**SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON
        D.C. 20549**
  **FORM
        10-K**
 
 (Mark
        One)
  ý
              
              **Annual
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act****of
                  1934 for the Fiscal Year Ended December 31, 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
                  ______**
  000-21765Commission
                  File Number**RIVER
                  VALLEY BANCORP**(Exact
                  name of registrant as specified in its charter)INDIANA
              
              35-1984567(State
                  or other jurisdiction of incorporation or organization )
              
              (IRS
                  Employer Identification No.)430
                  Clifty Drive, P.O. Box 1590, Madison, Indiana
              47250-0590(Address
                  of principal executive offices)
              (Zip
                  Code)(812)
                  273-4949(Registrant’s
                  telephone number, including area code)
 Securities
        registered pursuant to Section 12(b) of the Act:
  Title
                  of each class:
              Name
                  of each exchange on which registered:**Common
                  Stock**
              **The
                  NASDAQ Stock Market LLC**
  Securities
        registered pursuant to Section 12(g) of the Act:
 **None**
  Indicate
                  by check mark if the registrant is a well-known seasoned issuer,
                  as
                  defined in Rule 405 of the Securities Act.
              YesoNoýIndicate
                  by check mark if the registrant is not required to file reports
                  pursuant
                  to Section 13 or Section 15(d) of the Act.
              YesoNoýIndicate
                  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.
              YesýNooIndicate
                  by check mark if disclosure of delinquent filers pursuant to Item
                  405 of
                  Regulation S-K is not contained herein, and will not be contained,
                  to the
                  best of registrant’s knowledge, in definitive proxy or information
                  statements incorporated by reference in Part III of this Form 10-K
                  or any
                  amendment to this Form 10-K.
              oIndicate
                  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. (Check one):Large
                  accelerated filer   oAccelerated
                  filero       
                  Non-accelerated
                  filerýIndicate
                  by check mark whether the registrant is a shell company (as defined
                  in
                  Rule 12b-2 of the Act).
              YesoNoýAs
                  of June 30, 2006, the last day of the Registrant’s most recently completed
                  second fiscal quarter, the aggregate market value of the Registrant’s
                  Common Stock held by non-affiliates of the Registrant was $22,342,784
                  based on the closing sale price as reported on the NASDAQ Capital
                  Market.As
                  of February 23, 2007, there were issued and outstanding 1,614,663
                  shares
                  of the issuer’s Common Stock.
 **Documents
        Incorporated by Reference**
  Portions
        of the Proxy Statement for the 2007 Annual Meeting of Shareholders to be
        held on
        April 18, 2007 are incorporated in Part III.
   1
  
  **RIVER
        VALLEY BANCORP**
  **FORM
        10-K**
  **INDEX**
  FORWARD-LOOKING
                  STATEMENTS
              3PART
                  I
              3Item
                  1.
              Business.
              3Item
                  1A.
              Risk
                  Factors.
              29Item
                  1B.
              Unresolved
                  Staff Comments.
              30Item
                  2.
              Properties.
              31Item
                  3.
              Legal
                  Proceedings.
              31Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              32Item
                  4.5.
              Executive
                  Officers of the Registrant.
              32PART
                  II
              
              33Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities.
              33Item
                  6.
              Selected
                  Financial Data.
              35Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              37Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk.
              48Item
                  8.
              Financial
                  Statements and Supplementary Data.
              48Item
                  9.
              Changes
                  In and Disagreements With Accountants on Accounting and Financial
                  Disclosure.
              79Item
                  9A.
              Controls
                  and Procedures.
              79Item
                  9B.
              Other
                  Information.
              79PART
                  III
              79Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance.
              79Item
                  11.
              Executive
                  Compensation.
              80Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.
              80Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence.
              80Item
                  14.
              Principal
                  Accounting Fees and Services.
              80PART
                  IV
              81Item
                  15.
              Exhibits,
                  Financial Statement Schedules.
              81
 
 
  2
   **FOR** **WARD-LOOKING
        STATEMENTS**
  This
        Annual Report on Form 10-K (“ **Form
        10-K** ”)
        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-K and include statements
        regarding the intent, belief, outlook, estimates or expectations of River
        Valley
        Bancorp, its directors, or its officers primarily with respect to future
        events
        and the future financial performance of the Holding Company. Readers of this
        Form 10-K 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-K identifies important factors that could cause
        such
        differences, including those set forth under “Risk Factors.” These factors
        include, but are not limited to, changes in interest rates; loss of deposits
        and
        loan demand to other savings and financial institutions; substantial changes
        in
        financial markets; changes in real estate values and the real estate market;
        regulatory changes; or unanticipated results in pending legal
        proceedings.
  **PART
        I**
 **ITE** **M
        1****.****BUSINESS.**
   **BUSINESS**
 ***GENERAL***
  River
        Valley Bancorp (the “ **Holding
        Company** ”
and
        together with the “ **Bank** ,”
the
        “ **Company** ”),
        an
        Indiana corporation, was formed in 1996 for the primary purpose of purchasing
        all of the issued and outstanding common stock of River Valley Financial
        Bank
        (formerly Madison First Federal Savings and Loan Association; hereinafter
        “ **River
        Valley Financial** ”
or
        the
“ **Bank** ”)
        in its
        conversion from mutual to stock form. The conversion offering was completed
        on
        December 20, 1996. On December 23, 1996, the Company utilized approximately
        $3.0
        million of the net conversion proceeds to purchase 95.6% of the outstanding
        common shares of Citizens National Bank of Madison (“ **Citizens** ”),
        and
        River Valley Financial and Citizens merged on November 20, 1997.
  The
        activities of the Holding Company have been limited primarily to holding
        the
        stock of River Valley Financial, which was organized in 1875 under the laws
        of
        the United States of America. River Valley Financial, which provides banking
        services in a single significant business segment, conducts operations from
        its
        seven full-service office locations in Jefferson and Clark Counties, Indiana,
        and Carroll County, Kentucky, and offers a variety of deposit and lending
        services to consumer and commercial customers. The Company is subject to
        regulation, supervision and examination by the Office of Thrift Supervision
        of
        the U.S. Department of Treasury (the “ **OTS** ”).
        River
        Valley Financial is subject to regulation, supervision and examination by
        the
        OTS and the Federal Deposit Insurance Corporation (the “ **FDIC** ”).
        Deposits in River Valley Financial are insured up to applicable limits by
        the
        Deposit Insurance Fund of the FDIC.
  The
        Bank
        historically has concentrated its lending activities on the origination of
        loans
        secured by first mortgage liens for the purchase, construction, or refinancing
        of one- to four-family residential real property. One- to four-family
        residential mortgage loans continue to be the major focus of the Bank’s loan
        origination activities, representing 42.2% of the Bank’s total loan portfolio at
        December 31, 2006. The Bank did not identify any loans as held for sale at
        December 31, 2006. The Bank also offers multi-family mortgage loans,
        non-residential real estate loans, land loans, construction loans, non-mortgage
        commercial loans and consumer loans. The Bank’s primary market areas are
        Jefferson and Clark Counties
  3
   in
        Southeastern Indiana and adjacent Carroll County in Kentucky. The Company’s
        internet address is www.rvfbank.com, and the Company makes available all
        filings
        with the Securities and Exchange Commission via its internet
        website.
  *Loan
        Portfolio Data.* The
        following table sets forth the composition of the Bank’s loan portfolio,
        including loans held for sale, as of December 31, 2006, 2005, 2004, 2003
        and 2002 by loan type as of the dates indicated, including a reconciliation
        of
        gross loans receivable after consideration of the allowance for loan losses,
        deferred loan origination costs and loans in process.
 
 **At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Amount**
              
              **Percent****of
                  Total**
              
              **Amount**
              
              **Percent****of
                  Total**
              
              **Amount**
              
              **Percent****of
                  Total**
              
              **Amount**
              
              **Percent****of
                  Total**
              
              **Amount**
              
              **Percent****of
                  Total****(Dollars
                  in thousands)****TYPE
                  OF LOAN**Residential
                  real estate:One-to-four-family
              
              $
              104,404
              
              
              42.2
              %
              $
              96,766
              
              
              41.0
              %
              $
              103,606
              
              
              43.0
              %
              $
              89,787
              
              
              45.6
              %
              $
              72,555
              
              
              43.2
              %Multi-family
              
              
              9,613
              
              
              3.9
              
              
              8,412
              
              
              3.6
              
              
              8,100
              
              
              3.4
              
              
              5,009
              
              
              2.6
              
              
              4,396
              
              
              2.6Construction
              
              
              17,993
              
              
              7.3
              
              
              13,549
              
              
              5.7
              
              
              20,046
              
              
              8.3
              
              
              8,689
              
              
              4.4
              
              
              4,866
              
              
              2.9Nonresidential
                  real estate
              
              
              64,130
              
              
              25.9
              
              
              65,310
              
              
              27.7
              
              
              59,702
              
              
              24.8
              
              
              50,995
              
              
              25.9
              
              
              42,672
              
              
              25.4Land
                  loans
              
              
              15,790
              
              
              6.4
              
              
              16,744
              
              
              7.1
              
              
              7,933
              
              
              3.3
              
              
              5,393
              
              
              2.7
              
              
              3,364
              
              
              2.0Consumer
                  loans:Automobile
                  loans
              
              
              2,853
              
              
              1.1
              
              
              3,444
              
              
              1.5
              
              
              4,675
              
              
              1.9
              
              
              6,347
              
              
              3.2
              
              
              9,494
              
              
              5.6Loans
                  secured by deposits
              
              
              605
              
              
              .2
              
              
              510
              
              
              .2
              
              
              553
              
              
              .2
              
              
              427
              
              
              .2
              
              
              401
              
              
              .2Other
              
              
              2,802
              
              
              1.2
              
              
              2,986
              
              
              1.3
              
              
              3,659
              
              
              1.5
              
              
              3,513
              
              
              1.8
              
              
              4,171
              
              
              2.5Commercial
                  loans
              
              
              29,000
              
              
              11.8
              
              
              28,148
              
              
              11.9
              
              
              32,582
              
              
              13.6
              
              
              26,764
              
              
              13.6
              
              
              26,203
              
              
              15.6Gross
                  loans receivable
              
              
              247,190
              
              
              100.0
              
              
              235,869
              
              
              100.00
              
              
              240,856
              
              
              100.00
              
              
              196,924
              
              
              100.00
              
              
              168,122
              
              
              100.00Add/(Deduct):Deferred
                  loan origination costs
              
              
              487
              
              
              .2
              
              
              488
              
              
              .2
              
              
              496
              
              
              .2
              
              
              461
              
              
              .2
              
              
              379
              
              
              .2Undisbursed
                  portions of loans in process
              
              
              (3,614
              )
              
              (1.5
              )
              
              (5,152
              )
              
              (2.2
              )
              
              (8,812
              )
              
              (3.7
              )
              
              (3,868
              )
              
              (2.0
              )
              
              (2,147
              )
              
              (1.3
              )Allowance
                  for loan losses
              
              
              (2,176
              )
              
              (.9
              )
              
              (2,320
              )
              
              (1.0
              )
              
              (2,364
              )
              
              (1.0
              )
              
              (2,056
              )
              
              (1.1
              )
              
              (2,101
              )
              
              (1.3
              )Net
                  loans receivable
              
              $
              241,887
              
              
              97.8
              %
              $
              228,885
              
              
              97.0
              %
              $
              230,176
              
              
              95.6
              %
              $
              191,461
              
              
              97.2
              %
              $
              164,253
              
              
              97.7
              %
  The
        following table sets forth certain information at December 31, 2006,
        regarding the dollar amount of loans maturing in the Bank’s loan portfolio based
        on the contractual terms to maturity. Demand loans, loans having no stated
        schedule of repayments and no stated maturity and overdrafts are reported
        as due
        in one year or less. This schedule does not reflect the effects of possible
        prepayments or enforcement of due-on-sale clauses. Management expects
        prepayments will cause actual maturities to be shorter.
 
 **Due
                  During Years Ended December 31****Balance
                  Outstanding at December 31, 2006**
              
              **2007**
              
              **2008**
              
              **2009
                  to 2010**
              
              **2011
                  to 2015**
              
              **2016
                  to 2020**
              
              **2021
                  and following**(In
                  thousands)Residential
                  real estate loans:One-to-four-family
              
              $
              104,404
              
              $
              607
              
              $
              142
              
              $
              580
              
              $
              4,184
              
              $
              12,421
              
              $
              86,470Multi-family
              
              
              9,613
              
              
              —
              
              
              —
              
              
              221
              
              
              93
              
              
              731
              
              
              8,568Construction
              
              
              17,993
              
              
              16,693
              
              
              1,300
              
              
              -—
              
              
              -—
              
              
              -—
              
              
              -—Nonresidential
                  Real estate loans
              
              
              64,130
              
              
              644
              
              
              75
              
              
              208
              
              
              5,372
              
              
              6,662
              
              
              51,169Land
                  loans
              
              
              15,790
              
              
              4,633
              
              
              3,470
              
              
              208
              
              
              2,217
              
              
              833
              
              
              4,429Consumer
                  loans:Loans
                  secured by deposits
              
              
              605
              
              
              456
              
              
              53
              
              
              66
              
              
              30
              
              
              -—
              
              
              -—Other
                  loans
              
              
              5,655
              
              
              1,039
              
              
              788
              
              
              2,253
              
              
              1,527
              
              
              48
              
              
              -—Commercial
                  loans
              
              
              29,000
              
              
              12,769
              
              
              4,469
              
              
              3,027
              
              
              4,369
              
              
              4,366
              
              
              -—Total
              
              $
              247,190
              
              $
              36,841
              
              $
              10,297
              
              $
              6,563
              
              $
              17,792
              
              $
              25,061
              
              $
              150,636
  4
  The
        following table sets forth, as of December 31, 2006, the dollar amount of
        all loans due after one year that have fixed interest rates and floating
        or
        adjustable interest rates.
 
 **Due
                  After December 31, 2007****Fixed
                  Rates**
              
              **Variable
                  Rates**
              
              **Total****(In
                  thousands)**Residential
                  real estate loans:One-to-four-family
              
              $
              14,177
              
              $
              89,620
              
              $
              103,797Multi-family
              
              
              470
              
              
              9,143
              
              
              9,613Construction
              
              
              1,300
              
              
              —
              
              
              1,300Non-residential
                  real estate loans
              
              
              6,437
              
              
              57,049
              
              
              63,486Land
                  loans
              
              
              175
              
              
              10,982
              
              
              11,157Consumer
                  loans:Loans
                  secured by deposits
              
              
              149
              
              
              —
              
              
              149Other
                  loans
              
              
              4,532
              
              
              84
              
              
              4,616Commercial
                  loans
              
              
              12,682
              
              
              3,549
              
              
              16,231Total
              
              $
              39,922
              
              $
              170,427
              
              $
              210,349
   *Residential
        Loans* .
        Residential loans consist primarily of one- to four-family loans. Approximately
        $104.4 million, or 42.2% of the Bank’s portfolio of loans, at December 31,
        2006, consisted of one- to four-family residential loans, of which approximately
        80.3% had adjustable rates.
  The
        Bank
        currently offers adjustable rate one- to four-family residential mortgage
        loans
        (“ **ARMs** ”)
        which
        adjust annually and are indexed to the one-year U.S. Treasury securities
        yields
        adjusted to a constant maturity, although until late 1995, the Bank’s ARMs were
        indexed to the 11th District Cost of Funds. Some of the Bank’s residential ARMs
        are originated at a discount or “teaser” rate which is generally 150 to 175
        basis points below the “fully indexed” rate. These ARMs then adjust annually to
        maintain a margin above the applicable index, subject to maximum rate
        adjustments discussed below. The Bank’s ARMs have a current margin above such
        index of 3% for owner-occupied properties and 3.5% for non-owner-occupied
        properties. A substantial portion of the ARMs in the Bank’s portfolio at
        December 31, 2006 provide for maximum rate adjustments per year and over
        the life of the loan of 2% and 6%, respectively, although the Bank also
        originates residential ARMs which provide for maximum rate adjustments per
        year
        and over the life of the loan of 1% and 4%, respectively. The Bank’s ARMs
        generally provide for interest rate minimums equal to the origination rate.
        The
        Bank’s residential ARMs are amortized for terms up to 30 years.
  Adjustable
        rate loans decrease the risk associated with changes in interest rates but
        involve other risks, primarily because as interest rates rise, the payments
        by
        the borrowers may rise to the extent permitted by the terms of the loan,
        thereby
        increasing the potential for default. Also, adjustable rate loans have features
        which restrict changes in interest rates on a short-term basis and over the
        life
        of the loan. At the same time, the market value of the underlying property
        may
        be adversely affected by higher interest rates.
  The
        Bank
        currently offers fixed rate one- to four-family residential mortgage loans
        which
        provide for the payment of principal and interest over periods of 10 to 30
        years. At December 31, 2006, approximately 19.7% of the Bank’s one- to
        four-family residential mortgage loans had fixed rates. The Bank currently
        underwrites its fixed-rate residential mortgage loans for potential sale
        to the
        Federal Home Loan Mortgage Corporation (the “ **FHLMC** ”).
        The
        Bank retains all servicing rights on the residential mortgage loans sold
        to the
        FHLMC. At December 31, 2006, the Bank had approximately $83.7 million of
        fixed rate residential mortgage loans which were sold to the FHLMC and for
        which
        the Bank provides servicing.
  The
        Bank
        generally does not originate one- to four-family residential mortgage loans
        if
        the ratio of the loan amount to the lesser of the current cost or appraised
        value of the property (the “ **Loan-to-Value
        Ratio** ”)
        exceeds 95% and generally does not originate one- to four-family residential
        ARMs if the Loan-to-Value Ratio exceeds 90%. The Bank generally requires
        private
        mortgage insurance on all fixed rate
  5
  conventional
        one- to four-family residential real estate mortgage loans with Loan-to-Value
        Ratios in excess of 80%. The cost of such insurance is factored into the
        annual
        percentage yield on such loans, and is not automatically eliminated when
        the
        principal balance is reduced over the term of the loan. During 2006 the Bank
        originated and retained $6.9 million of fixed rate one- to four-family
        residential mortgage loans that typically would be sold to the secondary
        market,
        but were held by the bank for investment purposes.
  Substantially
        all of the one- to four-family residential mortgage loans that the Bank
        originates include “due-on-sale” clauses, which give the Bank the right to
        declare a loan immediately due and payable in the event that, among other
        things, the borrower sells or otherwise disposes of the real property subject
        to
        the mortgage and the loan is not repaid.
  At
        December 31, 2006, the Bank had outstanding approximately $10.1 million of
        home equity loans, with unused lines of credit totaling approximately $14.4
        million. Four home equity loans were included in non-performing assets on
        that
        date in the amount of $69,000. The Bank’s home equity lines of credit are
        adjustable rate lines of credit tied to the prime rate and are amortized
        based
        on a 10- to 20-year maturity. The Bank generally allows a maximum 90%
        Loan-to-Value Ratio for its home equity loans (taking into account any other
        mortgages on the property). Payments on such home equity loans are equal
        to 1.5%
        of the outstanding principal balance per month, or on newer home equity loans,
        to the interest accrued at the end of the period.
  The
        Bank
        also offers standard second mortgage loans, which are adjustable rate loans
        tied
        to the U.S. Treasury securities yields adjusted to a constant maturity with
        a
        current margin above such index of 3.5%. The Bank’s second mortgage loans have
        maximum rate adjustments per year and over the terms of the loans equal to
        2%
        and 6%, respectively. The Bank’s second mortgage loans have terms of up to 30
        years.
  At
        December 31, 2006, $640,000 of one- to four-family residential mortgage
        loans, or .3% of total loans, were included in the Bank’s non-performing assets.
  *Construction
        Loans* .
        The
        Bank offers construction loans with respect to residential and nonresidential
        real estate and, in certain cases, to builders or developers constructing
        such
        properties on a speculative basis ( *i.e* .,
        before
        the builder/developer obtains a commitment from a buyer).
  Generally,
        construction loans are written as 12-month loans, either fixed or adjustable,
        with interest calculated on the amount disbursed under the loan and payable
        on a
        semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value
        Ratio for its construction loans, although the Bank may permit an 85%
        Loan-to-Value Ratio for one- to four-family residential construction loans.
        Inspections are generally made prior to any disbursement under a construction
        loan, and the Bank does not charge commitment fees for its construction
        loans.
  At
        December 31, 2006, $17.9 million, or 7.3% of the Bank’s total loan
        portfolio, consisted of construction loans. The largest construction loan
        at
        December 31, 2006 totaled $2.7 million. There were no non-performing
        construction loans at December 31, 2006.
  While
        providing the Bank with a comparable, and in some cases higher, yield than
        a
        conventional mortgage loan, construction loans involve a higher level of
        risk.
        For example, if a project is not completed and the borrower defaults, the
        Bank
        may have to hire another contractor to complete the project at a higher cost.
        Also, a project may be completed, but may not be saleable, resulting in the
        borrower defaulting and the Bank taking title to the project.
  *Nonresidential
        Real Estate Loans* .
        At
        December 31, 2006, $64.1 million, or 25.9% of the Bank’s portfolio,
        consisted of nonresidential real estate loans. Nonresidential real estate
        loans
        are primarily secured by real estate such as churches, farms and small business
        properties. The Bank generally originates nonresidential real estate loans
        as
        one-year adjustable rate loans indexed to the one-year U.S. Treasury securities
        yields adjusted to a constant maturity, written for maximum terms of 30 years.
        The
  6
  Bank’s
        adjustable rate nonresidential real estate loans have maximum adjustments
        per
        year and over the life of the loan of 2% and 6%, respectively, and interest
        rate
        minimums of 1% below the origination rate. The Bank generally requires a
        Loan-to-Value Ratio of up to 80%, depending on the nature of the real estate
        collateral.
  The
        Bank
        underwrites its nonresidential real estate loans on a case-by-case basis
        and, in
        addition to its normal underwriting criteria, evaluates the borrower’s ability
        to service the debt from the net operating income of the property. As of
        December 31, 2006, the Bank’s largest nonresidential real estate loan was
        $3.9 million. Nonresidential real estate loans in the amount of $210,000
        or .09%
        were included in non-performing assets at December 31, 2006.
  Loans
        secured by nonresidential real estate generally are larger than one- to
        four-family residential loans and involve a greater degree of risk.
        Nonresidential real estate loans often involve large loan balances to single
        borrowers or groups of related borrowers. Payments on these loans depend
        to a
        large degree on results of operations and management of the properties and
        may
        be affected to a greater extent by adverse conditions in the real estate
        market
        or the economy in general. Accordingly, the nature of the loans makes them
        more
        difficult for management to monitor and evaluate.
  *Multi-family
        Loans* .
        At
        December 31, 2006, approximately $9.6 million, or 3.9% of the Bank’s total loan
        portfolio, consisted of mortgage loans secured by multi-family dwellings
        (those
        consisting of more than four units). The Bank writes multi-family loans on
        terms
        and conditions similar to its nonresidential real estate loans. The largest
        multi-family loan in the Bank’s portfolio as of December 31, 2006 was $1.3
        million and was secured by a 46-unit apartment complex in Hanover, Indiana.
        No
        multi-family loans were included in non-performing assets as of December
        31,
        2006.
  Multi-family
        loans, like nonresidential real estate loans, involve a greater risk than
        residential loans. See “Nonresidential Real Estate Loans” above. Also, the
        loan-to-one borrower limitations restrict the ability of the Bank to make
        loans
        to developers of apartment complexes and other multi-family units.
  *Land
        Loans* .
        At
        December 31, 2006, approximately $15.8 million, or 6.4% of the Bank’s total loan
        portfolio, consisted of mortgage loans secured by undeveloped real estate.
        The
        Bank’s land loans are generally written on terms and conditions similar to its
        nonresidential real estate loans. Some of the Bank’s land loans are land
        development loans; *i.e.* ,
        the
        proceeds of the loans are used for improvements to the real estate such as
        streets and sewers. At December 31, 2006, the Bank’s largest land loan totaled
        $2.7 million. No land loans were included in non-performing assets as of
        December 31, 2006.
  Land
        loans are more risky than conventional loans since land development borrowers
        who are over budget may divert the loan funds to cover cost-overruns rather
        than
        direct them toward the purpose for which such loans were made. In addition,
        those loans are more difficult to monitor than conventional mortgage loans.
        As
        such, a defaulting borrower could cause the Bank to take title to partially
        improved land that is unmarketable without further capital
        investment.
  *Commercial
        Loans* .
        At
        December 31, 2006, $29.0 million, or 11.8% of the Bank’s total loan portfolio,
        consisted of non-mortgage commercial loans. The Bank’s commercial loans are
        written on either a fixed rate or an adjustable rate basis with terms that
        vary
        depending on the type of security, if any. At December 31, 2006, approximately
        $26.0 million, or 90.0%, of the Bank’s commercial loans were secured by
        collateral, such as equipment, inventory and crops. The Bank’s adjustable rate
        commercial loans are generally indexed to the prime rate with varying margins
        and terms depending on the type of collateral securing the loans and the
        credit
        quality of the borrowers. At December 31, 2006, the largest commercial loan
        was
        $3.5 million. As of the same date, commercial loans totaling $183,000 were
        included in non-performing assets.
  Commercial
        loans tend to bear somewhat greater risk than residential mortgage loans,
        depending on the ability of the underlying enterprise to repay the loan.
        Further, they are frequently larger in amount than the Bank’s average
        residential mortgage loans.
  7
  *Consumer
        Loans* .
        The
        Bank’s consumer loans, consisting primarily of auto loans, home improvement
        loans, unsecured installment loans, loans secured by deposits and mobile
        home
        loans, aggregated approximately $6.3 million at December 31, 2006, or 2.5%
        of
        the Bank’s total loan portfolio. The Bank consistently originates consumer loans
        to meet the needs of its customers and to assist in meeting its asset/liability
        management goals. All of the Bank’s consumer loans, except loans secured by
        deposits, are fixed rate loans with terms that vary from six months (for
        unsecured installment loans) to 60 months (for home improvement loans and
        loans
        secured by new automobiles). At December 31, 2006, 80.9% of the Bank’s consumer
        loans were secured by collateral.
  The
        Bank’s loans secured by deposits are made in amounts up to 90% of the current
        account balance and accrue at a rate of 2% over the underlying passbook or
        certificate of deposit rate.
  The
        Bank
        offers both direct and indirect automobile loans. Under the Bank’s indirect
        automobile program, participating automobile dealers receive loan applications
        from prospective purchasers of automobiles at the point of sale and deliver
        them
        to the Bank for processing. The dealer receives a portion of the interest
        payable on approved loans.
  Consumer
        loans may entail greater risk than residential mortgage loans, particularly
        in
        the case of consumer loans which are unsecured or are secured by rapidly
        depreciable assets, such as automobiles. Further, any repossessed collateral
        for
        a defaulted consumer loan may not provide an adequate source of repayment
        of the
        outstanding loan balance. In addition, consumer loan collections depend upon
        the
        borrower’s continuing financial stability, and thus are more likely to be
        affected by adverse personal circumstances. Furthermore, the application
        of
        various federal and state laws, including bankruptcy and insolvency laws,
        may
        limit the amount which can be recovered on such loans. At December 31, 2006,
        consumer loans amounting to $12,000 were included in non-performing assets.
  *Origination,
        Purchase and Sale of Loans* .
        The
        Bank historically originated its ARMs pursuant to its own underwriting
        standards. In 1996, the Bank began underwriting fixed rate residential mortgage
        loans for potential sale to the FHLMC on a servicing-retained basis. Loans
        originated for sale to the FHLMC in the secondary market are originated in
        accordance with the guidelines established by the FHLMC and are sold promptly
        after they are originated. The Bank receives a servicing fee of one-fourth
        of 1%
        of the principal balance of all loans serviced. At December 31, 2006, the
        Bank
        serviced $83.7 million in loans sold to the FHLMC.
  The
        Bank
        confines its loan origination activities primarily to Jefferson and Clark
        County
        in Indiana and Trimble and Carroll County in Kentucky, with some activity
        in the
        areas adjacent to these counties. At December 31, 2006, the Bank held loans
        totaling approximately $42.1 million that were secured by property located
        outside of Indiana. The Bank’s loan originations are generated from referrals
        from existing customers, real estate brokers and newspaper and periodical
        advertising. Loan applications are taken at any of the Bank’s seven full-service
        offices.
  The
        Bank’s loan approval processes are intended to assess the borrower’s ability to
        repay the loan, the viability of the loan and the adequacy of the value of
        the
        property that will secure the loan. To assess the borrower’s ability to repay,
        the Bank evaluates the employment and credit history and information on the
        historical and projected income and expenses of its borrowers.
  Under
        the
        Bank’s lending policy, a loan officer may approve mortgage loans up to $150,000,
        a Senior Loan Officer may approve mortgage loans up to $300,000 and the
        President may approve mortgage loans up to $400,000. All other mortgage loans
        must be approved by at least four members of the Bank’s Board of Directors. The
        lending policy further provides that loans secured by readily marketable
        collateral, such as stock, bonds and certificates of deposit may be approved
        by
        a Loan Officer for up to $150,000, by a Senior Loan Officer for up to $300,000
        and by the President up to $400,000. Loans secured by other non-real estate
        collateral may be approved by a Loan Officer for up to $50,000, by a Senior
        Loan
        Officer up to $100,000 and by the President up to $200,000. Finally, the
        lending
        policy provides that unsecured loans
  8
  may
        be
        approved by a Loan Officer up to $15,000 or up to $25,000 by a Senior Loan
        Officer or up to $50,000 by the President. All other unsecured loans or loans
        secured by non-real estate collateral must be approved by at least four members
        of the Bank’s Board of Directors.
  The
        Bank
        generally requires appraisals on all real property securing its loans and
        requires an attorney’s opinion or title insurance and a valid lien on the
        mortgaged real estate. Appraisals for all real property securing mortgage
        loans
        are performed by independent appraisers who are state-licensed. The Bank
        requires fire and extended coverage insurance in amounts at least equal to
        the
        principal amount of the loan and also requires flood insurance to protect
        the
        property securing the loan if the property is in a flood plain. The Bank
        also
        generally requires private mortgage insurance only on fixed rate residential
        mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does
        not
        require escrow accounts for insurance premiums or taxes.
  The
        Bank’s underwriting standards for consumer and commercial loans are intended to
        protect against some of the risks inherent in making such loans. Borrower
        character, paying habits and financial strengths are important
        considerations.
  The
        Bank
        occasionally purchases and sells participations in commercial loans,
        non-residential real estate and multi-family loans to or from other financial
        institutions. At December 31, 2006, the Bank held in its loan portfolio
        participations in these types of loans aggregating approximately $9.2 million
        that it had purchased or sold.
  The
        following table shows loan disbursement and repayment activity for the Bank
        during the periods indicated.
  **Year
                  Ended December 31****2006**
              
