquid assets(i.e., cash and cash equivalents) of $3.6 million. Net loans receivable, including loans held for sale, were $232.4 million at September 30, 2005, an increase of $1.0 million, or .4%, from $231.4 at December 31, 2004.

The Corporation’s consolidated allowance for loan losses totaled $2.4 million on December 31, 2004 and $2.3 million at September 30, 2005, which represented 1.0% and .99% of total loans respectively. Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) totaled $2,100,000 and $1,758,000 at December 31, 2004 and September 30, 2005 respectively. Although management believes that its allowance for loan losses at September 30, 2005, 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 $189.3 million at September 30, 2005, an increase of $18.8 million, or 11.0%, compared to total deposits at December 31, 2004. The growth for the nine-month period resulted from the fact that our home market has changed. The sale of our largest competitor allowed us to increase our deposits at a time when deposits are very difficult to attract.

Borrowings totaled $94.6 million at December 31, 2004, and $100.0 million on September 30, 2005. Of these totals, $65.0 million and $79.0 million respectively were FHLB Advances with average rates of 4.07% and 4.27%. Our interest spread is suffering as a result.

Shareholders’ equity totaled $23.1 million at September 30, 2005, an increase of $729,000, or 3.3% from $22.4 million at December 31, 2004. The increase resulted primarily from the Corporation’s net income and the offset by dividends paid.

The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2005, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.


Comparison of Operating Results for the Nine Months Ended September 30, 2005 and 2004

General

The Corporation’s net income for the nine months ended September 30, 2005, totaled $1,721,000, a decrease of $79,000 or 4.4% from the $1,800,000 reported for the period ended September 30, 2004. The decrease in income in the 2005 period was primarily attributable to increases in other expenses.

Net Interest Income

Total interest income for the nine months ended September 30, 2005 amounted to $11.9 million, an increase of $2.1 million, or 20.9%, from the comparable period in 2004, reflecting the effects of an increase in average interest-earning assets outstanding and an increase in the average loan rate of approximately 0.44%.

Interest expense on deposits increased by $434,000, or 21.1%, to a total of $2.5 million for the nine months ended September 30, 2005, due primarily to an increase in the average rate paid on deposits outstanding year-to-year. Interest expense on borrowings totaled $3.3 million for the nine months ended September 30, 2005, an increase of $1.4 million, from the comparable period in 2004. This increase resulted from an increase in the interest rate paid and the average borrowings year-to-year.

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $267,000, or 4.6%, for the nine months ended September 30, 2005, as compared to the same period in 2004.


12

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 $216,000 provision for losses on loans for the nine months ended September 30, 2005, compared to the $266,000 amount recorded in the 2004 period. The 2005 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 September 30, 2005, 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 $66,000, during the nine months ended September 30, 2005, as compared to the same period in 2004. The decrease was due primarily to a $94,000 decrease in gains on sale of loans, offset in part by an increase in service fees and charges. The current mortgage rates are deterring loan refinancing in comparison to previous periods.

Other Expense

Other expense increased by $537,000, or 11.7%, during the nine months ended September 30, 2005, as compared to the same period in 2004. The increase was due primarily to a $378,000 increase in salaries and benefits resulting from an expanded branch network and an increase in the asset base that is being served.
 
Income Taxes

The provision for income taxes totaled $.9 million for the nine months ended September 30, 2005, a decrease of $207,000, or 18.5%, as compared to the same period in 2004. This decrease resulted primarily from a decrease in net income before income taxes of $286,000.00 or 9.8%.


Comparison of Operating Results for the Three Months Ended September 30, 2005 and 2004

General

The Corporation’s net income for the three months ended September 30, 2005, totaled $576,000, a decrease of $70,000, or 10.8% from the $646,000 of net income reported in the comparable 2004 period. The decrease in earnings in the 2005 period was primarily attributable to an increase in other expenses.

Net Interest Income

Total interest income for the three months ended September 30, 2005 amounted to $4.1 million, an increase of $688,000, or 20.1%, from the comparable quarter in 2004, reflecting the effects of an increase in average interest-earning assets outstanding. Interest income on loans totaled $3.6 million for the three months ended September 30, 2005, an increase of $418,000, or 13.1%, from the comparable quarter in 2004, reflecting the effects of an increase in average balance of loans year-to-year.


