River Valley Bancorp 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
	OR
o	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 as specified in its charter)

Indiana	35-1984567
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
430 Clifty Drive Madison, Indiana	47250
(Address of principal executive offices)	(Zip Code)

(812) 273-4949

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

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 reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o No  ý

The number of shares of the Registrant’s common stock, without par value, outstanding as of September 30, 2006 was 1,617,731.

RIVER VALLEY BANCORP

FORM 10-Q

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 of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	14
Item 4.	Controls and Procedures	15
PART II. OTHER INFORMATION		16
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	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 Sheet 

	September 30, 2006 (Unaudited)			December 31, 2005
	(In Thousands, Except Share Amounts)
Assets
Cash and due from banks	$	7,070		$	4,749
Interest-bearing demand deposits		848			12,933
Fed funds sold		216			48
Cash and cash equivalents		8,134			17,730
Investment securities available for sale		64,744			59,609
Loans held for sale		45			--
Loans		240,417			232,044
Allowance for loan losses		2,296			2,320
Net loans		238,121			229,724
Premises and equipment		7,942			8,189
Federal Home Loan Bank stock		4,150			4,050
Interest receivable		2,204			2,060
Cash surrender value life insurance		5,671			5,523
Other assets		2,509			1,863
Total assets	$	333,520		$	328,748
Liabilities
Deposits
Non-interest-bearing	$	19,371		$	19,270
Interest-bearing		197,437			187,463
Total deposits		216,808			206,733
Borrowings		90,217			96,782
Interest payable		666			554
Other liabilities		2,072			1,661
Total liabilities		309,763			305,730
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 - 1,617,731and 1,586,495 shares
Additional paid-in capital		9,137			8,973
Retained earnings		15,104			14,663
Shares acquired by stock benefit plans		--			(152	)
Accumulated other comprehensive income		(484	)		(466	)
Total shareholders’ equity		23,757			23,018
Total liabilities and shareholders’ equity	$	333,520		$	328,748

See notes to consolidated condensed financial statements.

3

RIVER VALLEY BANCORP

Consolidated Condensed Statement of Income

(Unaudited)

	Nine Months Ended September 30,					Three Months Ended September 30,
	2006			2005		2006			2005
	(In Thousands, Except Share Amounts)
InInterest Income
Loans receivable	$	11,659		$	10,575	$	3,962		$	3,617
Investment securities		1,880			1,082		669			414
Interest-earning deposits and other		362			246		76			85
Total interest income		13,901			11,903		4,707			4,116
Interest Expense
Deposits		5,083			2,490		1,811			876
Borrowings		2,973			3,316		1,023			1,210
Total interest expense		8,056			5,806		2,834			2,086
Net Interest Income		5,845			6,097		1,873			2,030
Provision for loan losses		216			216		48			72
Net Interest Income After Provision for Loan Losses		5,629			5,881		1,825			1,958
Other Income
Net realized losses on sales of available-for-sale securities		(47	)		0		(47	)		0
Service fees and charges		1,500			1,399		538			507
Net gains on loan sales		109			248		54			76
Other income		263			240		82			69
Total other income		1,825			1,887		627			652
Other Expenses
Salaries and employee benefits		2,982			2,721		995			883
Net occupancy and equipment expenses		869			858		286			312
Data processing fees		77			94		22			37
Advertising		201			189		71			72
Legal and professional fees		145			198		46			45
Amortization of mortgage servicing rights		291			100		92			18
Other expenses		916			977		277			380
Total other expenses		5,481			5,137		1,789			1,747
Income Before Income Tax		1,973			2,631		663			863
Income tax expense		594			910		190			287
Net Income	$	1,379		$	1,721	$	473		$	576
Basic earnings per share	$	.86		$	1.09	$	.29		$	.36
Diluted earnings per share		.84			1.05		.29			.35
Dividends per share		.585			.58		.195			.195

See notes to consolidated condensed financial statements.