              **2005**
              
              **2004****(In
                  thousands)**Loans
                  Disbursed:Residential
                  real estate loans (1)
              
              $
              42,320
              
              $
              45,163
              
              $
              57,876Multi-family
                  loans
              
              
              1,770
              
              
              923
              
              
              3,778Construction
                  loans
              
              
              19,107
              
              
              18,958
              
              
              28,526Non-residential
                  real estate loans
              
              
              10,042
              
              
              12,549
              
              
              20,795Land
                  loans
              
              
              5,761
              
              
              9,728
              
              
              5,062Consumer
                  and other loans
              
              
              4,260
              
              
              4,244
              
              
              5,174Commercial
                  loans
              
              
              21,034
              
              
              26,400
              
              
              27,358Total
                  loans disbursed
              
              
              104,294
              
              
              117,965
              
              
              148,569Reductions:Sales
              
              
              5,501
              
              
              13,902
              
              
              18,288Principal
                  loan repayments and other (2)
              
              
              85,791
              
              
              105,354
              
              
              91,566Total
                  reductions
              
              
              91,292
              
              
              119,256
              
              
              109,854Net
                  Increase (decrease)
              
              $
              13,002
              
              $
              (1,291
              )
              $
              38,715
  (1)
                Includes
                    loans originated for sale in the secondary
                    market.
 (2)
                Other
                    items consist of amortization of deferred loan origination costs,
                    the
                    provision for losses on loans and net charges to the allowance
                    for loan
                    losses.
  9
  *Origination
        and Other Fees* .
        The
        Bank realizes income from loan origination fees, loan servicing fees, late
        charges, checking account service charges and fees for other miscellaneous
        services. Late charges are generally assessed if payment is not received
        within
        a specified number of days after it is due. The grace period depends on the
        individual loan documents.
   ***NON-PERFORMING
        AND PROBLEM ASSETS***
  Mortgage
        loans are reviewed by the Bank on a regular basis and are placed on a
        non-accrual status when management determines that the collectibility of
        the
        interest is less than probable or collection of any amount of principal is
        in
        doubt. Generally, when loans are placed on non-accrual status, unpaid accrued
        interest is written off, and further income is recognized only to the extent
        received. The Bank delivers delinquency notices with respect to all mortgage
        loans contractually past due 5 to 10 days. When loans are 30 days in default,
        personal contact is made with the borrower to establish an acceptable repayment
        schedule. Management is authorized to commence foreclosure proceedings for
        any
        loan upon making a determination that it is prudent to do so.
  Commercial
        and consumer loans are treated similarly. Interest income on consumer,
        commercial and other non-mortgage loans is accrued over the term of the loan
        except when serious doubt exists as to the collectibility of a loan, in which
        case accrual of interest is discontinued and the loan is written-off, or
        written
        down to the fair value of the collateral securing the loan. It is the Bank’s
        policy to recognize losses on these loans as soon as they become
        apparent.
  *Non-performing
        Assets* .
        At
        December 31, 2006, $1.1 million, or .33% of consolidated total assets, were
        non-performing loans compared to $1.7 million, or .53% of consolidated total
        assets, at December 31, 2005. The Bank had no REO at December 31, 2006.
  The
        table
        below sets forth the amounts and categories of the Bank’s non-performing assets
        (non-performing loans, foreclosed real estate and troubled debt restructurings)
        for the last three years. It is the policy of the Bank that all earned but
        uncollected interest on all loans be reviewed monthly to determine if any
        portion thereof should be classified as uncollectible for any loan past due
        in
        excess of 90 days.
 
 **At
                  December 31****2006**
              
              **2005**
              
              **2004****(In
                  thousands)**Non-performing
                  assets:Non-performing
                  loans
              
              $
              1,114
              
              $
              1,747
              
              $
              2,201Troubled
                  debt restructurings
              
              
              2,120
              
              
              1,352
              
              
              1,684Total
                  non-performing loans and troubled debt restructurings
              
              
              3,234
              
              
              3,099
              
              
              3,885Total
                  non-performing assets
              
              $
              3,234
              
              $
              3,099
              
              $
              3,885Total
                  non-performing loans and troubled debt restructurings to total
                  loans
              
              
              1.34
              %
              
              1.27
              %
              
              1.69
              %Total
                  non-performing assets to total assets
              
              
              .94
              %
              
              .94
              %
              
              1.34
              %
  At
        December 31, 2006, the Bank held loans delinquent from 30 to 89 days totaling
        $748,000. Other than in connection with these loans and other delinquent
        loans
        disclosed in this section, management was not aware of any other borrowers
        who
        were experiencing financial difficulties. In addition, there were no other
        assets that would need to be disclosed as non-performing
        assets.
  10
  *Delinquent
        Loans.* The
        following table sets forth certain information at December 31, 2006, 2005,
        and
        2004 relating to delinquencies in the Bank’s portfolio. Delinquent loans that
        are 90 days or more past due are considered non-performing assets.
 **At
                    December 31, 2006**
                
                **At
                    December 31, 2005**
                
                **At
                    December 31, 2004****30-89
                    Days**
                
                **90
                    Days or More**
                
                **30-89
                    Days**
                
                **90
                    Days or More**
                
                **30-89
                    Days**
                
                **90
                    Days or More****Number
                    of Loans**
                
                **Principal
                    Balance of Loans**
                
                **Number
                    of Loans**
                
                **Principal
                    Balance of Loans**
                
                **Number
                    of Loans**
                
                **Principal
                    Balance of Loans**
                
                **Number
                    of Loans**
                
                **Principal
                    Balance of Loans**
                
                **Number
                    of Loans**
                
                **Principal
                    Balance of Loans**
                
                **Number
                    of Loans**
                
                **Principal
                    Balance of Loans****(Dollars
                    in Thousands)**Residential
                    real estate loans
                
                
                11
                
                $
                310
                
                
                13
                
                $
                709
                
                
                9
                
                $
                1,306
                
                
                11
                
                $
                941
                
                
                60
                
                $
                1,267
                
                
                16
                
                $
                893Construction
                    loans
                
                
                2
                
                
                306
                
                
                —
                
                
                —
                
                
                1
                
                
                20
                
                
                2
                
                
                215
                
                
                1
                
                
                104
                
                
                1
                
                
                158Land
                    loans
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1
                
                
                28
                
                
                1
                
                
                15
                
                
                —
                
                
                —Non-residential
                    real estate loans
                
                
                1
                
                
                64
                
                
                1
                
                
                210
                
                
                1
                
                
                207
                
                
                1
                
                
                110
                
                
                3
                
                
                134
                
                
                3
                
                
                255Consumer
                    loans
                
                
                7
                
                
                15
                
                
                4
                
                
                12
                
                
                10
                
                
                81
                
                
                2
                
                
                9
                
                
                34
                
                
                115
                
                
                16
                
                
                74Commercial
                    loans
                
                
                7
                
                
                53
                
                
                2
                
                
                183
                
                
                1
                
                
                13
                
                
                4
                
                
                444
                
                
                13
                
                
                751
                
                
                10
                
                
                821Total
                
                
                28
                
                $
                748
                
                
                20
                
                $
                1,114
                
                
                22
                
                $
                1,627
                
                
                21
                
                $
                1,747
                
                
                112
                
                $
                2,386
                
                
                46
                
                $
                2,201Delinquent
                    loans to total loans
                
                
                
                
                
                
                
                
                
                
                
                0.77
                %
                
                
                
                
                
                
                
                
                
                
                1.47
                %
                
                
                
                
                
                
                
                
                
                
                1.99
                %
  *Classified
        Assets* .
        Federal
        regulations and the Bank’s Asset Classification Policy provide for the
        classification of loans and other assets such as debt and equity securities
        to
        be of lesser quality as “substandard,” “doubtful,” or “loss” assets. An asset is
        considered “substandard” if it is inadequately protected by the current net
        worth and paying capacity of the obligor or of the collateral pledged, if
        any.
“Substandard” assets include those characterized by the “distinct possibility”
that the Bank will sustain “some loss” if the deficiencies are not corrected.
        Assets classified as “doubtful” have all of the weaknesses inherent in those
        classified “substandard,” with the added characteristic that the weaknesses
        present make “collection or liquidation in full,” on the basis of currently
        existing facts, conditions, and values, “highly questionable and improbable.”
Assets classified as “loss” are those considered “uncollectible” and of such
        little value that their continuance as assets without the establishment of
        a
        specific loss reserve is not warranted.
  An
        insured institution is required to establish general allowances for loan
        losses
        in an amount deemed prudent by management for loans classified substandard
        or
        doubtful, as well as for other problem loans. General allowances represent
        loss
        allowances which have been established to recognize the inherent risk associated
        with lending activities, but which, unlike specific allowances, have not
        been
        allocated to particular problem assets. When an insured institution classifies
        problem assets as “loss,” it is required either to establish a specific
        allowance for losses equal to 100% of the amount of the asset so classified
        or
        to charge off such amount. An institution’s determination as to the
        classification of its assets and the amount of its valuation allowances is
        subject to review by the OTS, which can order the establishment of additional
        general or specific loss allowances.
  At
        December 31, 2006, the aggregate amount of the Bank’s classified assets are as
        follows:
  **At
                  December 31, 2006****(In
                  thousands)**Substandard
                  assets
              
              $
              7,189Doubtful
                  assets
              
              
              412Loss
                  assets
              
              
              —Total
                  classified assets
              
              $
              7,601
  The
        Bank
        regularly reviews its loan portfolio to determine whether any loans require
        classification in accordance with applicable regulations. Not all of the
        Bank’s
        classified assets constitute non-performing assets.
  11
  ***ALLOWANCE
        FOR LOAN LOSSES***
  The
        allowance for loan losses is maintained through the provision for loan losses,
        which is charged to earnings. The provision for loan losses is determined
        in
        conjunction with management’s review and evaluation of current economic
        conditions (including those of the Bank’s lending area), changes in the
        character and size of the loan portfolio, loan delinquencies (current status
        as
        well as past and anticipated trends) and adequacy of collateral securing
        loan
        delinquencies, historical and estimated net charge-offs and other pertinent
        information derived from a review of the loan portfolio. In management’s
        opinion, the Bank’s allowance for loan losses is adequate to absorb probable
        losses from loans at December 31, 2006. However, there can be no assurance
        that
        regulators, when reviewing the Bank’s loan portfolio in the future, will not
        require increases in its allowances for loan losses or that changes in economic
        conditions will not adversely affect the Bank’s loan portfolio.
  *Summary
        of Loan Loss Experience.* The
        following table analyzes changes in the allowance during the five years ended
        December 31, 2006.
  **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in Thousands)**Balance
                  at beginning of period
              
              $
              2,320
              
              $
              2,364
              
              $
              2,056
              
              $
              2,101
              
              $
              1,972Charge-offs:Single-family
                  residential
              
              
              (247
              )
              
              (190
              )
              
              (24
              )
              
              (401
              )
              
              (132
              )Consumer
              
              
              (178
              )
              
              (217
              )
              
              (150
              )
              
              (242
              )
              
              (258
              )Commercial
                  loans
              
              
              (19
              )
              
              —
              
              
              —
              
              
              (100
              )
              
              (111
              )Total
                  charge-offs
              
              
              (444
              )
              
              (407
              )
              
              (174
              )
              
              (743
              )
              
              (501
              )Recoveries
              
              
              36
              
              
              75
              
              
              144
              
              
              190
              
              
              60Net
                  charge-offs
              
              
              (408
              )
              
              (332
              )
              
              (30
              )
              
              (553
              )
              
              (441
              )Provision
                  for losses on loans
              
              
              264
              
              
              288
              
              
              338
              
              
              508
              
              
              570Balance
                  end of period
              
              $
              2,176
              
              $
              2,320
              
              $
              2,364
              
              $
              2,056
              
              $
              2,101Allowance
                  for loan losses as a percent of total loans outstanding
              
              
              0.89
              %
              
              1.00
              %
              
              1.02
              %
              
              1.06
              %
              
              1.26
              %Ratio
                  of net charge-offs to average loans outstanding before net
                  items
              
              
              .17
              %
              
              .14
              %
              
              .01
              %
              
              .29
              %
              
              .27
              %
   *Allocation
        of Allowance for Loan Losses.* The
        following table presents an analysis of the allocation of the Bank’s allowance
        for loan losses at the dates indicated.
  **At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Amount**
              
              **Percent
                  of loans in each category to total loans**
              
              **Amount**
              
              **Percent
                  of loans in each category to total loans**
              
              **Amount**
              
              **Percent
                  of loans in each category to total loans**
              
              **Amount**
              
              **Percent
                  of loans in each category to total loans**
              
              **Amount**
              
              **Percent
                  of loans in each category to total loans****(Dollars
                  in Thousands)**Balance
                  at end of period applicable to:Residential
                  real estate
              
              $
              954
              
              
              53.4
              %
              $
              1,102
              
              
              50.3
              %
              $
              930
              
              
              54.7
              %
              $
              1,007
              
              
              52.6
              %
              $
              827
              
              
              48.7
              %Nonresidential
                  real estate
              
              
              —
              
              
              32.3
              
              
              64
              
              
              34.8
              
              
              162
              
              
              28.1
              
              
              171
              
              
              28.6
              
              
              131
              
              
              27.4Consumer
                  loans
              
              
              171
              
              
              2.5
              
              
              156
              
              
              3.0
              
              
              226
              
              
              3.7
              
              
              246
              
              
              5.2
              
              
              452
              
              
              8.4Commercial
                  loans
              
              
              855
              
              
              11.7
              
              
              724
              
              
              11.9
              
              
              807
              
              
              13.5
              
              
              512
              
              
              13.6
              
              
              458
              
              
              15.6Unallocated
              
              
              196
              
              
              —
              
              
              274
              
              
              —
              
              
              239
              
              
              —
              
              
              120
              
              
              —
              
              
              233
              
              
              —Total
              
              $
              2,176
              
              
              100.0
              %
              $
              2,320
              
              
              100.0
              %
              $
              2,364
              
              
              100.0
              %
              $
              2,056
              
              
              100.0
              %
              $
              2,101
              
              
              100.0
              %
   12
  ***INVESTMENTS
        AND MORTGAGE-BACKED SECURITIES***
  *Investments* .
        The
        Bank’s investment portfolio (excluding mortgage-backed securities) consists of
        U.S. government and agency obligations, corporate bonds, municipal securities
        and Federal Home Loan Bank (“ **FHLB** ”)
        stock.
        At December 31, 2006, the investments in the portfolio had a carrying value
        of
        approximately $69.5 million, or 20.3%, of the consolidated total
        assets.
  The
        following table sets forth the amortized cost and the market value of the
        Bank’s
        investment portfolio at the dates indicated.
  **At
                  December 31,****2006**
              
              **2005**
              
              **2004****Amortized
                  Cost**
              
              **Market
                  Value**
              
              **Amortized
                  Cost**
              
              **Market
                  Value**
              
              **Amortized
                  Cost**
              
              **Market
                  Value****(In
                  thousands)**Available
                  for sale:U.S.
                  Government and agency obligations
              
              $
              50,812
              
              $
              50,369
              
              $
              57,737
              
              $
              56,986
              
              $
              25,478
              
              $
              25,413Corporate
                  bonds
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Municipal
                  securities
              
              
              14,776
              
              
              14,712
              
              
              2,562
              
              
              2,540
              
              
              1,430
              
              
              1,438Total
                  available for sale
              
              
              65,588
              
              
              65,081
              
              
              60,299
              
              
              59,526
              
              
              6,908
              
              
              26,851FHLB
                  stock
              
              
              4,400
              
              
              4,400
              
              
              4,050
              
              
              4,050
              
              
              3,281
              
              
              3,281Total
                  investments
              
              $
              69,988
              
              $
              69,481
              
              $
              64,349
              
              $
              63,576
              
              $
              30,189
              
              $
              30,132
  The
        following table sets forth the amount of investment securities (excluding
        FHLB
        stock) which mature during each of the periods indicated and the weighted
        average yields for each range of maturities at December 31, 2006.
  **Amount
                  at December 31, 2006 which matures in****Less
                  Than One Year**
              
              **One
                  Year to Five Years**
              
              **Five
                  to Ten Years**
              
              **After
                  Ten Years****Amortized
                  Cost**
              
              **Average
                  Yield**
              
              **Amortized
                  Cost**
              
              **Average
                  Yield**
              
              **Amortized
                  Cost**
              
              **Average
                  Yield**
              
              **Amortized
                  Cost**
              
              **Average
                   Yield****(Dollars
                  in thousands)**U.S.
                  Government and agency obligations
              
              $
              12,003
              
              
              3.93
              
              $
              36,834
              
              
              4.69
              
              $
              1,974
              
              
              5.24
              
              $
              0
              
              
              —Municipal
                  securities
              
              
              240
              
              
              3.09
              
              
              2,147
              
              
              5.42
              
              
              7,663
              
              
              6.09
              
              
              4,727
              
              
              6.28
  *Mortgage-Backed
        Securities* .
        The
        Bank maintains a portfolio of mortgage-backed pass-through securities in
        the
        form of FHLMC, FNMA and Government National Mortgage Association (“ **GNMA** ”)
        participation certificates. Mortgage-backed pass-through securities generally
        entitle the Bank to receive a portion of the cash flows from an identified
        pool
        of mortgages and gives the Bank an interest in that pool of mortgages. FHLMC,
        FNMA and GNMA securities are each guaranteed by its respective agencies as
        to
        principal and interest. Except for a $1,000 investment in interest-only
        certificates, the Bank does not invest in any derivative products.
  Although
        mortgage-backed securities generally yield less than individual loans originated
        by the Bank, they present less credit risk. Because mortgage-backed securities
        have a lower yield relative to current market rates, retention of such
        investments could adversely affect the Bank’s earnings, particularly in a rising
        interest rate environment. The mortgage-backed securities portfolio is generally
        considered to have very low credit risk because they are guaranteed as to
        principal repayment by the issuing agency.
  In
        addition, the Bank has purchased adjustable rate mortgage-backed securities
        as
        part of its effort to reduce its interest rate risk. In a period of declining
        interest rates, the Bank is subject to prepayment risk on such adjustable
        rate
        mortgage-backed securities. The Bank attempts to mitigate this prepayment
        risk
        by purchasing mortgage-backed securities at or near par. If interest rates
        rise
        in general, the interest rates on the loans backing the mortgage-backed
        securities will also adjust upward, subject to the interest rate
  13
  caps
        in
        the underlying mortgage loans. However, the Bank is still subject to interest
        rate risk on such securities if interest rates rise faster than 1% to 2%
        maximum
        annual interest rate adjustments on the underlying loans.
  At
        December 31, 2006, the Bank had mortgage-backed securities with a carrying
        value
        of approximately $68,000, all of which were classified as available for sale.
        These mortgage-backed securities may be used as collateral for borrowings
        and,
        through repayments, as a source of liquidity.
  The
        following table sets forth the amortized cost and market value of the Bank’s
        mortgage-backed securities at the dates indicated.
  **At
                  December 31,****2006**
              
              **2005**
              
              **2004****Amortized
                  Cost**
              
              **Market
                  Value**
              
              **Amortized
                  Cost**
              
              **Market
                  Value**
              
              **Amortized
                  Cost**
              
              **Market
                  Value****(In
                  thousands)**Available
                  for sale:Government
                  Agency securities
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Collateralized
                  mortgage obligations
              
              
              68
              
              
              69
              
              
              83
              
              
              83
              
              
              113
              
              
              113Total
                  mortgage-backed
                  securities
              
              $
              68
              
              $
              69
              
              $
              83
              
              $
              83
              
              $
              113
              
              $
              113
  The
        following table sets forth the amount of mortgage-backed securities which
        mature
        during each of the periods indicated and the weighted average yields for
        each
        range of maturities at December 31, 2006.
  **Amount
                  at December 31, 2006 which matures in****Less
                  Than One Year**
              
              **One
                  Year to Five Years**
              
              **Five
                  to Ten Years**
              
              **After
                  Ten Years****Amortized
                  Cost**
              
              **Average
                  Yield**
              
              **Amortized
                  Cost**
              
              **Average
                  Yield**
              
              **Amortized
                  Cost**
              
              **Average
                  Yield**
              
              **Amortized
                  Cost**
              
              **Average
                   Yield****(Dollars
                  in thousands)**Mortgage-backed
                  securities available for sale
              
              
              —
              
              
              —
              
              $
              68
              
              
              8.1
              %
              
              —
              
              
              —
              
              
              —
              
              
              —
  The
        following table sets forth the changes in the Bank’s mortgage-backed securities
        portfolio for the years ended December 31, 2006, 2005, and 2004.
  **For
                  the Year Ended December 31,****2006**
              
              **2005**
              
              **2004****(Dollars
                  in thousands)**Beginning
                  balance
              
              $
              83
              
              $
              113
              
              $
              175Purchases
              
              
              —
              
              
              —
              
              
              —Sales
                  proceeds
              
              
              —
              
              
              —
              
              
              —Repayments
              
              
              (15
              )
              
              (30
              )
              
              (62
              )Losses
                  on sales
              
              
              —
              
              
              —
              
              
              —Premium
                  and discount amortization, net
              
              
              —
              
              
              —
              
              
              (2
              )Unrealized
                  gains (losses) on securities available for sale
              
              
              —
              
              
              —
              
              
              2Ending
                  balance
              
              $
              68
              
              $
              83
              
              $
              113
   ***SOURCES
        OF FUNDS***
  *General* .
        Deposits have traditionally been the Bank’s primary source of funds for use in
        lending and investment activities. In addition to deposits, the Bank derives
        funds from scheduled loan payments, investment maturities, loan prepayments,
        retained earnings, income on earning assets and borrowings. While scheduled
        loan
        payments and income on earning assets are relatively stable sources of funds,
        deposit inflows and outflows can vary widely and are influenced by prevailing
        interest rates, market conditions and levels of competition. Borrowings from
        the
        FHLB of Indianapolis may be used in the short-term to compensate for reductions
        in deposits or deposit inflows at less than projected levels.
  14
  *Deposits* .
        Deposits are attracted, principally from within Jefferson County, through
        the
        offering of a broad selection of deposit instruments including fixed rate
        certificates of deposit, NOW, MMDAs and other transaction accounts, individual
        retirement accounts and savings accounts. The Bank actively solicits and
        advertises for deposits outside of Jefferson County. Since the opening of
        our
        branches in Sellersburg, Indiana (Clark County), Charlestown, Indiana (Clark
        County), and the branch in Carrollton, Kentucky (Carroll County), the Bank’s
        market area has expanded. Deposits will come from all of our market area.
        Deposit account terms vary, with the principal differences being the minimum
        balance required, the amount of time the funds remain on deposit and the
        interest rate. The Bank does not pay a fee for any deposits it
        receives.
  Interest
        rates paid, maturity terms, service fees and withdrawal penalties are
        established by the Bank on a periodic basis. Determination of rates and terms
        are predicated on funds acquisition and liquidity requirements, rates paid
        by
        competitors, growth goals and applicable regulations. The Bank relies, in
        part,
        on customer service and long-standing relationships with customers to attract
        and retain its deposits, but also closely prices its deposits in relation
        to
        rates offered by its competitors.
  The
        flow
        of deposits is influenced significantly by general economic conditions, changes
        in money market and prevailing interest rates and competition. The variety
        of
        deposit accounts offered by the Bank has allowed it to be competitive in
        obtaining funds and to respond with flexibility to changes in consumer demand.
        The Bank has become more susceptible to short-term fluctuations in deposit
        flows
        as customers have become more interest rate conscious. The Bank manages the
        pricing of its deposits in keeping with its asset/liability management and
        profitability objectives. Based on its experience, the Bank believes that
        its
        NOW and MMDAs are relatively stable sources of deposits. However, the ability
        of
        the Bank to attract and maintain certificates of deposit, and the rates paid
        on
        these deposits, have been and will continue to be significantly affected
        by
        market conditions.
  An
        analysis of the Company’s deposit accounts by type, maturity and rate at
        December 31, 2006 is as follows:
  **Type
                  of Account**
              
              **Minimum
                  Opening Balance**
              
              **Balance
                  at December 31, 2006**
              
              **%
                  of Deposits**
              
              **Weighted
                  Average Rate****(Dollars
                  in thousands)**Withdrawable:Non-interest
                  bearing accounts
              
              $
              100
              
              $
              19,340
              
              
              8.78
              %
              
              0.00
              %Savings
                  accounts
              
              
              50
              
              
              24,109
              
              
              10.95
              
              
              1.86MMDA
              
              
              2,500
              
              
              16,224
              
              
              7.37
              
              
              3.19NOW
                  accounts
              
              
              1,000
              
              
              58,564
              
              
              26.59
              
              
              3.31Total
                  withdrawable
              
              
              
              
              
              118,237
              
              
              53.69
              
              
              2.36Certificates
                  (original terms):I.R.A.
              