13
Interest expense on deposits increased by $185,000, or 26.8%, to a total of $876,000 for the quarter ended September 30, 2005, due to an increase in the average rate and average outstanding balance of deposits. Interest expense on borrowings totaled $1,210,000 for the three months ended September 30, 2005, an increase of $488,000 over the comparable quarter in 2004. This increase resulted from an increase in the rates and 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 $15,000, or .7%, for the three months ended September 30, 2005, as compared to the same quarter in 2004.

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, 2005. The same amount was recorded in the 2004 period. While management believes that the allowance for losses on loans is adequate at September 30, 2005, 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 $17,000, for the three months ended September 30, 2005, as compared to the same period in 2004, due primarily to an increase in Service fees and charges.

Other Expense

Other expenses increased by $251,000, or 16.8%, during the three months ended September 30, 2005, compared to the same period in 2004. The increase was due primarily to the increase in general expense due to growth.

Income Taxes

The provision for income taxes totaled $287,000 for the three months ended September 30, 2005, a decrease of $149,000, or 34.2%, as compared to the same period in 2004. This decrease resulted primarily from a decrease in net income before income taxes of $219,000, or 20.2%.
 
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. Quantitative and Qualitative Disclosures About Market Risk

An important part of River Valley Financial Bank’s asset/liability management policy includes examining the interest rate sensitivity of the assets and liabilities and monitoring the expected effects of interest rate changes on its net portfolio value.

Presented below, as of June 30, 2005 and 2004, is an analysis performed by the OTS of River Valley’s interest rate risk as measured by changes in River Valley’s net portfolio value (“NPV”) for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up 300 basis points and down 200 basis points. Down -200 basis points was added back as of the March 31, 2005 calculations.

14


June 30, 2005
   
Net Portfolio Value
    
NPV as% of PV of Assets
Changes In Rates
$ Amount
$ Change
%Change
NPV Ratio
Change
(Dollars in thousands)
                
+300
bp
39,043
  
1,999
  
+5
%
12.79
%
+97
bp
+200
bp
39,018
  
1,975
  
+5
%
12.65
%
+83
bp
+100
bp
38,406
  
1,362
  
+4
%
12.34
%
+52
bp
0
bp
37,044
 
      
 
11.82
 %
  
 
-100
bp
34,793
 
-2,251
  
-6
%
11.04
 %
-78
 bp
-200
bp
32,081
 
-4,963
  
-13
%
10.14
 %
-168
 bp
 

June 30, 2004
   
Net Portfolio Value
    
NPV as% of PV of Assets
Changes In Rates
$ Amount
$ Change
%Change
NPV Ratio
Change
(Dollars in thousands)
                
+300
bp
38,053
  
733
  
+2
%
14.63
%
+66
bp
+200
bp
38,495
  
1,174
  
+3
%
14.64
%
+67
bp
+100
bp
38,321
  
1,001
  
+3
%
14.44
%
+47
bp
0
bp
37,320
 
      
 
13.97
 %
  
 
-100
bp
35,278
 
-2,043
  
-5
%
13.16
 %
-81
 bp

Management believes at September 30, 2005 there have been no material changes in River Valley’s interest rate sensitive instruments which would cause a material change in the market risk exposures which affect the quantitative and qualitative risk disclosures as presented in Item 6., Management’s Discussion and Analysis or Plan of Operation, of the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2004


Item 4. 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 (the “Exchange Act”)), 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 effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

15


PART II.   OTHER INFORMATION
     
Item 1.
Legal Proceedings.
     
 
None.
     
Item 2.
Unregistered Sales of Equity 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.
     
 
No.
 
Description
 
     
 
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.

16


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


   
RIVER VALLEY BANCORP
     
Date:
November 14, 2005
/s/ Matthew P. Forrester
   
Matthew P. Forrester
   
President and Chief Executive Officer
     
Date:
November 14, 2005
By: /s/ Larry C. Fouse
   
Larry C. Fouse
   
Vice President of Finance


17

EXHIBIT INDEX
 

 
No.
 
  
Description
 
  
Location
 
 
31(1)
  
 
CEO Certification required by 17 C.F.R. Section 240.13a-14(a)
  
 
Attached
 
31(2)
  
 
CFO Certification required by 17 C.F.R. Section 240.13a-14(a)
  
 
Attached
 
32
  
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
 
Attached

 
 
18