4

RIVER VALLEY BANCORP

Consolidated Condensed Statement of Comprehensive Income

(Unaudited)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2006			2005			2006			2005
	(In Thousands)
Net income	$	1,379		$	1,721		$	473		$	576
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 $26, $(141), $183 and $(44).		(46	)		(215	)		325			(68	)
Less: Reclassification adjustment for gains losses included in net income, net of tax benefit of $18, $0, $18 and $0.		(28	)					(28	)
		(18	)		(215	)		353			(68	)
Comprehensive income	$	1,361		$	1,506		$	826		$	508

See notes to consolidated condensed financial statements.

5

RIVER VALLEY BANCORP

Consolidated Condensed Statement of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
	2006			2005
	(In Thousands)
Operating Activities
Net income	$	1,379		$	1,721
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		216			216
Depreciation and amortization		481			426
Loss on sale of premises and equipment		0			14
Investment securities gains		47			0
Loans originated for sale in the secondary market		(3,643	)		(11,615	)
Proceeds from sale of loans in the secondary market		3,628			11,794
Gain on sale of loans		(109	)		(248	)
Amortization of deferred loan origination cost		110			91
Amortization of expense related to stock benefit plans		37			249
Net change in:
Interest receivable		(144	)		(309	)
Interest payable		112			77
Other adjustments		(414	)		419
Net cash provided by operating activities		1,700			2,835
Investing Activities
Purchases of securities available for sale		(17,018	)		(36,771	)
Proceeds from maturities of securities available for sale		5,948			11,015
Proceeds from sale of securities available for sale		6,012			0
Purchase of Federal Home Loan Bank stock		(100	)		(695	)
Net change in loans		(9,265	)		(1,328	)
Purchases of premises and equipment		(234	)		(1,931	)
Proceeds from sale of foreclosed real estate		506			80
Other investing activities		(44	)		0
Net cash used in investing activities		(14,195	)		(29,630	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		8,842			13,744
Certificates of deposit		1,233			4,995
Short term borrowings		(14,565	)		(8,610	)
Proceeds from borrowings		29,000			32,000
Repayment of borrowings		(21,000	)		(18,000	)
Cash dividends		(934	)		(903	)
Excess tax benefit on stock options exercised		49			0
Stock options exercised		229			17
Purchase of stock		0			(147	)
Advances by borrowers for taxes and insurance		45			47
Net cash provided by financing activities		2,899			23,143
Net Change in Cash and Cash Equivalents		(9,596	)		(3,652	)
Cash and Cash Equivalents, Beginning of Period		17,730			12,437
Cash and Cash Equivalents, End of Period	$	8,134		$	8,785
Additional Cash Flows and Supplementary Information
Interest paid	$	7,944		$	5,729
Income tax paid		754			880

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-K for the year ended December 31, 2005. 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, 2006, 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, 2005 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. The Bank currently owns four subsidiaries. Madison First Service Corporation, which was incorporated under the laws of the State of Indiana on July 3, 1973, currently holds land but does not otherwise engage in significant business activities. RVFB Investments, Inc., RVFB Holdings, Inc., and RVFB Portfolio, LLC were established in Nevada the latter part of 2005. They hold and manage a significant portion of the Bank’s investment portfolio. All significant inter-company balances and transactions have been eliminated in the accompanying consolidated financial statements.

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.

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	Nine Months Ended September 30, 2006						Nine Months Ended September 30, 2005
	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	$	1,379		1,603,263	$	.86	$	1,721		1,578,958	$	1.09
Effect of dilutive RRP awards and stock options				41,339						61,387
Diluted earnings per share
Income available to common shareholders and assumed conversions	$	1,379		1,644,602	$	.84	$	1,721		1,640,345	$	1.05

	Three Months Ended September 30, 2006						Three Months Ended September 30, 2005
	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	$	473		1,612,660	$	. 29	$	576		1,584,073	$	. 36
Effect of dilutive RRP awards and stock options				35,613						60,084
Diluted earnings per share
Income available to common shareholders and assumed conversions	$	473		1,648,273	$	.29	$	576		1,644,157	$	.35

Options to purchase 5,000 shares of common stock at $22.67 per share were outstanding at September 30, 2006, but were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares.

NOTE 4: CHANGE IN ACCOUNTING PRINCIPLE

The Corporation has a stock-based employee compensation plan, which is described in Notes of Financial Statements included in the December 31, 2005 Annual Report to shareholders.

Effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 123(R), Share−Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses all forms of share−based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has elected the modified prospective application and, as a result, has recorded approximately $2,400 in compensation expense related to vested stock options less estimated forfeitures for the nine month period ended September 30, 2006.

8

Prior to the adoptions of SFAS 123(R), the Corporation accounted 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 was 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.

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

Prior to the adoption of SFAS 123 (R), unearned compensation related to restricted stock awards was classified as a separate component of shareholders’ equity. In accordance with the provisions of SFAS 123(R), on January 1, 2006, the balance in unearned compensation was reclassified to common stock on the balance sheet.

NOTE 5: ACCOUNTING CHANGES

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.

SFAS No. 156 requires an entity to initially recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract in other specific situations.

In addition, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

·��  Amortization method—Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.  

·   Fair value measurement method—Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

SFAS No. 156 is effective at the beginning of an entity’s first fiscal year that begins after September 15, 2006 and should be applied prospectively for recognition and initial measurement of servicing assets and servicing liabilities. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

The Corporation did not early adopt SFAS No. 156 on January 1, 2006. The Corporation is currently evaluating the effect of adoption of this statement on the Corporation’s financial condition or results of operations.

NOTE 6:RECLASSIFICATIONS

Certain reclassifications have been made to the 2005 consolidated condensed financial statements to conform to the September 30, 2006 presentation.

9

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, 2005. 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.

10

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, 2006 and December 31, 2005, mortgage servicing rights had carrying values of $627,000 and $839,000, respectively.

FINANCIAL CONDITION

At September 30, 2006, the Corporation’s consolidated assets totaled $333.5 million, an increase of $4.8 million, or 1.5% from December 31, 2005. The increase in assets resulted primarily from slight increases in the investment portfolio of $5.1 million and the loan portfolio of $8.4 million, offset by a decrease of liquid assets (i.e., cash and cash equivalents) of $9.6 million from December 2005.

The Corporation’s consolidated allowance for loan losses totaled $2.3 million on December 31, 2005 and September 30, 2006, which represented 1.00% and .95% of total loans respectively. Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) totaled $1,747,000 and $1,531,000 at December 31, 2005 and September 30, 2006 respectively. Although management believes that its allowance for loan losses at September 30, 2006, 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 $216.8 million at September 30, 2006, an increase of $10.1 million, or 4.9%, compared to total deposits at December 31, 2005. 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 were very difficult to attract.

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Borrowings totaled $96.8 million at December 31, 2005, and $90.0 million on September 30, 2006. Of these totals, $75.0 million and $83.0 million respectively were FHLB Advances with average rates of 4.34% and 4.63%. Our interest spread is further suffering as a result.

Shareholders’ equity totaled $23.8 million at September 30, 2006, an increase of $739,000, or 3.2% from $23.0 million at December 31, 2005. 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, 2006, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

GENERAL

The Corporation’s net income for the nine months ended September 30, 2006, totaled $1,379,000, a decrease of $342,000 or 19.9% from the $1,721,000 reported for the period ended September 30, 2005. The decrease in income in the 2006 period was primarily attributable to increases in other expenses.

NET INTEREST INCOME

Total interest income for the nine months ended September 30, 2006 amounted to $13.9 million, an increase of $2.0 million, or 16.8%, from the comparable period in 2005, reflecting the effects of an increase in average interest-earning assets outstanding and an increase in the average loan rate of approximately 0.58%.

Interest expense on deposits increased by $2.6 million, or 104.1%, to a total of $5.1 million for the nine months ended September 30, 2006, due primarily to an increase in the average rate paid on deposits outstanding year-to-year. Interest expense on borrowings totaled $3.0 million for the nine months ended September 30, 2006, a decrease of $.3 million, from the comparable period in 2005. This decrease resulted from a decrease in the average borrowings year-to-year.

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $252,000, or 4.1%, for the nine months ended September 30, 2006, as compared to the same period in 2005.

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, 2006, and the same amount of $216,000 for the same period in 2005. The 2006 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, 2006, 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 $62,000, during the nine months ended September 30, 2006, as compared to the same period in 2005. The decrease was due primarily to a $139,000 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.