              $
              2,500
              
              $
              7,197
              
              
              3.27
              %
              
              4.07
              %3
                  months
              
              
              2,500
              
              
              12
              
              
              —
              
              
              2.726
                  months
              
              
              2,500
              
              
              1,476
              
              
              .67
              
              
              4.579
                  months
              
              
              2,500
              
              
              2,304
              
              
              1.05
              
              
              5.0512
                  months
              
              
              2,500
              
              
              13,013
              
              
              5.91
              
              
              4.5215
                  months
              
              
              2,500
              
              
              15,589
              
              
              7.08
              
              
              4.4918
                  months
              
              
              2,500
              
              
              2,662
              
              
              1.21
              
              
              4.0024
                  months
              
              
              2,500
              
              
              4,227
              
              
              1.92
              
              
              4.4630
                  months
              
              
              2,500
              
              
              1,843
              
              
              .84
              
              
              3.6936
                  months
              
              
              2,500
              
              
              2,522
              
              
              1.14
              
              
              3.6648
                  months
              
              
              2,500
              
              
              1,416
              
              
              .64
              
              
              3.6860
                  months
              
              
              2,500
              
              
              8,198
              
              
              3.72
              
              
              4.53Jumbo
                  certificates
              
              
              2,500
              
              
              41,542
              
              
              18.86
              
              
              4.44Total
                  certificates
              
              
              
              
              
              102,001
              
              
              46.31
              
              
              4.40Total
                  deposits
              
              
              
              
              $
              220,238
              
              
              100.00
              %
              
              3.30
   15
  The
        following table sets forth by various interest rate categories the composition
        of time deposits of the Bank at the dates indicated:
 
 **At
                  December 31,****2006**
              
              **2005**
              
              **2004****(In
                  thousands)**0.00
                  to 3.00%
              
              $
              4,264
              
              $
              35,227
              
              $
              64,3543.01
                  to 5.00%
              
              
              68,257
              
              
              63,455
              
              
              21,7145.01
                  to 6.00%
              
              
              29,480
              
              
              3,759
              
              
              4,4746.01
                  to 7.00%
              
              
              —
              
              
              —
              
              
              167.01
                  to 8.00%
              
              
              —
              
              
              —
              
              
              100Total
              
              $
              102,001
              
              $
              102,441
              
              $
              90,658
   The
        following table represents, by various interest rate categories, the amounts
        of
        time deposits maturing during each of the three years following December
        31,
        2006. Matured certificates, which have not been renewed as of December 31,
        2006,
        have been allocated based upon certain rollover assumptions.
 
 **Amounts
                  at December 31, 2006 Maturing In****One
                  Year or Less**
              
              **Two
                  Years**
              
              **Three
                  Years**
              
              **Greater
                  Than****Three
                  Years****(In
                  thousands)**0.00
                  to 3.00%
              
              $
              3,710
              
              $
              272
              
              $
              —
              
              $
              2813.01
                  to 5.00%
              
              
              53,238
              
              
              8,795
              
              
              3,653
              
              
              1,9515.01
                  to 6.00%
              
              
              24,102
              
              
              4,042
              
              
              1,461
              
              
              4966.01
                  to 7.00%
              
              
              —
              
              
              —
              
              
              —
              
              
              —7.01
                  to 8.00%
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              81,050
              
              $
              13,109
              
              $
              5,114
              
              $
              2,728
   The
        following table indicates the amount of the Bank’s jumbo and other certificates
        of deposit of $100,000 or more by time remaining until maturity as of December
        31, 2006.
 
 **At
                  December 31, 2006****Maturity
                  Period**
              
              **(In
                  thousands)**Three
                  months or less
              
              $
              8,230Greater
                  than three months through six months
              
              
              8,860Greater
                  than six months through twelve months
              
              
              18,835Over
                  twelve months
              
              
              5,617Total
              
              $
              41,542
   16
  The
        following table sets forth the dollar amount of savings deposits in the various
        types of deposits offered by the Bank at the dates indicated, and the amount
        of
        increase or decrease in such deposits as compared to the previous
        period.
  **DEPOSIT
                  ACTIVITY****Balance
                  at December 31, 2006**
              
              **%
                  of Deposits**
              
              **Increase
                  (Decrease) from 2005**
              
              **Balance
                  at December 31, 2005**
              
              **%
                  of Deposits**
              
              **Increase
                  (Decrease) from 2004**
              
              **Balance
                  at December 31, 2004**
              
              **%
                  of Deposits****(Dollars
                  in thousands)**Withdrawable:Noninterest-bearing
                  accounts
              
              $
              19,340
              
              
              8.78
              %
              $
              71
              
              $
              19,269
              
              
              9.32
              %
              $
              4,203
              
              $
              15,066
              
              
              8.83
              %Savings
                  accounts
              
              
              24,109
              
              
              10.95
              
              
              (4,329
              )
              
              28,438
              
              
              13.76
              
              
              (387
              )
              
              28,825
              
              
              16.90MMDA
              
              
              16,224
              
              
              7.37
              
              
              1,390
              
              
              14,834
              
              
              7.18
              
              
              2,525
              
              
              12,309
              
              
              7.22NOW
                  accounts
              
              
              58,564
              
              
              26.59
              
              
              16,813
              
              
              41,751
              
              
              20.20
              
              
              18,071
              
              
              23,680
              
              
              13.89Total
                  withdrawable
              
              
              118,237
              
              
              53.69
              
              
              13,945
              
              
              104,292
              
              
              50.45
              
              
              24,412
              
              
              79,880
              
              
              46.84Certificates
                  (original terms):I.R.A.
              
              
              7,197
              
              
              3.27
              
              
              (169
              )
              
              7,366
              
              
              3.56
              
              
              366
              
              
              7,000
              
              
              4.10Brokerage
                  CD
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,229
              )
              
              2,229
              
              
              1.313
                  months
              
              
              12
              
              
              —
              
              
              12
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —6
                  months
              
              
              1,476
              
              
              .67
              
              
              (2,279
              )
              
              3,755
              
              
              1.82
              
              
              2,615
              
              
              1,140
              
              
              0.679
                  months
              
              
              2,304
              
              
              1.05
              
              
              1,168
              
              
              1,136
              
              
              .55
              
              
              842
              
              
              294
              
              
              0.1712
                  months
              
              
              13,013
              
              
              5.91
              
              
              2,655
              
              
              10,358
              
              
              5.01
              
              
              (9,450
              )
              
              19,808
              
              
              11.6215
                  months
              
              
              15,589
              
              
              7.08
              
              
              3,735
              
              
              11,854
              
              
              5.73
              
              
              7,254
              
              
              4,600
              
              
              2.7018
                  months
              
              
              2,662
              
              
              1.21
              
              
              171
              
              
              2,491
              
              
              1.20
              
              
              1,109
              
              
              1,382
              
              
              0.8124
                  months
              
              
              4,227
              
              
              1.92
              
              
              905
              
              
              3,322
              
              
              1.61
              
              
              808
              
              
              2,514
              
              
              1.4730
                  months
              
              
              1,843
              
              
              .84
              
              
              (1,245
              )
              
              3,088
              
              
              1.49
              
              
              (178
              )
              
              3,266
              
              
              1.9236
                  months
              
              
              2,522
              
              
              1.14
              
              
              (131
              )
              
              2,653
              
              
              1.28
              
              
              (8
              )
              
              2,661
              
              
              1.5648
                  months
              
              
              1,416
              
              
              .64
              
              
              (489
              )
              
              1,905
              
              
              .92
              
              
              271
              
              
              1,634
              
              
              0.9660
                  months
              
              
              8,198
              
              
              3.72
              
              
              (558
              )
              
              8,756
              
              
              4.24
              
              
              (221
              )
              
              8,977
              
              
              5.26Jumbo
                  certificates
              
              
              41,542
              
              
              18.86
              
              
              (4,215
              )
              
              45,757
              
              
              22.13
              
              
              10,604
              
              
              35,153
              
              
              20.61Total
                  certificates
              
              
              102,001
              
              
              46.31
              
              
              (440
              )
              
              102,441
              
              
              49.55
              
              
              11,783
              
              
              90,658
              
              
              53.16Total
                  deposits
              
              $
              220,238
              
              
              100.00
              %
              $
              13,505
              
              $
              206,733
              
              
              100.00
              %
              $
              36,195
              
              $
              170,538
              
              
              100.00
              %
  *Borrowings* .
        The
        Bank focuses on generating high quality loans and then seeks the best source
        of
        funding from deposits, investments, or borrowings. At December 31, 2006,
        the
        Bank had $88 million in FHLB advances. The Bank does not anticipate any
        difficulty in obtaining advances appropriate to meet its requirements in
        the
        future.
  The
        following table presents certain information relating to the Holding Company’s
        and the Bank’s borrowings at or for the years ended December 31, 2006, 2005, and
        2004.
  **At
                  or for the Year Ended December 31,****2006**
              
              **2005**
              
              **2004****(Dollars
                  in thousands)**FHLB
                  Advances and Other Borrowed Money:Outstanding
                  at end of period
              
              $
              95,217
              
              $
              96,782
              
              $
              94,600Average
                  balance outstanding for period
              
              
              86,635
              
              
              102,501
              
              
              65,468Maximum
                  amount outstanding at any month-end during the period
              
              
              95,217
              
              
              111,555
              
              
              94,600Weighted
                  average interest rate during the period
              
              
              4.72
              %
              
              4.35
              %
              
              4.15
              %Weighted
                  average interest rate at end of period
              
              
              4.76
              %
              
              fdsr4.36
              %
              
              4.00
              %
   ***SERVICE
        CORPORATION SUBSIDIARIES***
  Office
        of
        Thrift Supervision regulations permit federal savings associations to invest
        in
        the capital stock, obligations or other specified types of securities of
        subsidiaries (referred to as “service corporations”) and
 17
  to
        make
        loans to such subsidiaries and joint ventures in which such subsidiaries
        are
        participants in an aggregate amount not exceeding 2% of the association’s
        assets, plus an additional 1% of assets if the amount over 2% is used for
        specified community or inner-city development purposes. In addition, federal
        regulations permit associations to make specified types of loans to such
        subsidiaries (other than special purpose finance subsidiaries) in which the
        association owns more than 10% of the stock, in an aggregate amount not
        exceeding 50% of the association’s regulatory capital if the association’s
        regulatory capital is in compliance with applicable regulations.
  A
        savings
        association that acquires a non-savings association subsidiary, or that elects
        to conduct a new activity within a subsidiary, must give the Federal Deposit
        Insurance Corporation, the Office of Thrift Supervision and the Department
        of
        Financial Institutions at least 30 days advance written notice. The Federal
        Deposit Insurance Corporation may, after consultation with the Office of
        Thrift
        Supervision, prohibit specified activities if it determines such activities
        pose
        a serious threat to the Deposit Insurance Fund. Moreover, a savings association
        must deduct from capital, for purposes of meeting the core capital, tangible
        capital and risk-based capital requirements, its entire investment in and
        loans
        to a subsidiary engaged in activities not permissible for a national bank
        (other
        than exclusively agency activities for its customers or mortgage banking
        subsidiaries).
  The
        Bank’s wholly owned subsidiary, 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. During 2005, the Bank established in Nevada three new subsidiaries
        --RVFB Investments, Inc., RVFB Holdings, Inc. and RVFB Portfolio, LLC--to
        hold
        and manage a significant portion of the Bank’s investment portfolio.
   ***FINANCING
        SUBSIDIARY***
  On
        March 13, 2003, the Company formed the “RIVR Statutory Trust I,” a
        statutory trust formed under Connecticut law, and filed a Certificate of
        Trust
        with the Secretary of the State of Connecticut. The sole purpose of the Trust
        is
        to issue and sell certain securities representing undivided beneficial interests
        in the assets of the Trust and to invest the proceeds thereof in certain
        debentures of the Company.
   ***EMPLOYEES***
  As
        of
        December 31, 2006, the Bank employed 77 persons on a full-time basis and
        11
        persons on a part-time basis. None of the employees is represented by a
        collective bargaining group. Management considers its employee relations
        to be
        good.
   **COMPETITION**
  The
        Bank
        originates most of its loans to and accepts most of its deposits from residents
        of Jefferson and Clark Counties, Indiana, and Carroll County, Kentucky. The
        Bank
        is subject to competition from various financial institutions, including
        state
        and national banks, state and federal savings associations, credit unions
        and
        certain non-banking consumer lenders that provide similar services in Jefferson
        County and Clark Counties in Indiana and Carroll County in Kentucky and which
        have significantly larger resources available to them than does the
        Bank. **** In
        total,
        there are 22 financial institutions located in the three-county market area,
        including the Bank. The Bank also competes with money market funds with respect
        to deposit accounts and with insurance companies with respect to individual
        retirement accounts.
  The
        primary factors influencing competition for deposits are interest rates,
        service
        and convenience of office locations. The Bank competes for loan originations
        primarily through the efficiency and quality of services it provides borrowers
        and through interest rates and loan fees charged. Competition is affected
        by,
        among other things, the general availability of lendable funds, general and
        local economic conditions, current interest rate levels and other factors
        that
        are not readily predictable.
  18
  **REGULATION**
  ***GENERAL***
  As
        a
        federally-chartered, FDIC-insured savings association, the Bank is subject
        to
        extensive regulation by the OTS and the FDIC. For example, the Bank must
        obtain
        OTS approval before it may engage in certain activities and must file reports
        with the OTS regarding its activities and financial condition. The OTS
        periodically examines the Bank’s books and records and, in conjunction with the
        FDIC in certain situations, has examination and enforcement powers. This
        supervision and regulation are intended primarily for the protection of
        depositors and the federal deposit insurance fund. A savings association
        must
        pay a semi-annual assessment to the OTS based upon a marginal assessment
        rate
        that decreases as the asset size of the savings association increases, and
        which
        includes a fixed-cost component that is assessed on all savings associations.
        The assessment rate that applies to a savings association depends upon the
        institution’s size, condition and the complexity of its operations. The Bank’s
        semi-annual assessment is approximately $42,000.
  The
        Bank
        is also subject to federal and state regulation as to such matters as loans
        to
        officers, directors, or principal shareholders, required reserves, limitations
        as to the nature and amount of its loans and investments, regulatory approval
        of
        any merger or consolidation, issuances or retirements of its securities,
        and
        limitations upon other aspects of banking operations. In addition, the Bank’s
        activities and operations are subject to a number of additional detailed,
        complex and sometimes overlapping federal and state laws and regulations.
        These
        include state usury and consumer credit laws, state laws relating to
        fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal
        Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
        Act,
        the Community Reinvestment Act, anti-redlining legislation, antitrust laws
        and
        regulations protecting the confidentiality of consumer financial
        information.
   ***SAVINGS
        AND LOAN HOLDING COMPANY REGULATION***
  As
        the
        holding company for the Bank, the Holding Company is regulated as a
“non-diversified savings and loan holding company” within the meaning of the
        Home Owners’ Loan Act, as amended (“ **HOLA** ”),
        and
        is subject to regulatory oversight by the Director of the OTS. As such, the
        Holding Company is registered with the OTS and is thereby subject to OTS
        regulations, examinations, supervision and reporting requirements. As a
        subsidiary of a savings and loan holding company, the Bank is subject to
        certain
        restrictions in its dealings with the Holding Company and with other companies
        affiliated with the Holding Company.
  In
        general, the HOLA prohibits a savings and loan holding company, without
        obtaining the prior approval of the Director of the OTS, from acquiring control
        of another savings association or savings and loan holding company or retaining
        more than 5% of the voting shares of a savings association or of another
        holding
        company which is not a subsidiary. The HOLA also restricts the ability of
        a
        director or officer of the Holding Company, or any person who owns more than
        25%
        of the Holding Company’s stock, from acquiring control of another savings
        association or savings and loan holding company without obtaining the prior
        approval of the Director of the OTS.
  The
        Holding Company currently operates as a unitary savings and loan holding
        company. Prior to the enactment of the Gramm-Leach-Bliley Act (the “ **GLB
        Act** ”)
        in
        1999, there were no restrictions on the permissible business activities of
        a
        unitary savings and loan holding company. The GLB Act included a provision
        that
        prohibits any new unitary savings and loan holding company, defined as a
        company
        that acquires a thrift after May 4, 1999, from engaging in commercial
        activities. This provision also includes a grandfather clause, however, that
        permits a company that was a savings and loan holding company as of May 4,
        1999, or had an application to become a savings and loan holding company
        on file
        with the OTS as of that date, to acquire and continue to control a thrift
        and to
        continue to engage in commercial
  19
  activities.
        Because the Holding Company qualifies under this grandfather provision, the
        GLB
        Act did not affect the Holding Company’s authority to engage in diversified
        business activities.
  If
        the
        Holding Company were to acquire control of another savings association other
        than through a merger or other business combination with the Bank, the Holding
        Company would thereupon become a multiple savings and loan holding company.
        Except where such acquisition is pursuant to the authority to approve emergency
        thrift acquisitions and where each subsidiary savings association meets the
        Qualified Thrift Lender (“ **QTL** ”)
        test,
        the activities of the Holding Company and any of its subsidiaries (other
        than
        the Bank or other subsidiary savings associations) would thereafter be subject
        to further restrictions. The HOLA provides that, among other things, a multiple
        savings and loan holding company may not, either directly or acting through
        a
        subsidiary that is not a savings association, conduct, any business activity
        other than (i) furnishing or performing management services for a
        subsidiary savings association, (ii) conducting an insurance agency or
        escrow business, (iii) holding, managing, or liquidating assets owned by or
        acquired from a subsidiary savings association, (iv) holding or managing
        properties used or occupied by a subsidiary savings association, (v) acting
        as trustee under deeds of trust, (vi) those activities in which multiple
        savings and loan holding companies were authorized (by regulation) to directly
        engage on March 5, 1987, or (vii) those activities authorized by the
        FRB as permissible for bank holding companies, unless the Director of the
        OTS by
        regulation prohibits or limits such activities for savings and loan holding
        companies. Those activities described in (vii) above must also be approved
        by the Director of the OTS before a multiple savings and loan holding company
        may engage in such activities.
  The
        Director of the OTS may also approve acquisitions resulting in the formation
        of
        a multiple savings and loan holding company which controls savings associations
        in more than one state, if the multiple savings and loan holding company
        involved controls a savings association which operated a home or branch office
        in the state of the association to be acquired as of March 5, 1987, or if
        the laws of the state in which the association to be acquired is located
        specifically permit associations to be acquired by state-chartered associations
        or savings and loan holding companies located in the state where the acquiring
        entity is located (or by a holding company that controls such state-chartered
        savings associations). Also, the Director of the OTS may approve an acquisition
        resulting in a multiple savings and loan holding company controlling savings
        associations in more than one state in the case of certain emergency thrift
        acquisitions.
  Notwithstanding
        the above rules as to permissible business activities of savings and loan
        holding companies, if the savings association subsidiary of such a holding
        company fails to meet the QTL test, then such holding company would be deemed
        to
        be a bank holding company subject to all of the provisions of the Bank Holding
        Company Act of 1956 and other statutes applicable to bank holding companies,
        to
        the same extent as if the Holding Company were a bank holding company and
        the
        Bank were a bank. See “-Qualified Thrift Lender.” At December 31, 2006, the
        Bank’s asset composition was in excess of that required to qualify as a
        Qualified Thrift Lender.
  Indiana
        law permits federal and state savings association holding companies with
        their
        home offices located outside of Indiana to acquire savings associations whose
        home offices are located in Indiana and savings association holding companies
        with their principal place of business in Indiana (“ **Indiana
        Savings Association Holding Companies** ”)
        upon
        receipt of approval by the Indiana Department of Financial Institutions.
        Moreover, Indiana Savings Association Holding Companies may acquire savings
        associations with their home offices located outside of Indiana and savings
        association holding companies with their principal place of business located
        outside of Indiana upon receipt of approval by the Indiana Department of
        Financial Institutions.
  No
        subsidiary savings association of a savings and loan holding company may
        declare
        or pay a dividend or make a capital distribution on its permanent or
        non-withdrawable stock unless it first gives the Director of the OTS 30 days
        advance notice of such declaration and payment. Any dividend declared during
        such period or without giving notice shall be invalid.
  20
  ***FEDERAL
        HOME LOAN BANK SYSTEM***
  The
        Bank
        is a member of the FHLB system, which consists of 12 regional banks. The
        Federal
        Housing Finance Board (“ **FHFB** ”),
        an
        independent agency, controls the FHLB System including the FHLB of Indianapolis.
        The FHLB System provides a central credit facility primarily for member
        financial institutions. At December 31, 2006, the Bank’s investment in stock of
        the FHLB of Indianapolis was $4.4 million. For the fiscal year ended December
        31, 2006, the FHLB of Indianapolis paid approximately $198,000 in cash dividends
        to the Bank, for an annual rate of 4.81%.
  All
        12
        FHLBs are required to provide funds to establish affordable housing programs
        through direct loans or interest subsidies on advances to members to be used
        for
        lending at subsidized interest rates for low-and moderate-income, owner-occupied
        housing projects, affordable rental housing, and certain other community
        projects. These contributions and obligations could adversely affect the
        value
        of FHLB stock in the future. A reduction in the value of such stock may result
        in a corresponding reduction in the Bank’s capital.
  The
        FHLB
        of Indianapolis serves as a reserve or central bank for its member institutions.
        It is funded primarily from proceeds derived from the sale of consolidated
        obligations of the FHLB System. It makes advances to members in accordance
        with
        policies and procedures established by the FHLB and the Board of Directors
        of
        the FHLB of Indianapolis.
  All
        FHLB
        advances must be fully secured by sufficient collateral as determined by
        the
        FHLB. Eligible collateral includes first mortgage loans not more than 90
        days
        delinquent or securities evidencing interests therein, securities (including
        mortgage-backed securities) issued, insured or guaranteed by the federal
        government or any agency thereof, cash or FHLB deposits, certain small business
        and agricultural loans of smaller institutions and real estate with readily
        ascertainable value in which a perfected security interest may be obtained.
        Other forms of collateral may be accepted as additional security or, under
        certain circumstances, to renew outstanding advances. All long-term advances
        are
        required to provide funds for residential home financing and the FHLB has
        established standards of community service that members must meet to maintain
        access to long-term advances.
  Interest
        rates charged for advances vary depending upon maturity, the cost of funds
        to
        the FHLB of Indianapolis and the purpose of the borrowing.
   ***INSURANCE
        OF DEPOSITS***
  The
        Bank's deposits are insured to applicable limits by the FDIC. The Federal
        Deposit Insurance Reform Act of 2005 (the “ **Reform
        Act** ”),
        which
        was signed into law in February 2006, has resulted in significant changes
        to the
        federal deposit insurance program:
 
 ·
              Effective
                  March 31, 2006, the Bank Insurance Fund (“**BIF**”)
                  and the Savings Association Insurance Fund (“**SAIF**”)
                  were merged to create a new fund, called the Deposit Insurance
                  Fund
                  (“**DIF**”)
  ·
              The
                  current $100,000 deposit insurance coverage is subject to adjustment
                  for
                  inflation beginning in 2010 and every succeeding five
                  years
  ·
              Deposit
                  insurance coverage for individual retirement accounts and certain
                  other
                  retirement accounts has been increased from $100,000 to $250,000
                  and also
                  will be subject to adjustment for
                  inflation
  Pursuant
        to the Reform Act, the FDIC is authorized to set the reserve ratio for the
        DIF
        annually at between 1.15% and 1.5% of estimated insured deposits and the
        FDIC
        has been given discretion to set assessment rates according to risk regardless
        of the level of the fund reserve ratio. On November 2, 2006,
   21
  the
        FDIC
        adopted final regulations that set the designated reserve ratio for the DIF
        at
        1.25% beginning January 1, 2007.
  Insured
        depository institutions that were in existence on December 31, 1996 and paid
        assessments prior to that date (or their successors) are entitled to a one-time
        credit against future assessments based on their past contributions to the
        BIF
        or SAIF. In 2007, the Bank will receive a one-time credit against future
        assessments. A preliminary figure of $178,099 was projected by the FDIC in
        October of 2006, with a final figure due for the June, 2007 assessment
        period.
  Also
        on
        November 2, 2006, the FDIC adopted final regulations that establish a new
        risk-based premium system. Under the new system,  the
        FDIC
        will evaluate each institution’s risk based on three primary sources of
        information: supervisory ratings for all insured institutions, financial
        ratios
        for most institutions, and long-term debt issuer ratings for large institutions
        that have such ratings. An institution’s assessments will be based on the
        insured institution’s ranking in one of four risk categories. Effective January
        1, 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2
        are
        grouped in Risk Category I and are assessed for deposit insurance at an annual
        rate of between five and seven cents for every $100 of domestic deposits.
        Institutions in Risk Categories II, III and IV are assessed at annual rates
        of
        10, 28 and 43 cents, respectively. An increase in assessments could have
        a
        material adverse effect on the Company’s earnings.
  FDIC-insured
        institutions remain subject to the requirement to pay assessments to the
        FDIC to
        fund interest payments on bonds issued by the Financing Corporation
        (“ **FICO** ”),
        an
        agency of the Federal government established to recapitalize the predecessor
        to
        the SAIF. These assessments will continue until the FICO bonds mature in
        2017.
        For the quarter ended December 31, 2006, the FICO assessment rate was equal
        to
        1.24 cents for each $100 in domestic deposits maintained at an
        institution.
   ***SAVINGS
        ASSOCIATION REGULATORY CAPITAL***
  Currently,
        savings associations are subject to three separate minimum capital-to-assets
        requirements: (i) a leverage limit, (ii) a tangible capital
        requirement, and (iii) a risk-based capital requirement. The leverage limit
        requires that savings associations maintain “core capital” of at least 3% of
        total assets. Core capital is generally defined as common shareholders’ equity
        (including retained earnings), non-cumulative perpetual preferred stock and
        related surplus, certain minority equity interests in subsidiaries, qualifying
        supervisory goodwill, purchased mortgage servicing rights and purchased credit
        card relationships (subject to certain limits) less non-qualifying intangibles.
        The OTS requires a core capital level of 3% of total adjusted assets for
        savings
        associations that receive the highest supervisory rating for safety and
        soundness, and no less than 4% for all other savings associations. Under
        the
        tangible capital requirement, a savings association must maintain tangible
        capital (core capital less all intangible assets except purchased mortgage
        servicing rights which may be included after making the above-noted adjustment
        in an amount up to 100% of tangible capital) of at least 1.5% of total assets.
        Under the risk-based capital requirements, a minimum amount of capital must
        be
        maintained by a savings association to account for the relative risks inherent
        in the type and amount of assets held by the savings association. The risk-based
        capital requirement requires a savings association to maintain capital (defined
        generally for these purposes as core capital plus general valuation allowances
        and permanent or maturing capital instruments such as preferred stock and
        subordinated debt less assets required to be deducted) equal to 8.0% of
        risk-weighted assets. Assets are ranked as to risk in one of four categories
        (0-100%). A credit risk-free asset, such as cash, requires no risk-based
        capital, while an asset with a significant credit risk, such as a non-accrual
        loan, requires a risk factor of 100%. Moreover, a savings association must
        deduct from capital, for purposes of meeting the core capital, tangible capital
        and risk-based capital requirements, its entire investment in and loans to
        a
        subsidiary engaged in activities not permissible for a national bank (other
        than
        exclusively agency activities for its customers or mortgage banking
        subsidiaries). At December 31, 2006, the Bank was in compliance with all
        capital
        requirements imposed by law.
  22
   If
        an
        association is not in compliance with the capital requirements, the OTS is
        required to prohibit asset growth and to impose a capital directive that
        may
        restrict, among other things, the payment of dividends and officers’
compensation. In addition, the OTS and the FDIC generally are authorized
        to take
        enforcement actions against a savings association that fails to meet its
        capital
        requirements. These actions may include restricting the operations activities
        of
        the association, imposing a capital directive, cease and desist order, or
        civil
        money penalties, or imposing harsher measures such as appointing a receiver
        or
        conservator or forcing the association to merge into another
        institution.
   ***PROMPT
        CORRECTIVE REGULATORY ACTION***
  The
        Federal Deposit Insurance Corporation Improvement Act of 1991 (“ **FedICIA** ”)
        requires, among other things, that federal bank regulatory authorities take
        “prompt corrective action” with respect to institutions that do not meet minimum
        capital requirements. For these purposes, FedICIA establishes five capital
        tiers: well capitalized, adequately capitalized, undercapitalized, significantly
        undercapitalized and critically undercapitalized. At December 31, 2006, the
        Bank
        was categorized as “well capitalized,” meaning that its total risk-based capital
        ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its
        leverage ratio exceeded 5%, and it was not subject to a regulatory order,
        agreement or directive to meet and maintain a specific capital level for
        any
        capital measure.
  The
        FDIC
        may order savings associations which have insufficient capital to take
        corrective actions. For example, a savings association which is categorized
        as
“undercapitalized” would be subject to growth limitations and would be required
        to submit a capital restoration plan, and a holding company that controls
        such a
        savings association would be required to guarantee that the savings association
        complies with the restoration plan. “Significantly undercapitalized” savings
        associations would be subject to additional restrictions. Savings associations
        deemed by the FDIC to be “critically undercapitalized” would be subject to the
        appointment of a receiver or conservator.
   ***DIVIDEND
        LIMITATIONS***
  The
        OTS
        also restricts the amount of “capital distributions” that may be made by savings
        associations. The applicable regulation defines a capital distribution as
        a
        distribution of cash or other property to a savings association’s owners, made
        on account of their ownership. This definition includes a savings association’s
        payment of cash dividends to shareholders, or any payment by a savings
        association to repurchase, redeem, retire, or otherwise acquire any of its
        shares or debt instruments that are included in total capital, and any extension
        of credit to finance an affiliate’s acquisition of those shares or interests.
        The amended regulation does not apply to dividends consisting only of a savings
        association’s shares or rights to purchase such shares.
  The
        regulation exempts certain savings associations from filing either a notice
        or
        an application with the OTS before making any capital distribution, and requires
        a savings association to file an application for approval of a proposed capital
        distribution with the OTS if the association is not eligible for expedited
        treatment under OTS’s application processing rules, or the total amount of all
        capital distributions, including the proposed capital distribution, for the
        applicable calendar year would exceed an amount equal to the savings
        association’s net income for that year to date plus the savings association’s
        retained net income for the preceding two years (the “retained net income
        standard”). A savings association must also file an application for approval of
        a proposed capital distribution if, following the proposed distribution,
        the
        association would not be at least adequately capitalized under the OTS prompt
        corrective action regulations, or if the proposed distribution would violate
        a
        prohibition contained in any applicable statute, regulation, or agreement
        between the association and the OTS or the FDIC.
  The
        regulation requires a savings association to file a notice of a proposed
        capital
        distribution in lieu of an application if the association or the proposed
        capital distribution do not meet the conditions described above, and: (1)
        the
        savings association will not be at least well capitalized (as defined under
        the
        OTS
  23
  prompt
        corrective action regulations) following the capital distribution; (2) the
        capital distribution would reduce the amount of, or retire any part of the
        savings association’s common or preferred stock, or retire any part of debt
        instruments such as notes or debentures included in the association’s capital
        under the OTS capital regulation; or (3) the savings association is a subsidiary
        of a savings and loan holding company. Because the Bank is a subsidiary of
        a
        savings and loan holding company, this latter provision requires, at a minimum,
        that the Bank file a notice with the OTS 30 days before making any capital
        distributions to the Holding Company.
  In
        addition to these regulatory restrictions, the Bank’s Plan of Conversion imposes
        additional limitations on the amount of capital distributions it may make
        to the
        Holding Company. The Plan of Conversion requires the Bank to establish and
        maintain a liquidation account for the benefit of Eligible Account Holders
        and
        Supplemental Eligible Account Holders and prohibits the Bank from making
        capital
        distributions to the Holding Company if its net worth would be reduced below
        the
        amount required for the liquidation account.
   ***LIMITATIONS
        ON RATES PAID FOR DEPOSITS***
  Regulations
        promulgated by the FDIC pursuant to FedICIA place limitations on the ability
        of
        insured depository institutions to accept, renew or roll over deposits by
        offering rates of interest which are significantly higher than the prevailing
        rates of interest on deposits offered by other insured depository institutions
        having the same type of charter in the institution’s normal market area. Under
        these regulations, “well-capitalized” depository institutions may accept, renew,
        or roll such deposits over without restriction, “adequately capitalized”
depository institutions may accept, renew or roll such deposits over with
        a
        waiver from the FDIC (subject to certain restrictions on payments of rates)
        and
“undercapitalized” depository institutions may not accept, renew or roll such
        deposits over. The regulations contemplate that the definitions of “well
        capitalized,” “adequately capitalized” and “undercapitalized” will be the same
        as the definition adopted by the agencies to implement the corrective action
        provisions of FedICIA. Management does not believe that these regulations
        will
        have a materially adverse effect on the Bank’s current operations.
   ***LIQUIDITY***
  The
        Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed
        the
        former statutory requirement that all savings associations maintain an average
        daily balance of liquid assets in a minimum amount of not less than 4% or
        more
        than 10% of their withdrawable accounts plus short-term borrowings. The OTS
        adopted a rule that implemented this revised statutory requirement, although
        savings associations remain subject to the OTS regulation that requires them
        to
        maintain sufficient liquidity to ensure their safe and sound
        operation.
   ***SAFETY
        AND SOUNDNESS STANDARDS***
  The
        federal banking agencies have adopted final safety and soundness standards
        for
        all insured depository institutions. The standards, which were issued in
        the
        form of guidelines rather than regulations, relate to internal controls,
        information systems, internal audit systems, loan underwriting and
        documentation, compensation, interest rate exposure, asset quality and earnings
        standards. In general, the standards are designed to assist the federal banking
        agencies in identifying and addressing problems at insured depository
        institutions before capital becomes impaired. If an institution fails to
        meet
        these standards, the appropriate federal banking agency may require the
        institution to submit a compliance plan. Failure to submit a compliance plan
        may
        result in enforcement proceedings.
  24
  ***REAL
        ESTATE LENDING STANDARDS***
  OTS
        regulations require savings associations to establish and maintain written
        internal real estate lending policies. Each association’s lending policies must
        be consistent with safe and sound banking practices and be appropriate to
        the
        size of the association and the nature and scope of its operations. The policies
        must establish loan portfolio diversification standards; establish prudent
        underwriting standards, including loan-to-value limits, that are clear and
        measurable; establish loan administration procedures for the association’s real
        estate portfolio; and establish documentation, approval and reporting
        requirements to monitor compliance with the association’s real estate lending
        policies. The association’s written real estate lending policies must be
        reviewed and approved by the association’s Board of Directors at least annually.
        Further, each association is expected to monitor conditions in its real estate
        market to ensure that its lending policies continue to be appropriate for
        current market conditions.
   ***LOANS
        TO ONE BORROWER***
  Under
        OTS
        regulations, the Bank may not make a loan or extend credit to a single or
        related group of borrowers in excess of 15% of its unimpaired capital and
        surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
        capital and surplus, if such loans or extensions of credit are fully secured
        by
        readily marketable collateral, including certain debt and equity securities
        but
        not including real estate. In some cases, a savings association may lend
        up to
        30 percent of unimpaired capital and surplus to one borrower for purposes
        of
        developing domestic residential housing, provided that the association meets
        its
        regulatory capital requirements and the OTS authorizes the association to
        use
        this expanded lending authority. At December 31, 2006, the Bank did not have
        any
        loans or extensions of credit to a single or related group of borrowers in
        excess of its lending limits. Management does not believe that the
        loans-to-one-borrower limits will have a significant impact on the Bank’s
        business operations or earnings.
   ***QUALIFIED
        THRIFT LENDER***
  Savings
        associations must meet a QTL test that requires the association to maintain
        an
        appropriate level of qualified thrift investments (“ **QTIs** ”)
        (primarily residential mortgages and related investments, including certain
        mortgage-related securities) and otherwise to qualify as a QTL. The required
        percentage of QTIs is 65% of portfolio assets (defined as all assets minus
        intangible assets, property used by the association in conducting its business
        and liquid assets equal to 10% of total assets). Certain assets are subject
        to a
        percentage limitation of 20% of portfolio assets. In addition, savings
        associations may include shares of stock of the FHLBs, FNMA, and FHLMC as
        QTIs.
        Compliance with the QTL test is determined on a monthly basis in nine out
        of
        every twelve months. As of December 31, 2006, the Bank was in compliance
        with
        its QTL requirement, with approximately 70.3% of its portfolio assets invested
        in QTIs.
  A
        savings
        association which fails to meet the QTL test must either convert to a bank
        or be
        subject to the following penalties: (i) it may not enter into any new
        activity except for those permissible for a national bank and for a savings
        association; (ii) its branching activities shall be limited to those of a
        national bank; and (iii) it shall be bound by regulations applicable to
        national banks respecting payment of dividends. Three years after failing
        the
        QTL test the association must dispose of any investment or activity not
        permissible for a national bank and a savings association. If such a savings
        association is controlled by a savings and loan holding company, then such
        holding company must, within a prescribed time period, become registered
        as a
        bank holding company and become subject to all rules and regulations applicable
        to bank holding companies (including restrictions as to the scope of permissible
        business activities).
   ***ACQUISITIONS
        OR DISPOSITIONS AND BRANCHING***
  The
        Bank
        Holding Company Act specifically authorizes a bank holding company, upon
        receipt
        of appropriate regulatory approvals, to acquire control of any savings
        association or holding company
  25
  thereof
        wherever located. Similarly, a savings and loan holding company may acquire
        control of a bank. Moreover, federal savings associations may acquire or
        be
        acquired by any insured depository institution. Regulations promulgated by
        the
        FRB restrict the branching authority of savings associations acquired by
        bank
        holding companies. Savings associations acquired by bank holding companies
        may
        be converted to banks, but as such they become subject to branching and activity
        restrictions applicable to banks.
  Subject
        to certain exceptions, commonly-controlled banks and savings associations
        must
        reimburse the FDIC for any losses suffered in connection with a failed bank
        or
        savings association affiliate. Institutions are commonly controlled if one
        is
        owned by another or if both are owned by the same holding company. Such claims
        by the FDIC under this provision are subordinate to claims of depositors,
        secured creditors, and holders of subordinated debt, other than
        affiliates.
  The
        OTS
        has adopted regulations which permit nationwide branching to the extent
        permitted by federal statute. Federal statutes permit federal savings
        associations to branch outside of their home state if the association meets
        the
        domestic building and loan test in §7701(a)(19) of the Internal Revenue Code of
        1986, as amended (the “ **Code** ”)
        or the
        asset composition test of §7701(c) of the Code. Branching that would result in
        the formation of a multiple savings and loan holding company controlling
        savings
        associations in more than one state is permitted if the law of the state
        in
        which the savings association to be acquired is located specifically authorizes
        acquisitions of its state-chartered associations by state-chartered associations
        or their holding companies in the state where the acquiring association or
        holding company is located. Moreover, Indiana banks and savings associations
        are
        permitted to acquire other Indiana banks and savings associations and to
        establish branches throughout Indiana.
  Finally,
        The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
        “ **Riegle-Neal
        Act** ”)
        permits bank holding companies to acquire banks in other states and, with
        state
        consent and subject to certain limitations, allows banks to acquire out-of-state
        branches either through merger or de novo expansion. The State of Indiana
        enacted legislation establishing interstate branching provisions for Indiana
        state-chartered banks consistent with those established by the Riegle-Neal
        Act
        (the “ **Indiana
        Branching Law** ”).
        The
        Indiana Branching Law, which became effective in 1996, authorizes Indiana
        banks
        to branch interstate by merger or de novo expansion, provided that such
        transactions are not permitted to out-of-state banks unless the laws of their
        home states permit Indiana banks to merge or establish de novo banks on a
        reciprocal basis.
   ***TRANSACTIONS
        WITH AFFILIATES***
  The
        Bank
        is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which
        limits credit transactions between a bank or savings association and its
        executive officers and its affiliates. These provisions also prescribe terms
        and
        conditions deemed to be consistent with safe and sound banking practices
        for
        transactions between a financial institution and its affiliates, and restrict
        the types of collateral security permitted in connection with a financial
        institution’s extension of credit to an affiliate.
   ***FEDERAL
        SECURITIES LAW***
  The
        shares of Common Stock of the Holding Company have been registered with the
        SEC
        under the Securities Exchange Act (the “ **1934
        Act** ”).
        The
        Holding Company is subject to the information, proxy solicitation, insider
        trading restrictions and other requirements of the 1934 Act and the rules
        of the
        SEC thereunder. After three years following the Bank’s conversion to stock form,
        if the Holding Company has fewer than 300 shareholders, it may deregister
        its
        shares under the 1934 Act and cease to be subject to the foregoing
        requirements.
  Shares
        of
        Common Stock held by persons who are affiliates of the Holding Company may
        not
        be resold without registration unless sold in accordance with the resale
        restrictions of Rule 144 under the Securities Act of 1933. If the Holding
        Company meets the current public information requirements under Rule 144,
  26
  each
        affiliate of the Holding Company who complies with the other conditions of
        Rule
        144 (including those that require the affiliate’s sale to be aggregated with
        those of certain other persons) would be able to sell in the public market,
        without registration, a number of shares not to exceed, in any three-month
        period, the greater of (i) 1% of the outstanding shares of the Holding
        Company or (ii) the average weekly volume of trading in such shares during
        the preceding four calendar weeks.
   ***SARBANES-OXLEY
        ACT OF 2002***
  The
        Holding Company is subject to the Sarbanes-Oxley Act of 2002 (the “ **Sarbanes-Oxley
        Act** ”).
        The
        Sarbanes-Oxley Act’s stated goals include enhancing corporate responsibility,
        increasing penalties for accounting and auditing improprieties at publicly
        traded companies and protecting investors by improving the accuracy and
        reliability of corporate disclosures pursuant to the securities laws. The
        Sarbanes-Oxley Act generally applies to all companies that file or are required
        to file periodic reports with the Securities and Exchange Commission under
        the
        1934 Act.
  Among
        other things, the Sarbanes-Oxley Act creates the Public Company Accounting
        Oversight Board as an independent body subject to SEC supervision with
        responsibility for setting auditing, quality control and ethical standards
        for
        auditors of public companies. The Sarbanes-Oxley Act also requires public
        companies to make faster and more-extensive financial disclosures, requires
        the
        chief executive officer and chief financial officer of public companies to
        provide signed certifications as to the accuracy and completeness of financial
        information filed with the SEC, and provides enhanced criminal and civil
        penalties for violations of the federal securities laws.
  The
        Sarbanes-Oxley Act also addresses functions and responsibilities of audit
        committees of public companies. The statute makes the audit committee directly
        responsible for the appointment, compensation and oversight of the work of
        the
        company’s outside auditor, and requires the auditor to report directly to the
        audit committee. The Sarbanes-Oxley Act authorizes each audit committee to
        engage independent counsel and other advisors, and requires a public company
        to
        provide the appropriate funding, as determined by its audit committee, to
        pay
        the company’s auditors and any advisors that its audit committee retains. The
        Sarbanes-Oxley Act also requires public companies to include an internal
        control
        report and assessment by management, along with an attestation to this report
        prepared by the company’s registered public accounting firm, in their annual
        reports to stockholders.
  The
        Holding Company continues to incur additional expense in complying with the
        provisions of the Sarbanes-Oxley Act and the resulting regulations, but
        management does not expect that such compliance will have a material impact
        on
        the Holding Company’s results of operations or financial condition.
   ***COMMUNITY
        REINVESTMENT ACT MATTERS***
  Federal
        law requires that ratings of depository institutions under the Community
        Reinvestment Act of 1977 (“ **CRA** ”)
        be
        disclosed. The disclosure includes both a four-unit descriptive rating -
        outstanding, satisfactory, needs to improve, and substantial noncompliance
        - and
        a written evaluation of an institution’s performance. Each FHLB is required to
        establish standards of community investment or service that its members must
        maintain for continued access to long-term advances from the FHLBs. The
        standards take into account a member’s performance under the CRA and its record
        of lending to first-time home buyers. The OTS has designated the Bank’s record
        of meeting community credit needs as satisfactory.
   ***PREDATORY
        LENDING***
  The
        Federal Reserve Board issued a regulation that became effective on
        October 1, 2002 that is aimed at curbing “predatory lending.” The term
“predatory lending” encompasses a variety of practices, but the term generally
        is used to refer to abusive lending practices involving fraud, deception
        or
        unfairness.
  27
  Predatory
        lending typically involves one or more of the following: (i) making
        unaffordable loans based on the assets of the borrower rather than on the
        borrower’s ability to repay an obligation (“asset-based lending”);
        (ii) inducing a borrower to refinance a loan repeatedly in order to charge
        high points and fees each time the loan is refinanced (“loan flipping”); or
        (iii) engaging in fraud or deception to conceal the true nature of the loan
        obligation from an unsuspecting or unsophisticated borrower. The Federal
        Reserve
        Board amended Regulation Z to broaden the scope of loans subject to the
        protections of the Home Ownership and Equity Protection Act of 1994
        (“ **HOEPA** ”).
        Among
        other things, the regulation brings within the scope of HOEPA first-lien
        mortgage loans with interest rates that are at least 8 percentage points
        above
        Treasury securities having a comparable maturity. In addition, the regulation
        requires that the cost of optional insurance and similar debt protection
        products paid by a borrower at closing be included in calculating the finance
        charge paid by the borrower. HOEPA coverage is triggered if such finance
        charges
        exceed 8 percent of the total loan. Finally, the regulation restricts creditors
        from engaging in repeated refinancings of their own HOEPA loans over a short
        time period when the transactions are not in the borrower’s interest. Lenders
        that violate the rules face cancellation of loans and penalties equal to
        the
        finance charges paid. The Bank does not anticipate that these provisions,
        or any
        similar state predatory lending regulations, will materially affect its
        financial condition or results of operations.
   ***USA
        PATRIOT ACT OF 2001***
  The
        USA
        PATRIOT Act of 2001 (the “ **PATRIOT
        Act** ”)
        is
        intended to strengthen the ability of U.S. Law Enforcement to combat terrorism
        on a variety of fronts. The PATRIOT Act contains sweeping anti-money laundering
        and financial transparency laws and requires financial institutions to implement
        additional policies and procedures with respect to, or additional measures
        designed to address, any or all the following matters, among others: money
        laundering, suspicious activities and currency transaction reporting, and
        currency crimes. Many of the provisions in the PATRIOT Act were to have expired
        December 31, 2005, but the U.S. Congress authorized renewals that extended
        the
        provisions until March 10, 2006. In early March 2006, the U.S. Congress approved
        the USA PATRIOT Improvement and Reauthorization Act of 2005 (the “ **Reauthorization
        Act** ”)
        and
        the USA PATRIOT Act Additional Reauthorizing Amendments Act of 2006 (the
        “ **PATRIOT
        Act Amendments** ”),
        and
        they were signed into law by President Bush on March 9, 2006. The
        Reauthorization Act makes permanent all but two of the provisions that had
        been
        set to expire and provides that the remaining two provisions, which relate
        to
        surveillance and the production of business records under the Foreign
        Intelligence Surveillance Act, will expire in four years. The PATRIOT Act
        Amendments include provisions allowing recipients of certain subpoenas to
        obtain
        judicial review of nondisclosure orders and clarifying the use of certain
        subpoenas to obtain information from libraries. The Company does not anticipate
        that these changes will materially affect its operations.
   **TAXATION**
 ***FEDERAL
        TAXATION***
  Historically,
        savings associations, such as the Bank, have been permitted to compute bad
        debt
        deductions using either the bank experience method or the percentage of taxable
        income method. However, for years beginning after December 31, 1995, the
        Bank can no longer use the percentage of taxable income method of computing
        its
        allowable tax bad debt deduction and instead must compute its allowable
        deduction using the experience method. In addition, the pre-1988 reserve,
        for
        which no deferred taxes have been recorded,
        will not have to be recaptured into income unless (i) the Bank no longer
        qualifies as a bank under the Code or (ii) excess dividends or
        distributions are paid out by the Bank or the Bank redeems its own
        stock.
  28
  Depending
        on the composition of its items of income and expense, a savings association
        may
        be subject to the alternative minimum tax. A savings association must pay
        an
        alternative minimum tax equal to the amount (if any) by which 20% of alternative
        minimum taxable income (“ **AMTI** ”),
        as
        reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI
        equals regular taxable income increased or decreased by certain tax preferences
        and adjustments, including depreciation deductions in excess of that allowable
        for alternative minimum tax purposes, tax-exempt interest on most private
        activity bonds issued after August 7, 1986 (reduced by any related interest
        expense disallowed for regular tax purposes), the amount of the bad debt
        reserve
        deduction claimed in excess of the deduction based on the experience method
        and
        75% of the excess of adjusted current earnings over AMTI (before this adjustment
        and before any alternative tax net operating loss). AMTI may be reduced only
        up
        to 90% by net operating loss carryovers, but alternative minimum tax paid
        can be
        credited against regular tax due in later years.
  For
        federal income tax purposes, the Company has been reporting its income and
        expenses on the accrual method of accounting. The Company’s federal income tax
        returns have not been audited in recent years.
   ***STATE
        TAXATION***
  The
        Company is subject to Indiana’s Financial Bank Tax (“ **IFBT** ”),
        which
        is imposed at a flat rate of 8.5% on apportioned “adjusted gross income.”
“Adjusted gross income,” for purposes of IFBT, begins with taxable income as
        defined by Section 63 of the Code and, thus, incorporates federal tax law
        to the
        extent that it affects the computation of taxable income. Federal taxable
        income
        is then adjusted by several Indiana modifications. Other applicable state
        taxes
        include generally applicable sales and use taxes plus real and personal property
        taxes. The Company’s state income tax returns have not been audited in recent
        years.
  The
        Company is subject to Kentucky’s Bank Franchise Tax (“ **KBFT** ”),
        which
        is imposed at a flat rate of 1.1% on apportioned “net capital.” For purposes of
        the KBFT, “net capital” is determined by (1) adding together the Company’s
        paid-in capital stock, surplus, undivided profits, capital reserves, net
        unrealized gains or losses on certain securities, and cumulative foreign
        currency translation adjustments and (2) deducting from the total an amount
        equal to the same percentage of the total as the book value of U.S. obligations
        and Kentucky obligations bears to the book value of the total assets of the
        Company. “Kentucky obligations” are all obligations of the state, counties,
        municipalities, taxing districts, and school districts that are exempt from
        taxation under Kentucky law. Other applicable state taxes include generally
        applicable sales and use taxes as well as Kentucky bank deposit and local
        deposit taxes which are generally imposed on the Company with respect to
        the
        deposits of Kentucky resident individuals at rates of .001% and .025%,
        respectively.
   **ITEM
        1A.**  **RISK
        FACTORS.**
  Investors
        should consider carefully the risks and uncertainties described below, which
        are
        some of the factors that could adversely affect our operating results and
        financial condition.
  **Changes
        in market interest rates could adversely affect our financial condition and
        results of operations.**
  Our
        financial condition and result of operations are significantly affected by
        changes in market interest rates. Our results of operations depend substantially
        on our net interest income, which is the difference between the interest
        income
        that we earn on our interest-earning assets and the interest expense that
        we pay
        on our interest-bearing liabilities. Our interest-bearing liabilities generally
        reprice or mature more quickly than our interest-earning assets. If rates
        increase rapidly as a result of an improving economy, we may have to increase
        the rates paid on our deposits and borrowed funds more quickly than loans
        and
        investments reprice, resulting in a negative impact on interest spreads and
        net
        interest income. The impact of rising rates could be compounded if deposit
        customers move funds from savings accounts to higher
  29
  rate
        certificate of deposit accounts. Conversely, should market interest rates
        fall
        below current levels, our net interest margin could also be negatively affected,
        as competitive pressures could keep us from further reducing rates on our
        deposits, and prepayments and curtailments on assets may continue. Such
        movements may cause a decrease in our interest rate spread and net interest
        margin.
  We
        also
        are subject to reinvestment risk associated with changes in interest rates.
        Changes in interest rates may affect the average life of loans and
        mortgage-related securities. Increases in interest rates may decrease loan
        demand and/or may make it more difficult for borrowers to repay adjustable
        rate
        loans. Decreases in interest rates often result in increased prepayments
        of
        loans and mortgage-related securities, as borrowers refinance their loans
        to
        reduce borrowings costs. Under these circumstances, we are subject to
        reinvestment risk to the extent that we are unable to reinvest the cash received
        from such prepayments in loans or other investments that have interest rates
        that are comparable to the interest rates on existing loans and securities.
  **Our** **nonresidential
        real estate and commercial loans expose us to increased credit risks.**
  At
        December 31, 2006, our portfolio of nonresidential real estate and land loans
        totaled $79.9 million, or 32.3% of totals loans, and our commercial loans
        totaled $29 million, or 11.8% of total loans. These types of loans generally
        have greater credit risk than residential mortgage loans.
  **An
        economic slowdown in** **our
        market area could affect our business.**
  Our
        primary market area for deposits and loans consists of Jefferson and Clark
        Counties in Southeastern Indiana and adjacent Carroll County in Kentucky.
        An
        economic slowdown in these areas could hurt our business. Possible consequences
        of such a downturn could include the following:
  •
        increases in loan delinquencies and foreclosures;
  •
        declines in the value of real estate and other collateral for loans;
        and
  •
a
        decline in the demand for our products and services.
  **We
        are subject to extensive regulation and legislative or regulatory changes
        could
        adversely affect our business.**
  Our
        operations are subject to extensive regulation by federal, state and local
        governmental authorities and are subject to various laws and judicial and
        administrative decisions imposing requirements and restrictions on them.
        Policies adopted or required by these governmental authorities can affect
        our
        business operations and the availability, growth and distribution of the
        Bank’s
        investments, borrowings and deposits. In addition, the Office of Thrift
        Supervision periodically conducts examinations of the Holding Company and
        the
        Bank and may impose various requirements or sanctions.
  Proposals
        to change the laws governing financial institutions are frequently raised
        in
        Congress and before bank regulatory authorities. Changes in applicable laws
        or
        policies could materially affect our business, and the likelihood of any
        major
        changes in the future and their effects are impossible to determine. Moreover,
        it is impossible to predict the ultimate form any proposed legislation might
        take or how it might affect us.
   **ITEM
        1B.**  **UNRESOLVED
        STAFF COMMENTS.**
  Not
        applicable.
  30
  **ITEM** **2.PROPERTIES.**
  The
        following table provides certain information with respect to the Bank’s offices
        as of December 31, 2006.
  **Description
                    and Address**
                
                **Owned
                    or Leased**
                
                **Year
                    Opened**
                
                **Total
                    Deposits**
                
                **Net
                    Book Value of Property, Furniture & Fixtures**
                
                **Approximate
                    Square Footage****Locations
                    in Madison, Indiana:***Downtown
                    Office*:233
                    East Main Street
                
                
                Owned
                
                
                1952
                
                $
                39,115
                
                $
                398
                
                
                9,110*Drive-Through
                    Branch*:401
                    East Main Street
                
                
                Owned
                
                
                1984
                
                
                —
                
                
                235
                
                
                420*Hilltop
                    Location:*430
                    Clifty Drive
                
                
                Owned
                
                
                1983
                
                
                155,036
                
                
                3,012
                
                
                18,696*Wal-mart
                    Banking Center:*567
                    Ivy Tech Drive
                
                
                Leased
                
                
                1995
                
                
                7,655
                
                
                26
                
                
                517**Location
                    in Hanover, Indiana:**10
                    Medical Plaza Drive
                
                
                Owned
                
                
                1995
                
                
                9,103
                
                
                445
                
                
                1,344**Location
                    in Charlestown, Indiana:**1025
                    Highway 62
                
                
                Leased
                
                
                2002
                
                
                1,949
                
                
                560
                
                
                1,500**Location
                    in Sellersburg, Indiana:**Highway
                    311
                
                
                Owned
                
                
                2005
                
                
                2,737
                
                
                2,852
                
                
                13,000**Location
                    in Carrollton, Kentucky:**1501
                    Highland Avenue
                
                
                Leased
                
                
                2003
                
                
                4,643
                
                
                285
                
                
                1,656
  The
        Bank
        owns computer and data processing equipment which is used for transaction
        processing, loan origination, and accounting. The net book value of electronic
        data processing equipment owned by the Bank was approximately $241,000 at
        December 31, 2006.
  The
        Bank
        operates 13 automated teller machines (“ **ATMs** ”),
        one
        at each office location (the main office has two), one at Hanover College,
        in
        Hanover, Indiana, one in the Big Lots parking lot in Madison, one at Great
        Escape Theatres in New Albany, Indiana, one at Sellersburg, Indiana, one
        at IVY
        Tech State College in Sellersburg, Indiana and one at Butler Mall in Carrolton,
        Kentucky. The Bank’s ATMs participate in the Shazam® network.
  The
        Bank
        performs its own data processing and reporting services.
   **ITE** **M
        3****.****LEGAL
        PROCEEDINGS.**
  Neither
        the Holding Company nor the Bank is a party to any pending legal proceedings,
        other than routine litigation incidental to the Holding Company’s or the Bank’s
        business.
  In
        connection with the Bank’s 2004 examination by the Office of Thrift Supervision
        (the “ **OTS** ”),
        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 desistorder
        and assessment of the $1,400 in civil money penalties with respect to these
        matters. The OTS terminated the cease and desist order on December 27,
        2006.
  31
  **ITEM** **4.****SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
  No
        matter
        was submitted to a vote of the Holding Company’s shareholders during the quarter
        ended December 31, 2006.
   **ITE** **M
        4.5****.****EXECUTIVE
        OFFICERS OF THE REGISTRANT**
  The
        executive officers of the Holding Company are identified below. The executive
        officers of the Bank are elected annually by the Holding Company’s Board of
        Directors.
  **Name**
              **Position
                  with the Holding Company**
              **Position
                  with the Bank**Matthew
                  P. Forrester
              President
                  and Chief Executive Officer
              President
                  and Chief Executive OfficerLonnie
                  D. Collins
              Secretary
              SecretaryLarry
                  C. Fouse
              Treasurer
              Vice
                  President of FinanceDeanna
                  Liter
              