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OTHER EXPENSE

Other expense increased by $344,000, or 6.7%, during the nine months ended September 30, 2006, as compared to the same period in 2005. The increase was due primarily to an increase in mortgage servicing rights and salary/benefits expense. In the years prior to 2005, the Company recorded impairment on its mortgage servicing rights. As the market value of the mortgage servicing rights increased during 2005, the previously recorded impairment was recovered thus significantly lowering amortization expense during 2005. During the first three quarters of 2005, the impairment recovery totaled $189,664. The remainder of the 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 $594,000 for the nine months ended September 30, 2006, a decrease of $316,000, or 34.7%, as compared to the same period in 2005. This decrease resulted primarily from a decrease in net income before income taxes of $658,000.00 or 25.0% and the increase in non-taxable income.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

GENERAL

The Corporation’s net income for the three months ended September 30, 2006, totaled $473,000, a decrease of $103,000, or 17.9% from the $576,000 of net income reported in the comparable 2005 period. The decrease in earnings in the 2006 period was primarily attributable to an increase in deposit interest expense.

NET INTEREST INCOME

Total interest income for the three months ended September 30, 2006 amounted to $4.7 million, a increase of $591,000, or 14.4%, from the comparable quarter in 2005, reflecting the effects of an increase in average interest-earning assets outstanding. Interest income on loans totaled $4.0 million for the three months ended September 30, 2006, an increase of $345,000, or 9.5%, from the comparable quarter in 2005, reflecting the effects of an increase in average balance of loans year-to-year.

Interest expense on deposits increased by $935,000, or 106.7%, to a total of $1,811,000 for the quarter ended September 30, 2006, due to an increase in the average rate and average outstanding balance of deposits. Interest expense on borrowings totaled $1,023,000 for the three months ended September 30, 2006, a decrease of $187,000 over the comparable quarter in 2005. This decrease resulted from a decrease in the average borrowings outstanding from year-to-year.

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $157,000, or 7.7%, for the three months ended September 30, 2006, as compared to the same quarter in 2005.

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 $48,000 provision for losses on loan for the three months ended September 30, 2006 and $72,000 was recorded in the 2005 period. While management believes that the allowance for losses on loans is adequate at September 30, 2006, 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 $25,000, for the three months ended September 30, 2006, as compared to the same period in 2005, due primarily to an loss on sale of securities.

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OTHER EXPENSE

Other expenses increased by $42,000, or 2.4%, during the three months ended September 30, 2006, compared to the same period in 2005. The increase was due primarily to the increase in salaries/benefits due to growth.

INCOME TAXES

The provision for income taxes totaled $190,000 for the three months ended September 30, 2006, a decrease of $97,000, or 33.8%, as compared to the same period in 2005. This decrease resulted primarily from a decrease in net income before income taxes of $200,000, or 23.2% and an increase in non-taxable income.

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 addressis 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, 2006 and 2005, 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.

June 30, 2006

Net Portfolio Value							NPV as% of PV of Assets
Changes In Rates		$ Amount		$ Change	%Change		NPV Ratio		Change
		(Dollars in thousands)
+300	bp	$	39,587	-1,849	-4	%	12.14	%	-18	bp
+200	bp		40,214	-1,222	-3	%	12.21	%	-11	bp
+100	bp		40,893	-544	-1	%	12.28	%	-3	bp
0	bp		41,436				12.32	%
-100	bp		40,736	-700	-2	%	12.02	%	-29	bp
-200	bp		39,074	-2,362	-6	%	11.48	%	-84	bp

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

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Management believes at September 30, 2006 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 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the period ended December 31, 2005.

ITEM 4. 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 (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 Corporation’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Corporation 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 and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

B. Changes in internal control over financial reporting. There were no 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 have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.	Legal Proceedings.
	None.
Item 1A.	Risk Factors
	There have been no material changes with respect to the risk factors disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2.	Changes in Securities and Use of Proceeds and Issuers Purchases of Equity Securities.
	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.

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

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Signatures

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

	RIVER VALLEY BANCORP
Date: November 14, 2006	By:	/s/ Matthew P. Forrester
		Matthew P. Forrester
		President and Chief Executive Officer
Date: November 14, 2006	By:	/s/ Larry C. Fouse
		Larry C. Fouse
		Vice President of Finance

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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

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