              Vice
                  President of Data ServicesBarbara
                  Eades
              
              Vice
                  President of Retail BankingLoy
                  Skirvin
              
              Vice
                  President of Human ResourcesMark
                  A. Goley
              
              Vice
                  President of LendingAnthony
                  D. Brandon
              
              Vice
                  President of Loan AdministrationJohn
                  Muessel
              
              Vice
                  President - Trust OfficerVickie
                  Grimes
              
              Vice
                  President - Controller
  *Matthew
        P. Forrester* (age 50)
        has served as the Bank and Holding Company President and Chief Executive
        Officer
        since October 1999. Prior to that, Mr. Forrester served as the Chief
        Financial Officer for Home Loan Bank in Fort Wayne, Indiana and Senior Vice
        President and Treasurer for its holding company, Home Bancorp. Prior to joining
        Home Loan Bank, Mr. Forrester was an examiner for the Indiana Department of
        Financial Institutions.
  *Lonnie
        D. Collins* (age 58)
        has served as Secretary of the Bank since September 1994 and as Secretary
        of the
        Holding Company since 1996. Mr. Collins has also practiced law since
        October 1975 and has served as the Bank’s outside counsel since
        1980.
  *Larry
        C. Fouse* (age 61)
        has served as the Holding Company’s Controller since 1997. From 1993 to 1997, he
        served as the Chief Financial Officer and Controller of Citizens and from
        1989
        to 1993 served as Citizens’ Vice President and Operations Officer.
  *Deanna
        Liter* (age 43)
        has served as Vice President of Data Services since 1999. From 1986 to 1997,
        she
        was manager of the Citizens’ Data Processing Department.
  *Barbara
        Eades* (age 57)
        has served as Vice President of Retail Banking since 2000. From 1997 to 1999,
        she was Branch Manager of the downtown branch. She served as Assistant Vice
        President for Madison First Federal from 1990 to 1996.
  *Loy
        Skirvin* (age
        58)
        has served as Vice President of Human Resources since 1998. From 1991 to
        1997,
        she was Human Resources Manager for a manufacturing firm.
  *Mark
        A. Goley* (age
        51)
        has served as Vice President of Loan Services since 1997. From 1989 to 1997,
        he
        served as Senior Loan Officer for Citizens.
  *Anthony
        D. Brandon* (age 35)
        has served as Executive Vice President since July 29, 2005, and as Vice
        President of Loan Administration of the Bank since September of 2001. Prior
        to
        his appointment as Executive Vice President, he served as Vice President
        of Loan
        Administration. Prior to joining the Bank, he served as President of Republic
        Bank of Indiana.
  *John
        Muessel* (age
        54)
        has served as Vice President - Trust Officer since April of 2002. Prior to
        joining the Bank, he served as Trust Officer of National City Bank of
        Indiana.
  32
  *Vickie
        Grimes* (age 51)
        has served as Vice President - Controller since September of 2006. She also
        served as the Bank’s Internal Auditor from 2003 to September 2006, and as an
        accountant with the Bank from 2000 to 2003. Prior to that, she served as
        the
        Accounting Manager for a financial institution in Pueblo, Colorado.
   **PART
        II**
  **ITEM** **5.****MARKET
        FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES.**
  **Market
        Information and Dividends**
  There
        were 1,614,663 common shares of River Valley Bancorp outstanding at February
        23,
        2007, held of record by approximately 350 shareholders. The number of
        shareholders does not reflect the number of persons or entities who may hold
        stock in nominee or “street name.” Since December 1996, the Company’s common
        shares have been listed on The NASDAQ Capital Market (formerly called the
        NASDAQ
        SmallCap Market) (“ **NASDAQ** ”),
        under
        the symbol “RIVR.” On December 26, 2003, the shares of River Valley underwent a
        2-for-1 stock split in order to create a more liquid market for the
        stock.
  Presented
        below are the high and low sale prices for the Holding Company’s common shares,
        as well as cash distributions paid thereon since January 2004. Such sales
        prices
        do not include retail financial markups, markdowns or commissions. Information
        relating to sales prices has been obtained from NASDAQ.
  **Quarter
                  Ended**
              
              **High**
              
              **Low**
              
              **Cash
                  Distributions****2006**December 31
              
              $
              19.46
              
              $
              17.60
              
              $
              0.200September
                  30
              
              
              18.74
              
              
              17.80
              
              
              0.195June
                  30
              
              
              19.82
              
              
              18.05
              
              
              0.195March
                  31
              
              
              20.50
              
              
              18.00
              
              
              0.195**2005**December 31
              
              $
              21.25
              
              $
              17.90
              
              $
              0.195September
                  30
              
              
              22.06
              
              
              20.00
              
              
              0.195June
                  30
              
              
              23.75
              
              
              19.01
              
              
              0.195March
                  31
              
              
              24.30
              
              
              19.82
              
              
              0.190**2004**December 31
              
              $
              23.50
              
              $
              21.10
              
              $
              0.190September
                  30
              
              
              24.00
              
              
              21.04
              
              
              0.180June
                  30
              
              
              23.50
              
              
              20.75
              
              
              0.180March
                  31
              
              
              30.25
              
              
              22.00
              
              
              0.170
  The
        high
        and low sale prices for River Valley’s common shares between December 31,
        2006 and February 23, 2007, were $18.04 and $17.52, respectively.
  Under
        OTS
        regulations applicable to converted savings associations, River Valley Financial
        is not permitted to pay a cash dividend on its common shares if the regulatory
        capital of River Valley Financial would, as a result of the payment of such
        dividend, be reduced below the amount required for the liquidation account
        (which was established for the purpose of granting a limited priority claim
        on
        the assets of River Valley Financial, in the event of a complete liquidation,
        to
        those members of River Valley Financial before the Conversion who maintain
        a
        savings account at River Valley Financial after the Conversion) or applicable
        regulatory capital requirements prescribed by the OTS.
  Regulations
        of the OTS impose limitations on the payment of dividends and other capital
        distributions by savings associations. Because the Bank is a subsidiary of
        a
        savings and loan holding company, it is required to file a notice with the
        OTS
        30 days before making any capital distributions to the Holding
  33
  Company.
        It may also have to file an application for approval of a proposed capital
        distribution with the OTS if the Bank is not eligible for expedited treatment
        under the OTS’s application processing rules, or the total amount of all capital
        distributions, including the proposed capital distribution, for the applicable
        calendar year would exceed an amount equal to the Bank’s net earnings for that
        year to date plus the Bank’s retained net earnings for the preceding two years.
        The Bank must also file an application for approval of a proposed capital
        distribution if, following the proposed distribution, the Bank would not
        be
        adequately capitalized under the OTS prompt corrective action regulations,
        or if
        the proposed distribution would violate a prohibition contained in any
        applicable statute, regulation, or agreement between the Bank and the OTS
        or the
        FDIC.
  Since
        the
        Holding Company has no independent operation or other subsidiaries to generate
        income, its ability to accumulate earnings for the payment of cash dividends
        to
        its shareholders directly depends upon the ability of the Bank to pay dividends
        to the Holding Company and upon the earnings on its investment
        securities.
  Any
        dividend distributions by the Bank to the Holding Company in excess of current
        or accumulated earnings and profits will be treated for federal income tax
        purposes as a distribution from the Bank’s accumulated bad debt reserves, which
        could result in increased federal income tax liability for the Bank.
  Generally,
        there is no OTS regulatory restriction on the payment of dividends by the
        Holding Company unless there is a determination by the Director of the OTS
        that
        there is reasonable cause to believe that the payment of dividends constitutes
        a
        serious risk to the financial safety, soundness or stability of the Bank.
        The
        FDIC also has authority under current law to prohibit a bank from paying
        dividends if, in its opinion, the payment of dividends would constitute an
        unsafe or unsound practice in light of the Bank’s financial condition. Indiana
        law, however, would prohibit the Holding Company from paying a dividend,
        if,
        after giving effect to the payment of that dividend, the Holding Company
        would
        not be able to pay its debts as they become due in the usual course of business
        or the Holding Company’s total assets would be less than the sum of its total
        liabilities plus preferential rights of holders of preferred stock, if any.
   **Equity
        Compensation Plans**
  The
        “Equity Compensation Plan Information” contained in Part III, Item 12 of this
        Annual Report on Form 10-K is incorporated herein by reference.
   **Issuer
        Purchases of Equity Securities**
  Purchases
        of common stock made by or on behalf of the Company during the three months
        ended December 31, 2006, are set forth below:
  **Period**
              
              **Total
                  Number of Shares (or Units) Purchased (1)**
              
              **Average
                  Price Paid Per Share (or Unit)**
              
              **Total
                  Number of Shares (or Units) Purchased as Part of Publicly Announced
                  Plans
                  or Programs**
              
              **Maximum
                  Number (or Approximate Dollar Value) of Shares (or Units) that
                  May Yet be
                  Purchased Under the Plans or Programs**October
                  1 - October 31, 2006
              
              
              2,400
              
              
              19.20
              
              
              2,400
              
              
              (1
              )November
                  1 - November 30, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —December
                  1 - December 31, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —**Total**
              
              
              2,400
              
              
              —
              
              
              2,400
              
              
              —(1)
                  Up to 10 % of total shares outstanding may be repurchased at a
                  given time
                  by the Company.
   34
  **Performance
        Graph**
  
   **ITEM** **6.****SELECTED
        FINANCIAL DATA.**
  The
        following tables set forth certain information concerning the consolidated
        financial condition, earnings, and other data regarding River Valley at the
        dates and for the periods indicated. The following selected financial data
        is
        qualified by reference to and should be read in conjunction with the
        Consolidated Financial Statements, including the Notes thereto, presented
        in
        Item 8 - Consolidated Financial Statements and Supplementary Data and in
        Item 7
        - Management’s Discussion and Analysis of Financial Condition and Results of
        Operation.
  
  35
  **Selected
        Consolidated Financial Information and Other Data**
  **At
                    December 31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****Selected
                    consolidated financial condition data:**
                
                (In
                    thousands)**Total
                    amount of:**Assets
                
                $
                342,249
                
                $
                328,748
                
                $
                289,427
                
                $
                255,076
                
                $
                224,020Loans
                    receivable - net (1)
                
                
                241,887
                
                
                228,885
                
                
                230,513
                
                
                191,561
                
                
                165,315Cash
                    and cash equivalents
                
                
                11,808
                
                
                17,730
                
                
                12,437
                
                
                12,512
                
                
                18,610Investment
                    securities
                
                
                65,150
                
                
                59,609
                
                
                26,964
                
                
                34,557
                
                
                28,174Deposits
                
                
                220,238
                
                
                206,733
                
                
                170,538
                
                
                179,954
                
                
                161,829FHLB
                    advances and other borrowings
                
                
                95,217
                
                
                96,782
                
                
                94,600
                
                
                50,000
                
                
                40,000Shareholders’
                    equity
                
                
                24,147
                
                
                23,018
                
                
                22,393
                
                
                22,855
                
                
                20,633
  **Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****Summary
                    of consolidated income data:**
                
                (In
                    thousands, except share data)Total
                    interest income
                
                $
                18,910
                
                $
                16,298
                
                $
                13,545
                
                $
                12,653
                
                $
                12,755Total
                    interest expense
                
                
                11,053
                
                
                8,155
                
                
                5,617
                
                
                5,348
                
                
                5,638Net
                    interest income
                
                
                7,857
                
                
                8,143
                
                
                7,928
                
                
                7,305
                
                
                7,117Provision
                    for losses on loans
                
                
                264
                
                
                288
                
                
                338
                
                
                508
                
                
                570Net
                    interest income after provision for losses on loans
                
                
                7,593
                
                
                7,855
                
                
                7,590
                
                
                6,797
                
                
                6,547Other
                    income
                
                
                2,448
                
                
                2,500
                
                
                2,518
                
                
                3,354
                
                
                3,094General,
                    administrative and other expense
                
                
                7,255
                
                
                7,094
                
                
                6,342
                
                
                5,831
                
                
                5,455Income
                    before income tax expense
                
                
                2,786
                
                
                3,261
                
                
                3,766
                
                
                4,320
                
                
                4,186Income
                    tax expense
                
                
                841
                
                
                1,175
                
                
                1,419
                
                
                1,665
                
                
                1,628Net
                    income
                
                $
                1,945
                
                $
                2,086
                
                $
                2,347
                
                $
                2,655
                
                $
                2,558Basic
                    earnings per share
                
                $
                1.21
                
                $
                1.32
                
                $
                1.48
                
                $
                1.67
                
                $
                1.64Diluted
                    earnings per share
                
                $
                1.18
                
                $
                1.27
                
                $
                1.42
                
                $
                1.59
                
                $
                1.58
 _______________________________________________
 (1)
          Includes loans held for sale.
  **Year
                  Ended December 31,****Selected
                  financial ratios and other data:**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Interest
                  rate spread during period
              
              
              2.53
              %
              
              2.79
              %
              
              3.13
              %
              
              3.21
              %
              
              3.39
              %Net
                  yield on interest-earning assets (1)
              
              
              2.55
              
              
              2.82
              
              
              3.19
              
              
              3.28
              
              
              3.56Return
                  on assets (2)
              
              
              .59
              
              
              .63
              
              
              .88
              
              
              1.11
              
              
              1.22Return
                  on equity (3)
              
              
              8.27
              
              
              9.06
              
              
              10.46
              
              
              12.22
              
              
              13.21Equity
                  to assets (4)
              
              
              7.06
              
              
              7.00
              
              
              7.73
              
              
              8.96
              
              
              9.21Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              100.68
              
              
              101.29
              
              
              102.51
              
              
              102.86
              
              
              106.18Non-performing
                  assets to total assets (4)
              
              
              .33
              
              
              .53
              
              
              0.76
              
              
              0.18
              
              
              0.48Allowance
                  for loan losses to total loans outstanding (4)
              
              
              .89
              
              
              1.00
              
              
              1.02
              
              
              1.06
              
              
              1.26Allowance
                  for loan losses to non-performing loans (4)
              
              
              195.33
              
              
              132.80
              
              
              107.41
              
              
              399.70
              
              
              194.54Net
                  charge-offs to average total loans outstanding
              
              
              .17
              
              
              0.14
              
              
              0.01
              
              
              0.29
              
              
              0.27General,
                  administrative and other expense to average assets (5)
              
              
              2.19
              
              
              2.29
              
              
              2.38
              
              
              2.43
              
              
              2.60Dividend
                  payout ratio
              
              
              66.53
              
              
              61.02
              
              
              50.70
              
              
              37.74
              
              
              25.40Number
                  of full service offices (4)
              
              
              7
              
              
              7
              
              
              6
              
              
              5
              
              
              4
 (1)
              Net
                  interest income divided by average interest-earning
                  assets.
 (2)
              Net
                  earnings divided by average total
                  assets.
 (3)
              Net
                  earnings divided by average total
                  equity.
 (4)
              At
                  end of period.
 (5)
              General,
                  administrative and other expense divided by average total
                  assets.
  36
  **ITEM** **7.****MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATION.**
  **General**
  As
        discussed previously, River Valley was incorporated for the primary purpose
        of
        owning all of the outstanding shares of River Valley Financial. As a result,
        the
        discussion that follows focuses on River Valley Financial’s financial condition
        and results of operations for the periods presented. The following discussion
        and analysis of the financial condition as of December 31, 2006, and River
        Valley’s results of operations for periods prior to that date, should be read in
        conjunction with the Consolidated Financial Statements and the Notes thereto,
        included in Item 8 of this Annual Report on Form 10-K.
  In
        addition to the historical information contained herein, the following
        discussion contains forward-looking statements that involve risks and
        uncertainties. River Valley’s operations and River Valley’s actual results could
        differ significantly from those discussed in the forward-looking statements.
        Some of the factors that could cause or contribute to such differences are
        discussed herein but also include, but are not limited to, changes in the
        economy and interest rates in the nation and River Valley’s general market area.
        The forward-looking statements contained herein include those with respect
        to
        the following matters:
  1.
              Management’s
                  determination as to the amount and adequacy of the loan loss
                  allowance;
  2.
              The
                  effect of changes in interest rates on financial condition and
                  results of
                  operations; and
  3.
              Management’s
                  opinion as to the effect of recent accounting pronouncements on
                  River
                  Valley’s consolidated financial position and results of
                  operations.
  **Critical
        Accounting Policies**
  Note
        1 to
        the Consolidated Financial Statements contains a summary of the Company’s
        significant accounting policies for the year ended December 31, 2006.
        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 economic
        and business conditions, among other factors. Management reviews the adequacy
        of
        the allowance for loan losses at least on a quarterly basis. The evaluation
        by
        management includes consideration of past loss experience, changes in the
        composition of the loan portfolio, the current economic condition, the amount
        of
        loans outstanding, certain 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 Company’s loan portfolios. In determining the appropriate amount
        of the allowance for loan losses, management makes numerous assumptions,
        estimates and assessments.
  The
        Company’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.
  37
  The
        Company’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 Company. Included in the review of individual loans
        are
        those that are impaired as provided in Statement of Financial Accounting
        Standards (“ **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 Company 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 nonaccrual loans),
        changes in mix, credit score migration comparisons, asset quality trends,
        risk
        management and loan administration, changes in the internal lending policies
        and
        credit standards, collection practices and examination results from bank
        regulatory agencies and the Company’s internal loan review.
  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
        Company’s primary market area for lending is southeastern Indiana and portions
        of Kentucky adjacent to that market. 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 Company’s
        customers.
  The
        Company 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.
  **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 amounts recorded in the consolidated
        income statement.
  38
  **Discussion
        of Changes in Financial Condition from December 31, 2005 to
        December 31, 2006**
  At
        December 31, 2006, River Valley’s consolidated assets totaled $342.2
        million, representing an increase of $13.5 million over the December 31,
        2005 total. This increase in assets was funded by a 6.5% increase in deposits.
        Deposits increased by $13.5 million to a total of $220.2 million at
        December 31, 2006. Savings and demand deposits increased by $13.9 million,
        or 13.4%, during 2006, while certificates of deposit remained strong with
        only a
        slight decrease at $102.0 million for 2006 compared to $102.4 million for
        2005.
        Overall, the increases were primarily attributable to the competitiveness
        of
        being a community based financial institution versus being a division of
        a
        regionally based institution.
  Liquid
        assets ( *i.e* .,
        cash,
        federal funds sold, interest-earning deposits and certificates of deposit)
        decreased by $5.9 million from December 31, 2005 levels to a total of $11.8
        million at December 31, 2006.
  Investment
        securities totaled $65.1 million at December 31, 2006, an increase of $5.5
        million from December 31, 2005. In September of 2005 the Company formed an
        investment subsidiary in Nevada with the sole purpose of holding liquid
        investments as interest on these investments is not subject to state taxation.
        This resulted in substantial tax savings for the Company in 2006.
  Loans
        receivable, including loans held for sale, totaled $241.9 million at
        December 31, 2006, an increase of $13.0 million from the $228.9 million
        total at December 31, 2005. There were strong increases in lending for 1-4
        family homes and overall construction lending. Slight decreases were seen
        in the
        consumer and non-residential loan categories with commercial and multi-family
        lending remaining relatively flat. The volume of loan sales into the secondary
        mortgage market decreased during 2006 from the 2005 volume by $8.5 million,
        due
        in large part to the increase in rates and a decrease in fixed rate lending
        for
        1-4 family residential properties.
  River
        Valley’s consolidated allowance for loan losses totaled approximately $2.2
        million for the year ended December 31, 2006, which represented 0.89% of
        total loans at that date. The allowance for loan losses totaled $2.3 million,
        or
        1.00% of total loans for the period ended December 31, 2005. Non-performing
        loans (defined as loans delinquent greater than 90 days and loans on nonaccrual
        status) totaled $1.1 million and $1.7 million at December 31, 2006 and
        2005, respectively. The consolidated allowance for loan losses represented
        195%
        and 133% of non-performing loans at December 31, 2006 and 2005,
        respectively. Non-performing loans decreased $630,000 at December 31, 2006
        compared to December 31, 2005. The Company has continued to de-emphasize
        consumer lending because of risk/reward opportunities.
  Although
        management believes that its allowance for loan losses at December 31,
        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 Company’s results of
        operations.
  Advances
        from the Federal Home Loan Bank (“FHLB”) and other borrowed money increased
        slightly by $1.6 million from the total at December 31, 2005. The interest
        rate environment has changed but we are still getting the advantage of the
        long-term funding we did in 2005.
  Shareholders’
        equity totaled $24.1 million at December 31, 2006, an increase of $1.1
        million from the $23.0 million total at December 31, 2005. The increase
        resulted primarily from net income offset by cash dividends and a decrease
        in
        unrealized losses on securities available for sale.
  **Comparison
        of Results of Operations for the Years Ended December 31, 2006 and
        2005**
  *General*
  River
        Valley’s net income for the year ended December 31, 2006, totaled $1.9
        million, a slight decrease of $141,000, or 6.8%, from net income reported
        in
        2005. The decrease in net income in the 2006 period was primarily attributable
        to a decrease in net interest income offset by a reduction in income tax
        expense.
  39
  The
        drop
        in income tax expense was due to a drop in the effective tax rate from 36.0%
        in
        2005 to 30.2% in 2006, a dollar drop of $334,000, primarily resulting from
        the
        establishment of the Nevada investment subsidiary.
  *Net
        Interest Income*
  Total
        interest income for the year ended December 31, 2006, amounted to $18.9
        million, an increase of $2.6 million, or 16.0%, from the 2005 total, reflecting
        higher average balances of interest earning assets and higher interest rates.
        The average balance of interest-earning assets outstanding year-to-year
        increased by $19.6 million, and the yield on those assets increased from
        an
        average yield of 5.65% in 2005 to 6.13% in 2006. Interest income on loans
        totaled $15.9 million for 2006, an increase of approximately $1.6 million,
        or
        11.0%, from 2005. Interest income on investments, FHLB stock and
        interest-earning deposits increased by $1.0 million, or 52.2%, due to much
        higher average balances on those investments and higher rates.
  Interest
        expense on deposits increased by $3.3 million, or 88.6%, to a total of $7.0
        million for the year ended December 31, 2006, due primarily to higher costs
        of funding higher average balances. The cost of deposits increased from 2.0%
        in
        2005 to 3.2% in fiscal 2006. Interest expense on borrowings totaled $4.0
        million
        for the year ended December 31, 2006, a decrease of $.5 million from
        2005.
  As
        a
        result of the foregoing changes in interest income and interest expense,
        net
        interest income decreased during 2006 by $286,000, or 3.5%, compared to 2005.
        The interest rate spread decreased by 26 basis points for 2006, to 2.53%
        from
        2.79% in the 2005 period, while the net interest margin amounted to 2.55%
        in
        2006 and 2.82% 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 River
        Valley Financial, the status of past due principal and interest payments,
        general economic conditions, particularly as such conditions relate to the
        primary market area, and other factors related to the collectibility of the
        loan
        portfolio. As a result of such analysis, management recorded a $264,000
        provision for losses on loans in 2006, a decrease of $24,000 or 8.3%, compared
        to the $288,000 provision recorded in 2005. The current period provision
        generally reflects growth in the loan portfolio, coupled with a change in
        the
        loan mix, that is more 1-4 family residential loans and fewer consumer
        loans.
  Non-performing
        loans for the period ended December 31, 2006 were $1.1 million, a decrease
        of approximately $630,000 from the $1.7 million recorded as of fiscal year
        ended
        2005. Net charge-offs amounted to $408,000 in 2006, compared to $332,000
        in
        2005. While management believes that the allowance for losses on loans is
        adequate at December 31, 2006, based upon available facts and
        circumstances, there can be no assurance that the loan loss allowance will
        be
        adequate to cover losses on nonperforming assets in the future.
  *Other
        Income*
  Other
        income amounted to $2.4 million for the year ended December 31, 2006, a
        decrease of $52,000, or 2.1%, compared to 2005, due primarily to a decrease
        in
        net gains on loan sales from $299,000 in 2005 to $107,000 in 2006, a decrease
        of
        $192,000 or 64.2%. The volume of loan sales decreased from $14.0 million
        in 2005
        to $5.5 million in 2006. The decline in other income due to the decline in
        loan
        sales was offset by an increase in service fees and charges of $131,000
        resulting from other programs and services.
  40
  *General,
        Administrative and Other Expense*
  General,
        administrative and other expense totaled $7.3 million for the year ended
        December 31, 2006, an increase of $161,000 over the 2005 total. Employee
        compensation and benefits increased slightly by $122,000 in fiscal 2006 as
        compared to 2005 primarily from additional staffing, cost of living and benefit
        expense. Mortgage servicing rights expense increased by $177,000 in 2006
        over
        the same period in 2005. 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.
  *Income
        Taxes*
  The
        provision for income taxes decreased by $334,000 or 28.4%, for the year ended
        December 31, 2006, as compared to 2005. In September of 2005 the Company
        formed an investment subsidiary in Nevada with the sole purpose of holding
        liquid investments as interest on these investments is not subject to state
        taxation. As a result, the effective tax rates dropped from 36.0% in 2005
        to
        30.2% in 2006.
  **Comparison
        of Results of Operations for the Years Ended December 31, 2005 and
        2004**
  *General*
  River
        Valley’s net income for the year ended December 31, 2005, totaled $2.1
        million, a decrease of $261,000, or 11.1%, from net income reported in 2004.
        The
        decrease in net income in the 2005 period was primarily attributable to an
        increase of $752,000 in administrative and other expenses which were in part
        offset by an increase in net interest income of $215,000, a decrease in the
        provision for income taxes of $244,000, and a decrease in the provision for
        loan
        losses of $50,000.
  *Net
        Interest Income*
  Total
        interest income for the year ended December 31, 2005, amounted to $16.3
        million, an increase of $2.8 million, or 20.3%, from the 2004 total, reflecting
        higher average balances of interest earning assets and higher interest rates.
        The average balance of interest-earning assets outstanding year-to-year
        increased by $40 million, and the yield on those assets increased from an
        average yield of 5.45% in 2004 to 5.65% in 2005. Interest income on loans
        totaled $14.3 million for 2005, an increase of approximately $1.8 million,
        or
        14.8%, from 2004. Interest income on investments, FHLB stock and
        interest-earning deposits increased by $0.9 million, or 83.9%, due to much
        higher average balances on those investments and higher rates.
  Interest
        expense on deposits increased by $0.9 million, or 31.1%, to a total of $3.7
        million for the year ended December 31, 2005, due primarily to higher costs
        of funding higher average balances. The cost of deposits increased from 1.6%
        in
        2004 to 2.0% in fiscal 2005. Interest expense on borrowings totaled $4.5
        million
        for the year ended December 31, 2005, an increase of $1.7 million from
        2004. The increase resulted primarily from higher average borrowings
        year-to-year, and by a 20 basis point increase in average cost.
  As
        a
        result of the foregoing changes in interest income and interest expense,
        net
        interest income increased during 2005 by $215,000, or 2.7%, compared to 2004.
        The interest rate spread decreased by 34 basis points for 2005, to 2.79%
        from
        3.13% in the 2004 period, while the net interest margin amounted to 2.82%
        in
        2005 and 3.19% 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 River
        Valley Financial, the status of past due principal and interest payments,
        general economic conditions, particularly as such conditions relate to the
        primary market area, and other factors related to the collectibility of the
        loan
        portfolio. As a result of such analysis, management recorded a $288,000
        provision for losses on loans in 2005, a decrease of $50,000 or 14.8%, compared
        to the
  41
  $338,000
        provision recorded in 2004. The current period provision generally reflects
        growth in the loan portfolio, coupled with a change in the loan mix, that
        is
        more 1-4 family residential loans and fewer consumer loans.
  Non-performing
        loans for the period ended December 31, 2005 were $1.7 million, a decrease
        of approximately $0.5 million from the $2.2 million recorded as of fiscal
        year
        ended 2004. Net charge-offs amounted to $331,000 in 2005, compared to $30,000
        in
        2004. While management believes that the allowance for losses on loans is
        adequate at December 31, 2005, based upon available facts and
        circumstances, there can be no assurance that the loan loss allowance will
        be
        adequate to cover losses on nonperforming assets in the future.
  *Other
        Income*
  Other
        income amounted to $2.5 million for the year ended December 31, 2005, a
        decrease of $18,000, or 0.72%, compared to 2004, due primarily to a decrease
        in
        net gains on loan sales from $394,000 in 2004 to $299,000 in 2005, a decrease
        of
        $95,000 or 24.1%. The volume of loan sales decreased from $18.3 million in
        2004
        to $14.0 million in 2005. The decline in other income due to the decline
        in loan
        sales was offset by an increase in service fees and charges of $129,000
        resulting from other programs and services.
  *General,
        Administrative and Other Expense*
  General,
        administrative and other expense totaled $7.1 million for the year ended
        December 31, 2005, an increase of $752,000 over the 2004 total. Employee
        compensation and benefits increased by $436,000 in fiscal 2005 as compared
        to
        2004 primarily from additional staffing, cost of living and benefit expense.
        Occupancy and equipment expense increased by $118,000 in 2005 as compared
        to
        2004 due to higher depreciation costs and equipment maintenance expenses.
        The
        increase to seven branches for River Valley Financial shows in these
        numbers.
  *Income
        Taxes*
  The
        provision for income taxes decreased by $244,000, or 17.2%, for the year
        ended
        December 31, 2005, as compared to 2004. The effective tax rates were 36.0%
        and 37.7% for the years ended December 31, 2005 and 2004,
        respectively.
  
  42
  **AVERAGE
        BALANCE, YIELD, RATE AND VOLUME DATA**
  The
        following table presents certain information relating to River Valley’s average
        balance sheet and reflects the average yield on interest-earning assets and
        the
        average cost of interest-bearing liabilities for the periods indicated. Such
        yields and costs are derived by dividing annual income or expense by the
        average
        daily balance of interest-earning assets or interest-bearing liabilities,
        respectively, for the years presented. Average balances are derived from
        daily
        balances, which include nonaccruing loans in the loan portfolio.
  **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****Average
                  outstanding balance**
              
              **Interest
                  earned/ paid**
              
              **Yield/
                  rate**
              
              **Average
                  outstanding balance**
              
              **Interest
                  earned/ paid**
              
              **Yield/
                  rate**
              
              **Average
                  outstanding balance**
              
              **Interest
                  earned/ paid**
              
              **Yield/
                  rate****Assets**
              
              (Dollars
                  in thousands)Interest-earning
                  assets:Interest-earning
                  deposits
              
              $
              5,807
              
              $
              286
              
              
              4.93
              %
              $
              5,397
              
              $
              238
              
              
              4.41
              %
              $
              6,224
              
              $
              112
              
              
              1.80
              %Other
                  securities (1)
              
              
              63,258
              
              
              2,557
              
              
              4.04
              
              
              47,845
              
              
              1,589
              
              
              3.32
              
              
              26,354
              
              
              850
              
              
              3.23Mortgage-backed
                  securities (1)
              
              
              74
              
              
              4
              
              
              5.41
              
              
              93
              
              
              4
              
              
              4.30
              
              
              143
              
              
              4
              
              
              2.80Loans
                  receivable (2)
              
              
              234,886
              
              
              15,865
              
              
              6.75
              
              
              231,217
              
              
              14,297
              
              
              6.18
              
              
              213,000
              
              
              12,457
              
              
              5.85FHLB
                  stock
              
              
              4,113
              
              
              198
              
              
              4.81
              
              
              3,959
              
              
              170
              
              
              4.29
              
              
              2,840
              
              
              122
              
              
              4.30Total
                  interest-earning assets
              
              
              308,138
              
              
              18,910
              
              
              6.14
              
              
              288,511
              
              
              16,298
              
              
              5.65
              
              
              248,561
              
              
              13,545
              
              
              5.45Non-interest
                  earning assets, net of allowance for loan losses
              
              
              23,590
              
              
              
              
              
              
              
              
              21,163
              
              
              
              
              
              
              
              
              17,901Total
                  assets
              
              $
              331,728
              
              
              
              
              
              
              
              $
              309,674
              
              
              
              
              
              
              
              $
              266,462**Liabilities/shareholder
                  equity**Interest-bearing
                  liabilities:Savings
                  deposits
              
              $
              41,228
              
              $
              963
              
              
              2.34
              %
              $
              42,776
              
              $
              692
              
              
              1.62
              %
              $
              48,237
              
              $
              485
              
              
              1.01Interest-bearing
                  demand (3)
              
              
              74,492
              
              
              1,826
              
              
              2.45
              
              
              45,400
              
              
              217
              
              
              0.48
              
              
              34,405
              
              
              110
              
              
              0.32Certificates
                  of deposit
              
              
              103,706
              
              
              4,175
              
              
              4.03
              
              
              94,168
              
              
              2,784
              
              
              2.96
              
              
              92,347
              
              
              2,223
              
              
              2.41FHLB
                  advances and other borrowings
              
              
              86,635
              
              
              4,089
              
              
              4.72
              
              
              102,501
              
              
              4,462
              
              
              4.35
              
              
              67,491
              
              
              2,799
              
              
              4.15Total
                  interest-bearing liabilities
              
              
              306,061
              
              
              11,053
              
              
              3.61
              
              
              284,845
              
              
              8,155
              
              
              2.86
              
              
              242,480
              
              
              5,617
              
              
              2.32Other
                  liabilities
              
              
              2,142
              
              
              
              
              
              
              
              
              1,862
              
              
              
              
              
              
              
              
              1,545Total
                  liabilities
              
              
              308,203
              
              
              
              
              
              
              
              
              286,707
              
              
              
              
              
              
              
              
              244,025Total
                  equity
              
              
              23,525
              
              
              
              
              
              
              
              
              22,967
              
              
              
              
              
              
              
              
              22,437Total
                  liabilities and equity
              
              $
              331,728
              
              
              
              
              
              
              
              $
              309,674
              
              
              
              
              
              
              
              $
              266,462Net
                  interest earning assets
              
              $
              2,077
              
              
              
              
              
              
              
              $
              3,666
              
              
              
              
              
              
              
              $
              6,081Net
                  interest income
              
              
              
              
              $
              7,857
              
              
              
              
              
              
              
              $
              8,143
              
              
              
              
              
              
              
              $
              7,928Interest
                  rate spread (4)
              
              
              
              
              
              
              
              
              2.53
              %
              
              
              
              
              
              
              
              2.79
              %
              
              
              
              
              
              
              
              3.13
              %Net
                  yield on weighted average interest-earning assets (5)
              
              
              
              
              
              
              
              
              2.55
              %
              
              
              
              
              
              
              
              2.82
              %
              
              
              
              
              
              
              
              3.19
              %Average
                  interest-earning assets to average bearing liabilities
              
              
              
              
              
              
              
              
              100.68
              %
              
              
              
              
              
              
              
              101.29
              %
              
              
              
              
              
              
              
              102.51
              %
 ________________________________________________________________
 (1)
              Includes
                  securities available for sale at amortized cost prior to SFAS No.
                  115
                  adjustments.
 (2)
              Total
                  loans less loans in process plus loans held for
                  sale.
 (3)
              Includes
                  Non-Interest Demand Deposit Accounts of $20,405, $17,346, and
                  $15,066
 (4)
              Interest
                  rate spread is calculated by subtracting weighted average interest
                  rate
                  cost from weighted average interest rate yield for the period
                  indicated.
 (5)
              The
                  net yield on weighted average interest-earning assets is calculated
                  by
                  dividing net interest income by weighted average interest-earning
                  assets
                  for the period indicated.
  43
  **Rate/Volume
        Table**
  The
        following table describes the extent to which changes in interest rates and
        changes in volume of interest-related assets and liabilities have affected
        River
        Valley’s interest income and expense during the years indicated. For each
        category of interest-earning assets and interest-bearing liabilities,
        information is provided on changes attributable to (i) changes in volume
        (change
        in volume multiplied by prior year rate), (ii) changes in rate (change in
        rate
        multiplied by prior year volume), and (iii) total changes in rate and volume.
        The combined effects of changes in both volume and rate, which cannot be
        separately identified, have been allocated proportionately to the change
        due to
        volume and the change due to rate:
 **Year
                    Ended December 31,****2006
                    vs. 2005**
                
                **2005
                    vs. 2004****Volume**
                
                **Increase
                    (decrease) due to Rate**
                
                **Total**
                
                **Volume**
                
                **Increase
                    (decrease) due to Rate**
                
                **Total**(In
                    thousands)Interest-earning
                    assets:Interest-earning
                    deposits and other
                
                $
                26
                
                $
                50
                
                $
                76
                
                $
                9
                
                $
                165
                
                $
                174Investment
                    securities
                
                
                578
                
                
                390
                
                
                968
                
                
                711
                
                
                28
                
                
                739Loans
                    receivable, net
                
                
                230
                
                
                1,338
                
                
                1,568
                
                
                1,102
                
                
                738
                
                
                1,840Total
                
                
                834
                
                
                1,778
                
                
                2,612
                
                
                1,822
                
                
                931
                
                
                2,753Interest-bearing
                    liabilities:Deposits
                
                
                494
                
                
                2,777
                
                
                3,271
                
                
                27
                
                
                848
                
                
                875FHLB
                    advances and other borrowings
                
                
                (728
                )
                
                355
                
                
                (373
                )
                
                1,518
                
                
                145
                
                
                1,663Total
                
                
                (234
                )
                
                3,132
                
                
                2,898
                
                
                1,545
                
                
                993
                
                
                2,538Net
                    change in interest income
                
                $
                1,068
                
                $
                (1,354
                )
                $
                (286
                )
                $
                277
                
                $
                (62
                )
                $
                215
  **Asset
        and Liability Management**
  Like
        other financial institutions, River Valley Financial is subject to interest
        rate
        risk to the extent that interest-earning assets reprice differently than
        interest-bearing liabilities. As part of its effort to monitor and manage
        interest rate risk, River Valley Financial is using the Net Portfolio Value
        (“NPV”) methodology adopted by the OTS as part of its capital
        regulations.
  Presented
        on the following table is an analysis of River Valley Financial’s interest rate
        risk, as of December 31, 2006 and December 31, 2005, as measured by
        changes in NPV for an instantaneous and sustained parallel shift of 100 through
        300 basis points in market interest rates.
  Generally,
        NPV is more sensitive to rising rates than declining rates. Such difference
        in
        sensitivity occurs principally because, as rates rise, a bank’s assets reprice
        slower than the deposits that fund them. As a result, in a rising interest
        rate
        environment, the amount of interest a bank would receive on loans would increase
        as loans are slowly prepaid and new loans at higher rates are made. Moreover,
        the interest the bank would pay on deposits would increase, but generally
        slower
        than the bank’s ability to reprice its interest-earning assets. However, River
        Valley Financial Bank has addressed some of these issues, which has generally
        reduced its overall exposure to interest rate risk.
  44
 **As
                    of December 31, 2006**(Dollars
                    in thousands)**Change
                    in Interest Rates (basis points)**
                **Estimated
                    NPV**
                **Amount
                    of Change**
                **Percent**+300
                
                $43,156
                
                $(1,918
                )
                -4
                %+200
                
                44,200
                
                (873
                )
                -2
                %+100
                
                45,280
                
                206
                
                0
                %—
                
                45,073
                
                —
                
                —-100
                
                44,007
                
                (1,066
                )
                -2
                %-200
                
                44,123
                
                (951
                )
                -2
                %-300
                (1)
                —
                
                —
                
                —
 
 **As
                    of December 31, 2005**(Dollars
                    in thousands)**Change
                    in Interest Rates (basis points)**
                **Estimated
                    NPV**
                **Amount
                    of Change**
                **Percent**+300
                
                $42,677
                
                $1,471
                
                +4
                %+200
                
                42,552
                
                1,346
                
                +3
                %+100
                
                41,998
                
                792
                
                +2
                %—
                
                41,206
                
                —
                
                —-100
                
                39,614
                
                (1,592
                )
                -4
                %-200
                
                36,914
                
                (4,292
                )
                -10
                %-300
                (1)
                —
                
                —
                
                —
 _____________________________________________________
 (1)
        At
        December 31, 2006 and at December 31, 2005, the OTS did not provide
        information as to interest rate risk for a 300 point decrease.
  As
        with
        any method of measuring interest rate risk, certain shortcomings are inherent
        in
        the NPV approach. For example, although certain assets and liabilities may
        have
        similar maturities or periods of repricing, they may react in different degrees
        to changes in market interest rates. Also, the interest rates on certain
        types
        of assets and liabilities may fluctuate in advance of changes in market interest
        rates, while interest rates on other types may lag behind changes in market
        rates. Further, in the event of a change in interest rates, expected rates
        of
        prepayment on loans and mortgage-backed securities and early withdrawal levels
        from certificates of deposit would likely deviate significantly from those
        assumed in making the risk calculations.
  **Liquidity
        and Capital Resources**
  The
        Company’s principal sources of funds are deposits, loan and mortgage-backed
        securities repayments, maturities of securities, borrowings and other funds
        provided by operations. While scheduled loan repayments and maturing investments
        are relatively predictable, deposit flows and loan and mortgage-backed
        securities prepayments are more influenced by interest rates, general economic
        conditions and competition. The Company maintains investments in liquid assets
        based upon management’s assessment of (1) the need for funds, (2) expected
        deposit flows, (3) the yield available on short-term liquid assets and (4)
        the
        objectives of the asset/liability management program.
  The
        Financial Regulatory Relief and Economic Efficiency Act of 2000, which was
        signed into law on December 27, 2000, repealed the former statutory requirement
        that all savings associations maintain an average daily balance of liquid
        assets
        in a minimum amount of not less than 4% or more than 10% of their withdrawable
        accounts plus short-term borrowings. The OTS adopted a rule that implemented
        this revised statutory requirement, although savings associations remain
        subject
        to the OTS regulation that requires them to maintain sufficient liquidity
        to
        ensure their safe and sound operation. At December 31, 2006, River Valley
        Financial Bank had commitments to originate loans totaling $5.5 million and
        in
        addition, had undisbursed loans in process, unused lines of credit and standby
        letters of credit totaling $27.0 million. At such date, River Valley Financial
        Bank had $520,000 in commitments to sell loans and no outstanding commitment
        to
        purchase loans. The Company considers River Valley Financial Bank’s liquidity
        and capital resources sufficient to meet outstanding short and long term
        needs.
  45
  The
        Company’s liquidity, primarily represented by cash and cash equivalents, is a
        result of the funds provided by or used in the Company’s operating, investing
        and financing activities. These activities are summarized below for the years
        ended December 31, 2006, 2005 and 2004:
  **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**(In
                  thousands)Cash
                  flows from operating activities
              
              $
              3,542
              
              $
              3,646
              
              $
              2,572Cash
                  flows from investing activities:Purchase
                  of securities
              
              
              (23,139
              )
              
              (48,816
              )
              
              (14,133
              )Proceeds
                  from maturities of securities
              
              
              7,012
              
              
              15,521
              
              
              7,221Proceeds
                  from sales of securities
              
              
              10,933
              
              
              —
              
              
              14,034Net
                  loan originations
              
              
              (14,384
              )
              
              536
              
              
              (39,317
              )Other
              
              
              (861
              )
              
              (2,607
              )
              
              (2,390
              )Cash
                  flows from financing activities:Net
                  increase (decrease) in deposits
              
              
              13,505
              
              
              36,195
              
              
              (9,416
              )Net
                  increase in borrowings
              
              
              (1,565
              )
              
              2,182
              
              
              44,383Purchase
                  of stock
              
              
              (46
              )
              
              (201
              )
              
              (1,895
              )Other
              
              
              (919
              )
              
              (1,163
              )
              
              (1,134
              )Net
                  increase (decrease) in cash and cash equivalents
              
              $
              (5,922
              )
              $
              5,293
              
              $
              (75
              )
  River
        Valley Financial is required by applicable law and regulation to meet certain
        minimum capital standards. Such capital standards include a tangible capital
        requirement, a core capital requirement, or leverage ratio, and a risk-based
        capital requirement.
  The
        tangible capital requirement requires savings associations to maintain “tangible
        capital” of not less than 1.5% of the association’s adjusted total assets.
        Tangible capital is defined in OTS regulations as core capital minus intangible
        assets. “Core capital” is comprised of common shareholders’ equity (including
        retained earnings), noncumulative preferred stock and related surplus, minority
        interests in consolidated subsidiaries, certain nonwithdrawable accounts
        and
        pledged deposits of mutual associations. OTS regulations require savings
        associations to maintain core capital generally equal to 4% of the association’s
        total assets except those associations with the highest examination rating
        and
        acceptable levels of risk.
  OTS
        regulations require that savings associations maintain “risk-based capital” in
        an amount not less than 8% of “risk-weighted assets.” Risk-based capital is
        defined as core capital plus certain additional items of capital, which in
        the
        case of River Valley Financial includes a general loan loss allowance of
        $2.2
        million at December 31, 2006.
  River
        Valley Financial exceeded all of its regulatory capital requirements at
        December 31, 2006. The following table summarizes River Valley Financial’s
        regulatory capital requirements and regulatory capital at December 31,
        2006:
  46
  **OTS
                  Requirement**
              
              **Actual
                  Amount****Percent
                  of Assets**
              
              **Amount**
              
              **Percent
                  of Assets (1)**
              
              **Amount**
              
              **Amount
                  of Excess**(Dollars
                  in thousands)Tangible
                  capital
              
              
              1.50
              %
              
              $ 
                  5,100
              
              
              8.47
              %
              
              $28,798
              
              
              $23,698Core
                  capital (2)
              
              
              4.00
              %
              
              13,599
              
              
              8.47
              %
              
              28,798
              
              
              15,199Risk-based
                  capital
              
              
              8.00
              %
              
              18,868
              
              
              12.92
              %
              
              30,472
              
              
              11,604
 ______________________________
 (1)
              Tangible
                  and core capital levels are shown as a percentage of total assets;
                  risk-based capital levels are shown as a percentage of risk-weighted
                  assets.
 (2)
              The
                  OTS has proposed and is expected to adopt a core capital requirement
                  for
                  savings associations comparable to that adopted by the Office of
                  the
                  Comptroller of the Currency for national banks. The regulation
                  requires
                  core capital of at least 3% of total adjusted assets for savings
                  associations that received the highest supervisory rating for safety
                  and
                  soundness, and 4% to 5% for all other savings associations. River
                  Valley
                  Financial is in compliance with this
                  requirement.
   **Impact
        of Inflation and Changing Prices**
  The
        Consolidated Financial Statements and Notes thereto included herein have
        been
        prepared in accordance with generally accepted accounting principles, which
        require River Valley to measure financial position and results of operations
        in
        terms of historical dollars with the exception of investment and mortgage-backed
        securities available-for-sale, which are carried at fair value. Changes in
        the
        relative value of money due to inflation or recession are generally not
        considered.
  In
        management’s opinion, changes in interest rates affect the financial condition
        of a financial institution to a far greater degree than changes in the rate
        of
        inflation. While interest rates are greatly influenced by changes in the
        rate of
        inflation, they do not change at the same rate or in the same magnitude as
        the
        rate of inflation. Rather, interest rate volatility is based on changes in
        the
        expected rate of inflation, as well as changes in monetary and fiscal
        policies.
  **Off-Balance
        Sheet Arrangements**
  As
        of the
        date of this Annual Report on Form 10-K, the Company does not have any
        off-balance sheet arrangements that have or are reasonably likely to have
        a
        current or future effect on the Company’s financial condition, change in
        financial condition, revenues or expenses, results of operations, liquidity,
        capital expenditures or capital resources that are material to investors.
        The
        term “off-balance sheet arrangement” generally means any transaction, agreement,
        or other contractual arrangement to which any entity unconsolidated with
        the
        Company is a party and under which the company has (i) any obligation arising
        under a guarantee contract, derivative instrument or variable interest; or
        (ii)
        a retained or contingent interest in assets transferred to such entity or
        similar arrangement that serves as credit, liquidity or market risk support
        for
        such assets.
  47
  **Contractual
        Obligations**
  The
        Company’s contractual obligations as of December 31, 2006 are summarized in
        the following table.
  **Payments
                  due by period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than 1 year**
              
              **2
                  to 3 years**
              
              **4
                  to 5 years**
              
              **More
                  than 5 years**Long
                  Term Debt (1)
              
              $
              95,217
              
              $
              16,000
              
              $
              24,000
              
              $
              23,000
              
              $
              32,217Capital
                  Leases (2)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Operating
                  Leases (3)
              
              
              2,279
              
              
              115
              
              
              239
              
              
              179
              
              
              1,746Purchase
                  Obligations (4)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Dividends
                  Declared (5)
              
              
              324
              
              
              324
              
              
              —
              
              
              —
              
              
              —Total
                  (6)
              
              $
              97,820
              
              $
              16,439
              
              $
              24,239
              
              $
              23,179
              
              $
              33,963
 _____________________________________________________________
 (1)
              Long
                  term debt includes FHLB advances and subordinated debentures. See
“Notes
                  to Consolidated Financial Statements -Borrowings,” contained in Note 7,
                  for information related to collateral and amounts with various
                  options.
 (2)
              River
                  Valley Bancorp had no capital
                  leases.
 (3)
              Leased
                  facilities for three locations with lease arrangements expiring
                  2010
                  through 2029.
 (4)
              The
                  purchase obligation relates to the purchase of data processing
                  equipment.
 (5)
              A
                  dividend on common stock was declared by the Board of Directors
                  to
                  shareholders of record on December 12, 2006, and payable on January
                  12,
                  2007. This obligation is shown net of certain affiliate
                  holdings.
 (6)
              For
                  information regarding the contractual maturities of deposit liabilities,
                  which are not included in the above table, see “Notes to Consolidated
                  Financial Statements - Deposits,” contained in Note
                  6.
   **ITEM
        7A.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.** ****
  The
        information required by this item is incorporated by reference to the discussion
        presented in Part II, Item 7 of this Annual Report on Form 10-K under the
        heading “Asset and Liability Management.”
   **ITEM
        8.**  **FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA.**
  **River
          Valley Bancorp**
  **Accountants’
          Report and Consolidated Financial Statements**
  December
          31, 2006, 2005 and 2004
  **Contents****Report
                    of Independent Registered Public Accounting Firm**
                49**Consolidated
                    Financial Statements**Balance
                    Sheets
                50Statements
                    of Income
                51Statements
                    of Comprehensive Income
                52Statements
                    of Stockholders' Equity
                53Statements
                    of Cash Flows
                54Notes
                    to Financial Statements
                55
  48
  **Report
        of Independent Registered Public Accounting Firm**
 
 
 Audit
        Committee, Board of Directors and Shareholders
 River
        Valley Bancorp
 Madison,
        Indiana
   We
        have
        audited the accompanying consolidated balance sheets of River Valley Bancorp
        as
        of December 31, 2006 and 2005, and the related consolidated statements of
        income, comprehensive income, shareholders’ equity and cash flows for each of
        the three years in the period ended December 31, 2006. These financial
        statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of River Valley Bancorp
        as of
        December 31, 2006 and 2005, and the results of its operations and its cash
        flows
        for each of the three years in the period ended December 31, 2006, in conformity
        with accounting principles generally accepted in the United States of
        America.
  
  Indianapolis,
        Indiana
 March
        13,
        2007
  
   49
  **River
        Valley Bancorp**
 **Consolidated
        Bal** **ance
        Sheets**
 **December
        31, 2006 and 2005**
  **2006**
              
              **2005****Assets**
              
              (In
                  Thousands, Except Share Amounts)Cash
                  and due from banks
              
              $
              6,838
              
              $
              4,749Interest-bearing
                  demand deposits
              
              
              4,736
              
              
              12,933Fed
                  funds sold
              
              
              234
              
              
              48Cash
                  and cash equivalents
              
              
              11,808
              
              
              17,730Investment
                  securities available for sale
              
              
              65,150
              
              
              59,609Loans,
                  net of allowance for loan losses of $2,176 and $2,320
              
              
              241,887
              
              
              228,885Premises
                  and equipment
              
              
              7,813
              
              
              8,189Real
                  estate, held for sale
              
              
              —
              
              
              271Federal
                  Home Loan Bank stock
              
              
              4,400
              
              
              4,050Interest
                  receivable
              
              
              2,334
              
              
              2,060Cash
                  value of life insurance
              
              
              7,222
              
              
              5,523Other
                  assets
              
              
              1,635
              
              
              2,431Total
                  assets
              
              $
              342,249
              
              $
              328,748**Liabilities**DepositsNoninterest-bearing
              
              $
              19,340
              
              $
              19,270Interest-bearing
              
              
              200,898
              
              
              187,463Total
                  deposits
              
              
              220,238
              
              
              206,733Borrowings
              
              
              95,217
              
              
              96,782Interest
                  payable
              
              
              705
              
              
              554Other
                  liabilities
              
              
              1,942
              
              
              1,661Total
                  liabilities
              
              
              318,102
              
              
              305,730**Commitments
                  and Contingencies****Stockholders'
                  Equity**Preferred
                  stock, no par valueAuthorized
                  and unissued - 2,000,000 sharesCommon
                  stock, no par valueAuthorized
                  - 5,000,000 sharesIssued
                  and outstanding - 1,620,431 and 1,596,309 shares
              
              
              9,129
              
              
              8,973Retained
                  earnings
              
              
              15,346
              
              
              14,663Shares
                  acquired by stock benefit plans
              
              
              —
              
              
              (152
              )Accumulated
                  other comprehensive loss
              
              
              (328
              )
              
              (466
              )Total
                  stockholders’ equity
              
              
              24,147
              
              
              23,018Total
                  liabilities and stockholders’ equity
              
              $
              342,249
              
              $
              328,748




*See
      Notes to Consolidated Financial Statements


50
 
 **River
        Valley Bancorp**
 **Consolidated
        Statem** **ents
        of Income**
 **Years
        Ended December 31, 2006, 2005 and 2004**
  **2006**
              
              **2005**
              
              **2004**(In
                  Thousands, Except Per Share Amounts)**Interest
                  Income**Loans
                  receivable
              
              $
              15,865
              
              $
              14,297
              
              $
              12,457Investment
                  securities
              
              
              2,561
              
              
              1,593
              
              
              854Interest-earning
                  deposits and other
              
              
              484
              
              
              408
              
              
              234Total
                  interest income
              
              
              18,910
              
              
              16,298
              
              
              13,545**Interest
                  Expense**Deposits
              
              
              6,964
              
              
              3,693
              
              
              2,818Borrowings
              
              
              4,089
              
              
              4,462
              
              
              2,799Total
                  interest expense
              
              
              11,053
              
              
              8,155
              
              
              5,617**Net
                  Interest Income**
              
              
              7,857
              
              
              8,143
              
              
              7,928Provision
                  for loan losses
              
              
              264
              
              
              288
              
              
              338**Net
                  Interest Income After Provision for Loan Losses**
              
              
              7,593
              
              
              7,855
              
              
              7,590**Other
                  Income**Service
                  fees and charges
              
              
              2,021
              
              
              1,890
              
              
              1,761Net
                  realized gains (losses) on sales of available-for-sale
                  securities
              
              
              (58
              )
              
              —
              
              
              24Net
                  gains on loan sales
              
              
              107
              
              
              299
              
              
              394Increase
                  in cash value of life insurance
              
              
              199
              
              
              202
              
              
              208Other
                  income
              
              
              179
              
              
              109
              
              
              131Total
                  other income
              
              
              2,448
              
              
              2,500
              
              
              2,518**Other
                  Expenses**Salaries
                  and employee benefits
              
              
              3,963
              
              
              3,841
              
              
              3,405Net
                  occupancy and equipment expenses
              
              
              1,151
              
              
              1,094
              
              
              976Data
                  processing fees
              
              
              91
              
              
              127
              
              
              144Advertising
              
              
              259
              
              
              267
              
              
              221Mortgage
                  servicing rights
              
              
              373
              
              
              196
              
              
              192Office
                  supplies
              
              
              171
              
              
              190
              
              
              168Professional
                  fees
              
              
              221
              
              
              280
              
              
              204Other
                  expenses
              
              
              1,026
              
              
              1,099
              
              
              1,032Total
                  other expenses
              
              
              7,255
              
              
              7,094
              
              
              6,342**Income
                  Before Income Tax**
              
              
              2,786
              
              
              3,261
              
              
              3,766Income
                  tax expense
              
              
              841
              
              
              1,175
              
              
              1,419**Net
                  Income**
              
              $
              1,945
              
              $
              2,086
              
              $
              2,347**Basic
                  Earnings per Share**
              
              $
              1.21
              
              $
              1.32
              
              $
              1.48**Diluted
                  Earnings per Share**
              
              $
              1.18
              
              $
              1.27
              
              $
              1.42
 *See
            Notes to Consolidated Financial Statements
 51
 
 **River
        Valley Bancorp**
 **Consolidated
        Statements of Comprehensive Income**
 **Years
        Ended December 31, 2006, 2005 and 2004**
  **2006**
              
              **2005**
              
              **2004**(In
                  Thousands)**Net
                  Income**
              
              $
              1,945
              
              $
              2,086
              
              $
              2,347Other
                  comprehensive income****(loss),
                  net of taxUnrealized
                  gains (losses) on securities available for saleUnrealized
                  holding gains (losses) arising during the period, net of tax expense
                  (benefit) of $107, $(285) and $(179)
              
              
              103
              
              
              (431
              )
              
              (276
              )Less:
                  Reclassification adjustment for gains (losses) included in net
                  income, net
                  of tax expense (benefit) of $22, $0 and $10
              
              
              (35
              )
              
              —
              
              
              14138
              
              
              (431
              )
              
              (290
              )**Comprehensive
                  Income**
              
              $
              2,083
              
              $
              1,655
              
              $
              2,057
 
   *See
          Notes to Consolidated Financial Statements
 
 52
 
 **River
        Valley Bancorp**
 **Consolidated
        Statements of Stockholders’ Equity**
 **Years
        Ended December 31, 2006, 2005 and 2004**
  **Shares**
              
              **Accumulated****Acquired**
              
              **Other****by
                  Stock**
              
              **Comprehensive****Common**
              
              **Retained**
              
              **Benefit**
              
              **Income****Shares**
              
              **Stock**
              
              **Earnings**
              
              **Plans**
              
              **(Loss)**
              
              **Total****Balances,
                  January 1, 2004**
              
              
              1,646,680
              
              $
              8,705
              
              $
              14,088
              
              $
              (193
              )
              $
              255
              
              $
              22,855Net
                  income
              
              
              
              
              
              
              
              
              2,347
              
              
              
              
              
              
              
              
              2,347Unrealized
                  losses on securities, net of reclassification adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (290
              )
              
              (290
              )Cash
                  dividends ($.72 per share)
              
              
              
              
              
              
              
              
              (1,130
              )
              
              
              
              
              
              
              
              (1,130
              )Exercise
                  of stock options
              
              
              15,846
              
              
              118
              
              
              
              
              
              
              
              
              
              
              
              118Tax
                  benefit of stock options exercised and RRP
              
              
              
              
              
              117
              
              
              
              
              
              
              
              
              
              
              
              117Contribution
                  to stock benefit plans
              
              
              
              
              
              
              
              
              
              
              
              (129
              )
              
              
              
              
              (129
              )Amortization
                  of expense related to stock benefit plans
              
              
              
              
              
              293
              
              
              
              
              
              107
              
              
              
              
              
              400Purchase
                  of stock
              
              
              (78,149
              )
              
              (390
              )
              
              (1,505
              )
              
              
              
              
              
              
              
              (1,895
              )**Balances,
                  December 31, 2004**
              
              
              1,584,377
              
              
              8,843
              
              
              13,800
              
              
              (215
              )
              
              (35
              )
              
              22,393Net
                  income
              
              
              
              
              
              
              
              
              2,086
              
              
              
              
              
              
              
              
              2,086Unrealized
                  losses on securities, net of reclassification adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (431
              )
              
              (431
              )Cash
                  dividends ($.775 per share)
              
              
              
              
              
              
              
              
              (1,223
              )
              
              
              
              
              
              
              
              (1,223
              )Exercise
                  of stock options
              
              
              11,932
              
              
              72
              
              
              
              
              
              
              
              
              
              
              
              72Tax
                  benefit of stock options exercised and RRP
              
              
              
              
              
              56
              
              
              
              
              
              
              
              
              
              
              
              56Contribution
                  to stock benefit plans
              
              
              
              
              
              
              
              
              
              
              
              (46
              )
              
              
              
              
              (46
              )Amortization
                  of expense related to stock benefit plans
              
              
              
              
              
              203
              
              
              
              
              
              109
              
              
              
              
              
              312Purchase
                  of stock
              
              
              (9,814
              )
              
              (201
              )
              
              
              
              
              
              
              
              
              
              
              (201
              )**Balances,
                  December 31, 2005**
              
              
              1,586,495
              
              
              8,973
              
              
              14,663
              
              
              (152
              )
              
              (466
              )
              
              23,018Net
                  income
              
              
              
              
              
              
              
              
              1,945
              
              
              
              
              
              
              
              
              1,945Unrealized
                  losses on securities, net of reclassification adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              138
              
              
              138Reclassification
                  of unearned compensation to common stock upon adoption of SFAS
                  123(R)
              
              
              
              
              
              (152
              )
              
              
              
              
              152Cash
                  dividends ($.785 per share)
              
              
              
              
              
              
              
              
              (1,262
              )
              
              
              
              
              
              
              
              (1,262
              )Exercise
                  of stock options
              
              
              36,336
              
              
              266
              
              
              
              
              
              
              
              
              
              
              
              266Tax
                  benefit of stock options exercised and RRP
              
              
              
              
              
              51
              
              
              
              
              
              
              
              
              
              
              
              51Stock
                  option expense
              
              
              
              
              
              2
              
              
              
              
              
              
              
              
              
              
              
              2Amortization
                  of expense related to stock benefit plans
              
              
              
              
              
              35
              
              
              
              
              
              
              
              
              
              
              
              35Purchase
                  of stock
              
              
              (2,400
              )
              
              (46
              )
              
              
              
              
              
              
              
              
              
              
              (46
              )**Balances,
                  December 31, 2006**
              
              
              1,620,431
              
              $
              9,129
              
              $
              15,346
              
              
              
              
              $
              (328
              )
              $
              24,147
  *See
          Notes to Consolidated Financial Statements
 53
 
 **River
        Valley Bancorp**
 **Consolidated
        Statements of Ca** **sh
        Flows**
 **Years
        Ended December 31, 2006, 2005 and 2004**
  **2006**
              
              **2005**
              
              **2004**(In
                  Thousands)**Operating
                  Activities**Net
                  income
              
              $
              1,945
              
              $
              2,086
              
              $
              2,347Items
                  not requiring (providing) cashProvision
                  for loan losses
              
              
              264
              
              
              288
              
              
              338Depreciation
                  and amortization
              
              
              625
              
              
              595
              
              
              580Deferred
                  income tax
              
              
              (162
              )
              
              25
              
              
              3Investment
                  securities gains
              
              
              58
              
              
              —
              
              
              (24
              )Loans
                  originated for sale in the secondary market
              
              
              (5,500
              )
              
              (13,565
              )
              
              (18,346
              )Proceeds
                  from sale of loans in the secondary market
              
              
              5,548
              
              
              14,026
              
              
              18,305Gain
                  on sale of loans
              
              
              (107
              )
              
              (299
              )
              
              (394
              )Amortization
                  of deferred loan origination cost
              
              
              148
              
              
              122
              
              
              109Amortization
                  of expense related to stock benefit plans
              
              
              38
              
              
              312
              
              
              400Tax
                  benefit on stock options exercised
              
              
              (51
              )
              
              —
              
              
              —(Gain)
                  loss on sale of premises and equipment
              
              
              —
              
              
              21
              
              
              —Net
                  change inInterest
                  receivable
              
              
              (274
              )
              
              (461
              )
              
              (110
              )Interest
                  payable
              
              
              151
              
              
              172
              
              
              1Other
                  adjustments
              
              
              859
              
              
              323
              
              
              (637
              )Net
                  cash provided by operating activities
              
              
              3,542
              
              
              3,646
              
              
              2,572**Investing
                  Activities**Purchase
                  of FHLB stock
              
              
              (350
              )
              
              (695
              )
              
              (992
              )Purchases
                  of securities available for sale
              
              
              (23,139
              )
              
              (48,816
              )
              
              (14,133
              )Proceeds
                  from maturities of securities available for sale
              
              
              7,012
              
              
              15,521
              
              
              7,221Proceeds
                  from sales of securities available for sale
              
              
              10,933
              
              
              —
              
              
              14,034Net
                  change in loans
              
              
              (14,384
              )
              
              536
              
              
              (39,317
              )Purchases
                  of premises and equipment
              
              
              (249
              )
              
              (2,007
              )
              
              (1,398
              )Proceeds
                  from sale of real estate acquired through foreclosure
              
              
              1,286
              
              
              95
              
              
              —Premiums
                  paid on life insurance
              
              
              (1,500
              )
              
              —
              
              
              —Other
                  investing activities - Capitalized costs on OREO property
              
              
              (48
              )
              
              —
              
              
              —Net
                  cash used in investing activities
              
              
              (20,439
              )
              
              (35,366
              )
              
              (34,585
              )**Financing
                  Activities**Net
                  change inNoninterest-bearing,
                  interest-bearing demand and savings deposits
              
              
              13,944
              
              
              24,413
              
              
              (5,472
              )Certificates
                  of deposit
              
              
              (439
              )
              
              11,782
              
              
              (3,944
              )Short-term
                  borrowings
              
              
              (14,565
              )
              
              (7,818
              )
              
              22,383Proceeds
                  from borrowings
              
              
              42,000
              
              
              32,000
              
              
              35,000Repayment
                  of borrowings
              
              
              (29,000
              )
              
              (22,000
              )
              
              (13,000
              )Cash
                  dividends
              
              
              (1,249
              )
              
              (1,211
              )
              
              (1,110
              )Purchase
                  of stock
              
              
              (46
              )
              
              (201
              )
              
              (1,895
              )Proceeds
                  from exercise of stock options
              
              
              266
              
              
              72
              
              
              118Advances
                  by borrowers for taxes and insurance
              
              
              13
              
              
              22
              
              
              (13
              )Tax
                  benefit on stock options exercised
              
              
              51
              
              
              (46
              )
              
              (129
              )Net
                  cash provided by financing activities
              
              
              10,975
              
              
              37,013
              
              
              31,938**Net
                  Change in Cash and Cash Equivalents**
              
              
              (5,922
              )
              
              5,293
              
              
              (75
              )**Cash
                  and Cash Equivalents, Beginning of Year**
              
              
              17,730
              
              
              12,437
              
              
              12,512**Cash
                  and Cash Equivalents, End of Year**
              
              $
              11,808
              
              $
              17,730
              
              $
              12,437**Additional
                  Cash Flows Information**Interest
                paid
              
              $
              10,902
              
              $
              7,983
              
              $
              5,616Income
                tax paid
              
              
              904
              
              
              1,459
              
              
              833
  *See
        Notes to Consolidated Financial Statements
 54
 
 **River
            Valley Bancorp**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2006, 2005 and 2004**
 (Table
            Dollar Amounts in Thousands
 Except
            Per Share Amounts)
 **Note
                  1:**
              **Nature
                  of Operations and Summary of Significant Accounting
                  Policies**
  The
        accounting and reporting policies of River Valley Bancorp (Company) and its
        wholly owned subsidiary, River Valley Financial Bank (Bank) and the Bank’s
        wholly owned subsidiary, Madison First Service Corporation (First Service)
        and
        RVFB Investments, Inc. (RVFB Investments), conform to accounting principles
        generally accepted in the United States of America and reporting practices
        followed by the thrift industry. The more significant of the policies are
        described below.
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenue and expenses
        during
        the reporting period. Actual results could differ from those
        estimates.
  The
        Company is a thrift holding company whose principal activity is the ownership
        and management of the Bank. The Bank operates under a federal thrift charter
        and
        provides full banking services, in a single significant business segment.
        As a
        federally-chartered thrift, the Bank is subject to regulation by the Office
        of
        Thrift Supervision, and the Federal Deposit Insurance Corporation.
  The
        Bank
        generates commercial, mortgage and consumer loans and receives deposits from
        customers located primarily in southeastern Indiana. The Bank’s loans are
        generally secured by specific items of collateral including real property,
        consumer assets and business assets.
  **Consolidation** - The
        consolidated financial statements include the accounts of the Company, the
        Bank,
        RVFB Investments and Madison First Service after elimination of all material intercompany transactions.
  **Cash
        Equivalents** - The
        Company considers all liquid investments with original maturities of three
        months or less to be cash equivalents.
  **Investment
        Securities** - Debt
        securities are classified as held to maturity when the Company has the positive
        intent and ability to hold the securities to maturity. Securities held to
        maturity are carried at amortized cost. Debt securities not classified as
        held
        to maturity and marketable equity securities are classified as available
        for
        sale. Securities available for sale are carried at fair value with unrealized
        gains and losses reported separately in accumulated other comprehensive income,
        net of tax.
  Amortization
        of premiums and accretion of discounts are recorded as interest income from
        securities. Realized gains and losses are recorded as net security gains
        (losses). Gains and losses on sales of securities are determined on the
        specific-identification method.
  **Loans
        held for sale** are
        carried at the lower of aggregate cost or market. Market is determined using
        the
        aggregate method. Net unrealized losses, if any, are recognized through a
        valuation allowance by charges to income based on the difference between
        estimated sales proceeds and aggregate cost.
   55
 **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 **Loans** are
        carried at the principal amount outstanding. A loan is impaired when, based
        on
        current information or events, it is probable that the Company will be unable
        to
        collect all amounts due (principal and interest) according to the contractual
        terms of the loan agreement. Payments with insignificant delays not exceeding
        90
        days are not considered impaired. Certain nonaccrual and substantially
        delinquent loans may be considered to be impaired. The Company considers
        its
        investment in one-to-four family residential loans and consumer loans to
        be
        homogeneous and therefore excluded from separate identification for evaluation
        of impairment. Interest income is accrued on the principal balances of loans.
        The accrual of interest on impaired and nonaccural loans is discontinued
        when,
        in management’s opinion, the borrower may be unable to meet payments as they
        become due. When interest accrual is discontinued, all unpaid accrued interest
        is reversed when considered uncollectible. Interest income is subsequently
        recognized only to the extent cash payments are received. Certain loan fees
        and
        direct costs are being deferred and amortized as an adjustment of yield on
        the
        loans over the contractual lives of the loans. When a loan is paid off or
        sold,
        any unamortized loan origination fee balance is credited to income.
  **Allowance
        for loan losses** is
        maintained to absorb loan losses based on management's continuing review
        and
        evaluation of the loan portfolio and its judgment as to the impact of economic
        conditions on the portfolio. The evaluation by management includes consideration
        of past loss experience, changes in the composition of the portfolio, the
        current condition and amount of loans outstanding, and the probability of
        collecting all amounts due. Impaired loans are measured by the present value
        of
        expected future cash flows, or the fair value of the collateral of the loan,
        if
        collateral dependent. Loan losses are charged against the allowance when
        management believes the uncollectibility of a loan balance is confirmed.
        Subsequent recoveries, if any, are credited to the allowance.
  The
        determination of the adequacy of the allowance for loan losses is based on
        estimates that are particularly susceptible to significant changes in the
        economic environment and market conditions. Management believes that as of
        December 31, 2006, the allowance for loan losses is adequate based on
        information currently available. A worsening or protracted economic decline
        in
        the areas within which the Company operates would increase the likelihood
        of
        additional losses due to credit and market risks and could create the need
        for
        additional loss reserves.
  **Premises
        and equipment** are
        carried at cost net of accumulated depreciation. Depreciation is computed
        using
        the straight-line method based principally on the estimated useful lives
        of the
        assets. Maintenance and repairs are expensed as incurred while major additions
        and improvements are capitalized. Gains and losses on dispositions are included
        in current operations.
   56
 **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 **Federal
        Home Loan Bank stock** is a
        required investment for institutions that are members of the Federal Home
        Loan
        Bank system. The required investment in the common stock is based on a
        predetermined formula.
  **Foreclosed
        assets** are
        carried at the lower of cost or fair value less estimated selling costs.
        When
        foreclosed assets are acquired, any required adjustment is charged to the
        allowance for loan losses. All subsequent activity is included in current
        operations.
  **Mortgage
        servicing rights** on
        originated loans are capitalized by allocating the total cost of the mortgage
        loans between the mortgage servicing rights and the loans based on their
        relative fair values. Capitalized servicing rights are amortized in proportion
        to and over the period of estimated servicing revenues.
  **Stock
        options -** The
        Company has a stock-based employee compensation plan, which is described
        more
        fully in Note 15. Prior to 2006, the Company 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 is reflected
        in net income, as all options granted under those plans had an exercise price
        equal to the market value of the underlying common stock on the grant
        date.
  Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        Statement of Financial Accounting Standards (SFAS) No. 123(R), *Share-Based
        Payment* .
        The
        Company selected the modified prospective application. Accordingly, after
        January 1, 2006, the Company began expensing the fair value of stock options
        granted, modified, repurchased or cancelled.
  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.
 **2005**
                
                **2004**Net
                    income, as reported
                
                $
                2,086
                
                $
                2,347Less:
                    Total stock-based employee compensation cost determined under
                    the fair
                    value based method, net of income taxes
                
                
                (12
                )
                
                (23
                )Pro
                    forma net income
                
                $
                2,074
                
                $
                2,324Earnings
                    per shareBasic
                    - as reported
                
                $
                1.32
                
                $
                1.48Basic
                    - pro forma
                
                $
                1.31
                
                $
                1.46Diluted
                    - as reported
                
                $
                1.27
                
                $
                1.42Diluted
                    - pro forma
                
                $
                1.27
                
                $
                1.40
  57
 **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 **Income
        tax** in the
        consolidated statements of income includes deferred income tax provisions
        or
        benefits for all significant temporary differences in recognizing income
        and
        expenses for financial reporting and income tax purposes.
  **Earnings
        per share** have
        been computed based upon the weighted-average common shares outstanding during
        each year. Unearned ESOP shares have been excluded from the computation of
        average shares outstanding.
  **Reclassifications** of
        certain amounts in the 2005 and 2004 consolidated financial statements have
        been
        made to conform to the 2006 presentation.
  **Note
                    2:**
                **Restriction
                    on Cash and Due From Banks**
  The
          Bank
          is required to maintain reserve funds in cash and/or on deposit with the
          Federal
          Reserve Bank. The reserve required at December 31, 2006 was
          $4,194,000.
   **Note
                    3:**
                **Investment
                    Securities**
  **2006****Amortized**
                  **Cost**
                
                **Gross**
                  **Unrealized**
                  **Gains**
                
                **Gross**
                  **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**Available
                    for saleFederal
                    agencies
                
                $
                50,812
                
                $
                9
                
                $
                452
                
                $
                50,369State
                    and municipal
                
                
                14,776
                
                
                26
                
                
                90
                
                
                14,712Mortgage
                    and other asset-backed securities
                
                
                68
                
                
                1
                
                
                —
                
                
                69Total
                    investment securities
                
                $
                65,656
                
                $
                36
                
                $
                542
                
                $
                65,150
 
 **2005****Amortized**
                  **Cost**
                
                **Gross**
                  **Unrealized**
                  **Gains**
                
                **Gross**
                  **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**Available
                    for saleFederal
                    agencies
                
                $
                57,737
                
                $
                —
                
                $
                751
                
                $
                56,986State
                    and municipal
                
                
                2,562
                
                
                3
                
                
                25
                
                
                2,540Mortgage
                    and other asset-backed securities
                
                
                83
                
                
                —
                
                
                —
                
                
                83Total
                    investment securities
                
                $
                60,382
                
                $
                3
                
                $
                776
                
                $
                59,609
  58
 **River
            Valley Bancorp**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2006, 2005 and 2004**
 (Table
            Dollar Amounts in Thousands
 Except
            Per Share Amounts)
 The
          amortized cost and fair value of securities available for sale at December
          31,
          2006, by contractual maturity, are shown below. Expected maturities will
          differ
          from contractual maturities because issuers may have the right to call
          or prepay
          obligations with or without call or prepayment penalties.
  **Available
                    for Sale****Amortized**
                  **Cost**
                
                **Fair**
                  **Value**Less
                    than one year
                
                $
                12,243
                
                $
                12,147One
                    to five years
                
                
                38,981
                
                
                38,620Five
                    to ten years
                
                
                9,637
                
                
                9,601More
                    than ten years
                
                
                4,727
                
                
                4,713$
                65,588
                
                $
                65,081Mortgage
                    and other asset-backed securities
                
                
                68
                
                
                69Totals
                
                $
                65,656
                
                $
                65,150
 
  Securities
          with a carrying value of $15,723,000 were pledged at December 31, 2005
          to secure
          repurchase agreements. Securities with a carrying value of $12,855,000
          and
          $13,742,000 were pledged at December 31, 2006 and 2005 to secure FHLB
          advances. Securities with a carrying value of $25,646,000 and $20,603,000
          were
          pledged at December 31, 2006 and 2005 to secure certain deposits and for
          other purposes as permitted or required by law.
  Proceeds
          from sales of securities available for sale during 2006, 2005, and 2004
          were
          $10,933,000, $0, and $14,034,000, respectively. Gross losses of $58,000
          were
          realized in 2006 for sales during that period, compared to gross gains
          of
          $29,000 and gross losses of $5,000 for sales in 2004.
  Certain
          investment securities are reported in the financial statements at an amount
          less
          than their historical cost. Total fair value of these investments at
          December 31, 2006 and 2005, were $52,759,000 and $54,933,000, which is
          approximately 81.0 percent and 92.2 percent of the Company’s investment
          portfolio. These declines primarily resulted from recent increases in market
          interest rates.
  Based
          on
          evaluation of available evidence, including recent changes in market interest
          rates, management believes the declines in fair value for these securities
          are
          temporary.
  Should
          the impairment of any of these securities become other than temporary,
          the cost
          basis of the investment will be reduced and the resulting loss recognized
          in net
          income in the period the other-than-temporary impairment is
          identified.
   59
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  The
          following tables show our investments’ gross unrealized losses and fair value,
          aggregated by investment category and length of time that individual securities
          have been in a continuous unrealized loss position at December 31, 2006 and
          December 31, 2005:
  **2006****Less
                    than 12 Months**
                
                **12
                    Months or More**
                
                **Total****Description
                    of**
                  **Securities**
                
                **Fair
                    Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair
                    Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair
                    Value**
                
                **Unrealized**
                  **Losses**U.
                    S. Government agencies
                
                $
                9,839
                
                $
                36
                
                $
                34,522
                
                $
                416
                
                $
                44,361
                
                $
                452State
                    and Municipal
                
                
                7,193
                
                
                70
                
                
                1,205
                
                
                20
                
                
                8,398
                
                
                90Total
                    temporarily impaired securities
                
                $
                17,032
                
                $
                106
                
                $
                35,727
                
                $
                436
                
                $
                52,759
                
                $
                542
 
 **2005****Less
                    than 12 Months**
                
                **12
                    Months or More**
                
                **Total****Description
                    of**
                  **Securities**
                
                **Fair
                    Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair
                    Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair
                    Value**
                
                **Unrealized**
                  **Losses**U.
                    S. Government agencies
                
                $
                38,399
                
                $
                450
                
                $
                14,671
                
                $
                301
                
                $
                53,070
                
                $
                751State
                    and Municipal
                
                
                1,318
                
                
                15
                
                
                545
                
                
                10
                
                
                1,863
                
                
                25Total
                    temporarily impaired securities
                
                $
                39,717
                
                $
                465
                
                $
                15,216
                
                $
                311
                
                $
                54,933
                
                $
                776
 
  **Note
                    4:**
                **Loans
                    and Allowance**
  **2006**
                
                **2005**Residential
                    real estateOne-to-four
                    family residential
                
                $
                104,404
                
                $
                96,766Multi-family
                    residential
                
                
                9,613
                
                
                8,412Construction
                
                
                17,993
                
                
                13,549Nonresidential
                    real estate and land
                
                
                79,920
                
                
                82,054Commercial
                
                
                29,000
                
                
                28,148Consumer
                    and other
                
                
                6,260
                
                
                6,940247,190
                
                
                235,869Unamortized
                    deferred loan costs
                
                
                487
                
                
                488Undisbursed
                    loans in process
                
                
                (3,614
                )
                
                (5,152
                )Allowance
                    for loan losses
                
                
                (2,176
                )
                
                (2,320
                )Total
                    loans
                
                $
                241,887
                
                $
                228,885
   60
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
   **2006**
                
                **2005**
                
                **2004**Allowance
                    for loan lossesBalances,
                    January 1
                
                $
                2,320
                
                $
                2,364
                
                $
                2,056Provision
                    for losses
                
                
                264
                
                
                288
                
                
                338Recoveries
                    on loans
                
                
                36
                
                
                75
                
                
                144Loans
                    charged off
                
                
                (444
                )
                
                (407
                )
                
                (174
                )Balances,
                    December 31
                
                $
                2,176
                
                $
                2,320
                
                $
                2,364
 
  Information
          on impaired loans is summarized below.
  **2006**
                
                **2005**Impaired
                    loans with an allowance
                
                $
                1,044
                
                $
                1,096Impaired
                    loans for which the discounted cash flows or collateral value
                    exceeds the
                    carrying value of the loan
                
                
                2,796
                
                
                2,404$
                3,840
                
                $
                3,500Allowance
                    for impairment loans (included in the Company’s allowance for loan
                    losses)
                
                $
                435
                
                $
                293
 
  **2006**
                
                **2005**
                
                **2004**Average
                    balance of impaired loans
                
                $
                3,634
                
                $
                3,417
                
                $
                2,058Interest
                    income recognized on impaired loans
                
                
                259
                
                
                246
                
                
                139Cash-basis
                    interest included above
                
                
                28
                
                
                243
                
                
                133
 
  At
          December 31, 2006 and 2005, the Company had non-accruing loans totaling
          $1,114,000 and $1,747,000, respectively. At December 31, 2006 and 2005,
          there
          were no accruing loans delinquent 90 days or more.
  **Note
          5:**  **Premises
          and Equipment**
  **2006**
                
                **2005**Land
                
                $
                1,503
                
                $
                1,499Buildings
                
                
                6,507
                
                
                6,484Equipment
                
                
                3,257
                
                
                3,044Construction
                    in progress
                
                
                7
                
                
                —Total
                    cost
                
                
                11,274
                
                
                11,027Accumulated
                    depreciation and amortization
                
                
                (3,461
                )
                
                (2,838
                )Net
                
                $
                7,813
                
                $
                8,189
  61
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  **Note
                    6:**
                **Deposits**
  **2006**
                
                **2005**Demand
                    deposits
                
                $
                94,128
                
                $
                75,854Savings
                    deposits
                
                
                24,109
                
                
                28,438Certificates
                    and other time deposits of $100,000 or more
                
                
                41,542
                
                
                45,757Other
                    certificates and time deposits
                
                
                60,459
                
                
                56,684Total
                    deposits
                
                $
                220,238
                
                $
                206,733
 
 Certificates
                    and other time deposits maturing in2007
                
                $
                81,0502008
                
                
                13,1092009
                
                
                5,1142010
                
                
                1,1442011
                
                
                1,303Thereafter
                
                
                281$
                102,001
 
  **Note
                    7:**
                **Borrowings**
  **2006**
                
                **2005**Repurchase
                    agreements
                
                $
                —
                
                $
                14,565Federal
                    Home Loan Bank advances
                
                
                88,000
                
                
                75,000Subordinated
                    debentures
                
                
                7,217
                
                
                7,217Total
                    borrowings
                
                $
                95,217
                
                $
                96,782
 
  Maturities
          by year for advances at December 31, 2006 are $16,000,000 in 2007, $14,000,000
          in 2008, $10,000,000 in 2009, $12,000,000 in 2010, $11,000,000 in 2011
          and
          $25,000,000 in 2012 and thereafter. The weighted-average interest rate
          at
          December 31, 2006 and 2005 was 4.63% and 4.34%.
  The
          Federal Home Loan Bank advances are secured by loans and investment securities
          totaling $147,917,000 at December 31, 2006. Advances are subject to
          restrictions or penalties in the event of prepayment.
  62
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  On
          March
          13, 2003, the Company formed RIVR Statutory Trust I (Trust). On March 26,
          2003,
          the Trust issued 7,000 Fixed/Floating Rate Capital Securities with a liquidation
          amount of $1,000 per Capital Security in a private placement to an offshore
          entity for an aggregate offering price of $7,000,000, and 217 Common Securities
          with a liquidation amount of $1,000 per Common Security to the Company
          for
          $217,000. The aggregate proceeds of $7,217,000 were used by the Trust to
          purchase $7,217,000 in Fixed/Floating Rate Junior Subordinated Deferrable
          Interest Debentures from the Company. The Debentures and the Common and
          Capital
          Securities have a term of 30 years, bear interest at the annual rate of
          6.4% for
          five years and thereafter bear interest at the rate of the 3-Month LIBOR
          plus
          3.15%. The Company has guaranteed payment of amounts owed by the Trust
          to
          holders of the Capital Securities.
 
  **Note
                    8:**
                **Loan
                    Servicing**
  Loans
          serviced for others are not included in the accompanying consolidated balance
          sheets. The unpaid principal balances of loans serviced for others totaled
          $83,703,000, $88,654,000 and $88,696,000 at December 31, 2006, 2005 and
          2004.
  The
          Company uses comparable market values and a valuation model that calculates
          the
          present value of future cash flows were used to estimate fair value of
          its
          mortgage servicing rights. For purposes of measuring impairment, risk
          characteristics including product type, investor type, and interest rates,
          were
          used to stratify the originated mortgage servicing rights.
  **2006**
                
                **2005**
                
                **2004**Mortgage
                    Servicing RightsBalances,
                    January 1
                
                $
                839
                
                $
                1,047
                
                $
                1,209Servicing
                    rights capitalized
                
                
                59
                
                
                175
                
                
                198Amortization
                    of servicing rights
                
                
                (373
                )
                
                (383
                )
                
                (360
                )525
                
                
                839
                
                
                1,047Valuation
                    allowance
                
                
                —
                
                
                —
                
                
                (187
                )Balances,
                    December 31
                
                $
                525
                
                $
                839
                
                $
                860
 
 Activity
          in the valuation allowance for mortgage servicing rights was as
          follows:
  **2006**
                
                **2005**
                
                **2004**Balance,
                    beginning of year
                
                $
                —
                
                $
                187
                
                $
                355Additions
                
                
                —
                
                
                —
                
                
                —Reduction
                
                
                —
                
                
                (187
                )
                
                (168
                )Balance,
                    end of year
                
                $
                —
                
                $
                —
                
                $
                187
 
  63
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  **Note
                    9:**
                **Income
                    Tax**
  **2006**
                  
                  **2005**
                  
                  **2004**Income
                      tax expense (benefit)Currently
                      payableFederal
                  
                  $
                  904
                  
                  $
                  933
                  
                  $
                  1,159State
                  
                  
                  99
                  
                  
                  217
                  
                  
                  257DeferredFederal
                  
                  
                  (136
                  )
                  
                  16
                  
                  
                  7State
                  
                  
                  (26
                  )
                  
                  9
                  
                  
                  (4
                  )Total
                      income tax expense
                  
                  $
                  841
                  
                  $
                  1,175
                  
                  $
                  1,419Reconciliation
                      of federal statutory to actual tax expense (benefit)Federal
                      statutory income tax at 34%
                  
                  $
                  947
                  
                  $
                  1,109
                  
                  $
                  1,280Effect
                      of state income taxes
                  
                  
                  48
                  
                  
                  149
                  
                  
                  167Tax
                      exempt interest
                  
                  
                  (91
                  )
                  
                  (17
                  )
                  
                  (5
                  )Qualified
                      Zone Academy credit
                  
                  
                  (52
                  )
                  
                  (57
                  )
                  
                  (62
                  )Cash
                      value of life insurance
                  
                  
                  (68
                  )
                  
                  (69
                  )
                  
                  (71
                  )ESOP
                      expense in excess of cost
                  
                  
                  
                  
                  
                  69
                  
                  
                  100Other
                  
                  
                  57
                  
                  
                  (9
                  )
                  
                  10Actual
                      tax expense
                  
                  $
                  841
                  
                  $
                  1,175
                  
                  $
                  1,419Effective
                      tax rate
                  
                  
                  30.2
                  %
                  
                  36.0
                  %
                  
                  37.7
                  %
 
  64
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  A
          cumulative net deferred tax asset (liability) is included in the balance
          sheets.
          The components of the asset (liability) are as follows:
  **2006**
                
                **2005****Assets**Allowance
                    for loan losses
                
                $
                875
                
                $
                898Deferred
                    compensation
                
                
                302
                
                
                256Pensions
                    and employee benefits
                
                
                26
                
                
                —Purchase
                    accounting adjustments
                
                
                52
                
                
                56Securities
                    available for sale
                
                
                178
                
                
                307Investment
                    valuation allowance
                
                
                103
                
                
                103Other
                
                
                5
                
                
                35Total
                    assets
                
                
                1,541
                
                
                1,655**Liabilities**Depreciation
                    and amortization
                
                
                (467
                )
                
                (427
                )Loan
                    fees
                
                
                (191
                )
                
                (189
                )Pensions
                    and employee benefits
                
                
                —
                
                
                (33
                )Mortgage
                    servicing rights
                
                
                (206
                )
                
                (325
                )Federal
                    Home Loan Bank stock dividends
                
                
                (102
                )
                
                (102
                )Prepaid
                    expenses
                
                
                (105
                )
                
                (129
                )Other
                
                
                (24
                )
                
                (37
                )Total
                    liabilities
                
                
                (1,095
                )
                
                (1,242
                )$
                446
                
                $
                413
 
  Retained
          earnings include approximately $2,100,000 for which no deferred income
          tax
          liability has been recognized. This amount represents an allocation of
          income to
          bad debt deductions as of December 31, 1987 for tax purposes only.
          Reduction of amounts so allocated for purposes other than tax bad debt
          losses or
          adjustments arising from carryback of net operating losses would create
          income
          for tax purposes only, which income would be subject to the then-current
          corporate income tax rate. The unrecorded deferred income tax liability
          on the
          above amount was approximately $714,000.
   65
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  **Note
                    10:**
                **Commitments
                    and Contingent Liabilities**
  In
          the
          normal course of business there are outstanding commitments and contingent
          liabilities, such as commitments to extend credit and standby letters of
          credit,
          which are not included in the accompanying financial statements. The Bank’s
          exposure to credit loss in the event of nonperformance by the other party
          to the
          financial instruments for commitments to extend credit and standby letters
          of
          credit is represented by the contractual or notional amount of those
          instruments. The Bank uses the same credit policies in making such commitments
          as it does for instruments that are included in the consolidated balance
          sheets.
  Financial
          instruments whose contract amount represents credit risk as of December
          31 were
          as follows:
  **2006**
                
                **2005**Commitments
                    to extend credit
                
                $
                28,214
                
                $
                25,205Standby
                    letters of credit
                
                
                740
                
                
                497
 
  Commitments
          to extend credit are agreements to lend to a customer as long as there
          is no
          violation of any condition established in the contract. Commitments generally
          have fixed expiration dates or other termination clauses and may require
          payment
          of a fee. Since many of the commitments are expected to expire without
          being
          drawn upon, the total commitment amounts do not necessarily represent future
          cash requirements. The Bank evaluates each customer's credit worthiness
          on a
          case-by-case basis. The amount of collateral obtained, if deemed necessary
          by
          the Bank upon extension of credit, is based on management's credit evaluation.
          Collateral held varies but may include accounts receivable, inventory,
          property
          and equipment, and income-producing commercial properties.
  Standby
          letters of credit are conditional commitments issued by the Bank to guarantee
          the performance of a customer to a third party.
  The
          Company and subsidiaries lease operating facilities under lease arrangements
          expiring 2010 through 2029. Rental expense included in the consolidated
          statements of income for the years ended December 31, 2006 and 2005 was
          $115,000
          and $114,000.
  
   66
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  Future
          minimum lease payments under the leases are:
  2007
                
                $
                1152008
                
                
                1172009
                
                
                1222010
                
                
                912011
                
                
                88Thereafter
                
                
                1,746Total
                    minimum lease payments
                
                $
                2,279
 
  The
          Company and Bank are also subject to claims and lawsuits which arise primarily
          in the ordinary course of business. It is the opinion of management that
          the
          disposition or ultimate resolution of such claims and lawsuits will not
          have a
          material adverse effect on the consolidated financial position of the
          Company.
  
  **Note
                    11:**
                **Dividend
                    and Capital Restrictions**
  Without
          prior approval, current regulations allow the Bank to pay dividends to
          the
          Company not exceeding net profits (as defined) for the current year plus
          those
          for the previous two years. The Bank normally restricts dividends to a
          lesser
          amount because of the need to maintain an adequate capital structure. At
          December 31, 2006, the stockholder’s equity of the Bank was $29,161,000, of
          which approximately $28,343,000 was restricted from dividend distribution
          to the
          Company.
  
  **Note
                    12:**
                **Regulatory
                    Capital**
  The
          Bank
          is subject to various regulatory capital requirements administered by the
          federal banking agencies and is assigned to a capital category. The assigned
          capital category is largely determined by three ratios that are calculated
          according to the regulations: total risk adjusted capital, Tier 1 capital,
          and
          Tier 1 leverage ratios. The ratios are intended to measure capital relative
          to
          assets and credit risk associated with those assets and off-balance sheet
          exposures of the entity. The capital category assigned to an entity can
          also be
          affected by qualitative judgments made by regulatory agencies about the
          risk
          inherent in the entity’s activities that are not part of the calculated
          ratios.
   67
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  There
          are
          five capital categories defined in the regulations, ranging from well
          capitalized to critically undercapitalized. Classification of a bank in
          any of
          the undercapitalized categories can result in actions by regulators that
          could
          have a material effect on a bank’s operations. At December 31, 2006 and 2005,
          the Bank is categorized as well capitalized and met all subject capital
          adequacy
          requirements. There are no conditions or events since December 31, 2006
          that
          management believes have changed the Bank’s classification.
  **Actual**
                
                **Required
                    for Adequate Capital**
                
                **To
                    Be Well**
                  **Capitalized****Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio****2006**Total
                    risk-based capital (to risk-weighted assets)
                
                $
                30,472
                
                
                12.92
                %
                $
                18,868
                
                
                8.00
                %
                $
                23,585
                
                
                10.00
                %Tier
                    1 capital (to risk-weighted assets)
                
                
                28,798
                
                
                12.21
                %
                
                9,434
                
                
                4.00
                %
                
                14,151
                
                
                6.00
                %Core
                    capital (to adjusted total assets)
                
                
                28,798
                
                
                8.47
                %
                
                13,599
                
                
                4.00
                %
                
                16,999
                
                
                5.00
                %Core
                    capital (to adjusted tangible assets)
                
                
                28,798
                
                
                8.47
                %
                
                6,800
                
                
                2.00
                %
                
                
                
                
                N/ATangible
                    capital (to adjusted total assets)
                
                
                28,798
                
                
                8.47
                %
                
                5,100
                
                
                1.50
                %
                
                
                
                
                N/A**2005**Total
                    risk-based capital (to risk-weighted assets)
                
                $
                29,967
                
                
                13.1
                %
                $
                18,303
                
                
                8.0
                %
                $
                22,878
                
                
                10.0
                %Tier
                    1 capital (to risk-weighted assets)
                
                
                27,993
                
                
                12.2
                %
                
                9,151
                
                
                4.0
                %
                
                13,727
                
                
                6.0
                %Core
                    capital (to adjusted total assets)
                
                
                27,993
                
                
                8.5
                %
                
                13,114
                
                
                4.0
                %
                
                16,383
                
                
                5.0
                %Core
                    capital (to adjusted tangible assets)
                
                
                27,993
                
                
                8.5
                %
                
                6,557
                
                
                2.0
                %
                
                —
                
                
                N/ATangible
                    capital (to adjusted total assets)
                
                
                27,993
                
                
                8.5
                %
                
                4,918
                
                
                1.5
                %
                
                —
                
                
                N/A
 
  **Note
                    13:**
                **Employee
                    Benefits**
  The
          Bank
          provides pension benefits for substantially all of the Bank’s employees who were
          employed by the Bank prior to September 1, 2005, through its participation
          in a
          pension fund known as the Pentegra Group. This plan is a multi-employer
          plan;
          separate actuarial valuations are not made with respect to each participating
          employer. Pension expense related to this plan was $234,000, $191,000 and
          $45,000 for the years ended December 31, 2006, 2005 and 2004.
   68
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  The
          Bank
          has a retirement savings 401(k) plan in which substantially all employees
          may
          participate. For employees hired prior to September 1, 2005, the Bank matches
          employees’ contributions at the rate of 50 percent for the first 6 percent
          of W-2 earnings contributed by participants. For employees hired on or
          after
          September 1, 2005, the Bank matches employees’ contributions at the rate of 100
          percent for the first 6 percent of W-2 earnings contributed by participants.
          The
          Bank’s expense for the plan was $59,000, $51,000 and $45,000 for the years ended
          December 31, 2006, 2005 and 2004.
  The
          Bank
          has a supplemental retirement plan which provides retirement benefits to
          all
          directors. The Bank’s obligations under the plan have been funded by the
          purchase of key man life insurance policies, of which the Bank is the
          beneficiary. Expense recognized under the supplemental retirement plan
          totaled
          approximately $75,000, $80,000 and $64,000 for the years ended December 31,
          2006, 2005 and 2004.
  The
          Company has an ESOP covering substantially all employees of the Company
          and
          Bank. The ESOP acquired 190,440 shares of the Company’s common stock at $10 per
          share with funds provided by a loan from the Company. The loan was paid
          off on
          December 31, 2005. There were no unearned ESOP shares at December 31, 2006
          and December 31, 2005. At December 31, 2004, there were 13,102 unearnd
          ESOP
          shares that had a fair value of $295,000. Shares are released to participants
          proportionately. Dividends on allocated shares are recorded as dividends
          and
          charged to retained earnings. Dividends on unallocated shares, which may
          be
          distributed to participants or used to repay the loan, were treated as
          compensation expense.
  All
          contributions to the ESOP are determined annually by the Board of Directors
          of
          the Company and Bank. During 2006, compensation was recorded based on the
          annual
          contributions to the ESOP. Prior to 2006, compensation expense was recorded
          equal to the fair market value of the stock when contributions were made
          to the
          ESOP. ESOP expense for the years ended December 31, 2006, 2005 and 2004 was
          $200,000, $269,000 and $373,000. At December 31, 2006, the ESOP had 143,969
          allocated shares, no suspense shares and no committed-to-be released shares.
          At
          December 31, 2005, the ESOP had 147,733 allocated shares, no suspense shares
          and
          no committed-to-be released shares. At December 31, 2004, the ESOP had
          177,338 allocated shares, 13,102 suspense shares and no committed-to-be
          released
          shares.
  The
          Company also has a Recognition and Retention Plan (RRP) which provides
          for the
          award and issuance of up to 95,220 shares of the Company’s stock to members of
          the Board of Directors and management. The RRP has purchased 75,390 shares
          of
          the Company’s common stock in the open market. At December 31, 2006, 74,990
          shares had been awarded. Common stock awarded under the RRP vests ratably
          over a
          five-year period, commencing with the date of the award. Expense recognized
          under the RRP plan totaled approximately $33,000, $32,000 and $50,000 for
          the
          years ended December 31, 2006, 2005 and 2004.
   69
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  Unvested
          RRP shares at December 31, 2006:
  **Number**
                  **of
                    Shares**
                
                **Grant
                    Date**
                  **Fair
                    Value**Beginning
                    of year
                
                $
                6,560
                
                $
                21.11Granted
                
                
                —Exercised
                
                
                (1,710
                )
                
                19.31Forfeited
                    or expired
                
                
                (500
                )
                
                20.16End
                    of year
                
                $
                4,350
                
                $
                21.94
 
  Unearned
          compensation at December 31, 2006 related to RRP shares is $95,000 and
          will be
          recognized over a weighted average period of 3.3 years.
  
  **Note
                    14:**
                **Related
                    Party Transactions**
  The
          Bank
          has entered into transactions with certain directors, executive officers,
          significant stockholders and their affiliates or associates (related parties).
          Such transactions were made in the ordinary course of business on substantially
          the same terms and conditions, including interest rates and collateral,
          as those
          prevailing at the same time for comparable transactions with other customers,
          and did not, in the opinion of management, involve more than normal credit
          risk
          or present other unfavorable features.
  The
          aggregate amount of loans, as defined, to such related parties were as
          follows:
  Balances,
                    January 1, 2006
                
                $
                1,305Change
                    in composition
                
                
                —New
                    loans, including renewals
                
                
                125Payments,
                    etc., including renewals
                
                
                507Balances,
                    December 31, 2006
                
                $
                923
 
  Deposits
          from related parties held by the Bank at December 31, 2006 and 2005 totaled
          $1,580,000 and $1,190,000.
   70
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  **Note
                    15:**
                **Stock
                    Option Plan**
  The
          Company’s Incentive Stock Option Plan (the Plan), which is shareholder approved,
          permits the grant of stock options to its directors, officers and other
          key
          employees. The Plan authorized the grant of options for up to 238,050 shares
          of
          the Company’s common stock, which generally vest at a rate of 20 percent a year
          and have a 10-year contractual term. The Company believes that such awards
          better align the interests of its directors and employees with those of
          its
          shareholders. Option awards are generally granted with an exercise price
          equal
          to the market price of the Company’s stock at the date of grant. Certain option
          awards provide for accelerated vesting if there is a change in control
          (as
          defined in the Plans). The Company generally issues shares from its authorized
          shares to satisfy option exercises.
  The
          fair
          value of each option award is estimated on the date of grant using a binomial
          option valuation model that uses the assumptions noted in the following
          table.
          Expected volatility is based on historical volatility of the Company’s stock and
          other factors. The Company uses historical data to estimate option exercise
          and
          employee termination within the valuation model. The expected term of options
          granted is derived from the output of the option valuation model and represents
          the period of time that options granted are expected to be outstanding.
          The
          risk-free rate for periods within the contractual life of the option is
          based on
          the U.S. Treasury yield curve in effect at the time of grant.
  **2004**Expected
                    volatility
                
                
                12.40
                %Expected
                    dividends
                
                
                2.91
                %Expected
                    term (in years)
                
                
                7Risk-free
                    rate
                
                
                2.40
                %
 
   71
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  A
          summary
          of option activity under the Plan as of December 31, 2006 and 2005, and
          changes
          during the years then ended, is presented below:
  **2006****Shares**
                
                **Weighted-Average
                    Exercise Price**
                
                **Weighted-Average
                    Remaining Contractual Term**
                
                **Aggregate
                    Intrinsic Value**Outstanding,
                    beginning of year
                
                
                98,200
                
                $
                8.29Granted
                
                
                —Exercised
                
                
                (36,336
                )
                
                7.33Forfeited
                    or expired
                
                
                —Outstanding,
                    end of year
                
                
                61,864
                
                $
                8.85
                
                
                3.5
                
                $
                592,000Exercisable,
                    end of year
                
                
                57,664
                
                $
                8.04
                
                
                3.3
                
                $
                586,000
 
  The
          weighted-average grant-date fair value of options granted during 2004 was
          $2.13.
          The total intrinsic value of options exercised during the years ended December
          31, 2006, 2005 and 2004, was $405,000, $157,000 and $287,000,
          respectively.
  As
          of
          December 31, 2006, there was $2,000 of total unrecognized compensation
          cost
          related to nonvested share-based compensation arrangements granted under
          the
          Plan. That cost is expected to be recognized over a weighted-average period
          of
          2.0 years.
  During
          2006, the Company recognized $2,000 of share-based compensation expense
          with no
          tax benefit related to the share based compensation expense.
   72
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
   **Note
                    16:**
                **Earnings
                    Per Share**
  **2006**
                
                **2005**
                
                **2004****Income**
                
                **Weighted-
                    Average**
                  **Shares**
                
                **Per**
                  **Share**
                  **Amount**
                
                **Income**
                
                **Weighted-**
                  **Average**
                  **Shares**
                
                **Per**
                  **Share
                    Amount**
                
                **Income**
                
                **Weighted-**
                  **Average**
                  **Shares**
                
                **Per
                    Share Amount****Basic
                    Earnings Per Share**Income
                    available to common stockholders
                
                $
                1,945
                
                
                1,607,319
                
                $
                1.21
                
                $
                2,086
                
                
                1,579,762
                
                $
                1.32
                
                $
                2,347
                
                
                1,586,889
                
                $
                1.48**Effect
                    of Dilutive Stock Options**
                
                
                
                
                
                38,857
                
                
                
                
                
                
                
                
                59,778
                
                
                
                
                
                
                
                
                70,015**Diluted
                    Earnings Per Share**Income
                    available to common stockholders and assumed conversions
                
                $
                1,945
                
                
                1,646,176
                
                $
                1.18
                
                $
                2,086
                
                
                1,639,540
                
                $
                1.27
                
                $
                2,347
                
                
                1,656,904
                
                $
                1.42
 
  **Note
                    17:**
                **Fair
                    Values of Financial
                    Instruments**
  The
          following methods and assumptions were used to estimate the fair value
          of each
          class of financial instrument:
  **Cash
          and Cash Equivalents** - The
          fair value of cash and cash equivalents approximates carrying
          value.
  **Investment
          Securities** -
          Fair
          values are based on quoted market prices.
  **Loans
          Held for Sale** - Fair
          values are based on quoted market prices.
  **Loans** - The
          fair value for loans is estimated using discounted cash flow analyses,
          using
          interest rates currently being offered for loans with similar terms to
          borrowers
          of similar credit quality.
  **Interest
          Receivable/Payable** - The
          fair values of interest receivable/payable approximate carrying
          values.
  **FHLB
          Stock** - Fair
          value of FHLB stock is based on the price at which it may be resold to
          the
          FHLB.
  **Deposits** - The
          fair values of noninterest-bearing, interest-bearing demand and savings
          accounts
          are equal to the amount payable on demand at the balance sheet date. The
          carrying amounts for variable rate, fixed-term certificates of deposit
          approximate their fair values at the balance sheet date. Fair values for
          fixed-rate certificates of deposit are estimated using a discounted cash
          flow
          calculation that applies interest rates currently being offered on certificates
          to a schedule of aggregated expected monthly maturities on such time
          deposits.
  **Short-Term
          Borrowings** - The
          fair value of short-term borrowings approximates carrying value.
   73
 **River
            Valley Bancorp**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2006, 2005 and 2004**
 (Table
            Dollar Amounts in Thousands
 Except
            Per Share Amounts)
  **Federal
          Home Loan Bank Advances** - The
          fair value of these borrowings are estimated using a discounted cash flow
          calculation, based on current rates for similar debt.
  **Other
          Borrowings** - The
          fair value of these borrowings are estimated using a discounted cash flow
          calculation, based on current rates for similar debt.
  **Advance
          Payment by Borrowers for Taxes and Insurance** - The
          fair value approximates carrying value.
  **Off-Balance
          Sheet Commitments** -
          Commitments include commitments to originate mortgage and consumer loans
          and
          standby letters of credit and are generally of a short-term nature. The
          fair
          value of such commitments are based on fees currently charged to enter
          into
          similar agreements, taking into account the remaining terms of the agreements
          and the counterparties’ credit standing. The carrying amounts of these
          commitments, which are immaterial, are reasonable estimates of the fair
          value of
          these financial instruments.
  The
          estimated fair values of the Company’s financial instruments are as
          follows:
  **2006**
                
                **2005****Carrying****Amount**
                
                **Fair**
                  **Value**
                
                **Carrying**
                  **Amount**
                
                **Fair**
                  **Value****Assets**Cash
                    and cash equivalents
                
                $
                11,808
                
                $
                11,808
                
                $
                17,730
                
                $
                17,730Investment
                    securities available for sale
                
                
                65,150
                
                
                65,150
                
                
                59,609
                
                
                59,609Loans
                    including loans held for sale, net
                
                
                241,887
                
                
                242,697
                
                
                228,885
                
                
                228,636Interest
                    receivable
                
                
                2,334
                
                
                2,334
                
                
                2,059
                
                
                2,059Stock
                    in FHLB
                
                
                4,400
                
                
                4,400
                
                
                4,050
                
                
                4,050**Liabilities**Deposits
                
                
                220,238
                
                
                219,850
                
                
                206,733
                
                
                205,906Short-term
                    borrowings
                
                
                —
                
                
                —
                
                
                14,565
                
                
                14,565FHLB
                    advances
                
                
                88,000
                
                
                88,303
                
                
                75,000
                
                
                73,738Other
                    borrowings
                
                
                7,217
                
                
                7,141
                
                
                7,217
                
                
                7,153Interest
                    payable
                
                
                705
                
                
                705
                
                
                554
                
                
                554Advance
                    payments by borrowers for taxes and insurance
                
                
                85
                
                
                85
                
                
                72
                
                
                72**Off-Balance
                    Sheet Assets (Liabilities)**Commitments
                    to extend credit
                
                
                —
                
                
                —
                
                
                —
                
                
                —Standby
                    letters of credit
                
                
                —
                
                
                —
                
                
                —
                
                
                —
  74
 **River
            Valley Bancorp**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2006, 2005 and 2004**
 (Table
            Dollar Amounts in Thousands
 Except
            Per Share Amounts)
  **Note
                    18:**
                **Condensed
                    Financial Information (Parent Company
                    Only)**
  Presented
          below is condensed financial information as to financial position, results
          of
          operations and cash flows of the Company:
  **Condense****d
                    Balance Sheets****2006**
                
                **2005****Assets**Cash
                    and due from banks
                
                $
                2,255
                
                $
                1,345Investment
                    in common stock of the Bank
                
                
                29,161
                
                
                28,596Investment
                    in RVB Trust I
                
                
                217
                
                
                217Other
                    assets
                
                
                555
                
                
                589Total
                    assets
                
                $
                32,188
                
                $
                30,747**Liabilities**Borrowings
                
                $
                7,217
                
                $
                7,217Dividends
                    payable
                
                
                324
                
                
                311Other
                    liabilities
                
                
                500
                
                
                201Total
                    liabilities
                
                
                8,041
                
                
                7,729**Stockholders'
                    Equity**
                
                
                24,147
                
                
                23,018Total
                    liabilities and stockholders' equity
                
                $
                32,188
                
                $
                30,747
  **Condensed
                    State****ments
                    of Income****2006**
                
                **2005**
                
                **2004****Income**Dividends
                    from the Bank
                
                $
                2,000
                
                $
                2,000
                
                $
                500Other
                    income
                
                
                7
                
                
                19
                
                
                32Total
                    income
                
                
                2,007
                
                
                2,019
                
                
                532**Expenses**Interest
                    expense
                
                
                462
                
                
                462
                
                
                462Other
                    expenses
                
                
                273
                
                
                166
                
                
                148Total
                    expenses
                
                
                735
                
                
                628
                
                
                610**Income
                    (loss) before income tax and equity in undistributed income of
                    subsidiary**
                
                
                1,272
                
                
                1,391
                
                
                (78
                )Income
                    tax benefit
                
                
                281
                
                
                269
                
                
                229**Income
                    before equity in undistributed income of
                    subsidiary**
                
                
                1,553
                
                
                1,660
                
                
                151Equity
                    in undistributed income of the Bank
                
                
                392
                
                
                426
                
                
                2,196**Net
                    Income**
                
                $
                1,945
                
                $
                2,086
                
                $
                2,347
  75
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  **Conde****nsed
                    Statements of Cash Flows****2006**
                
                **2005**
                
                **2004****Operating
                    Activities**Net
                    income
                
                $
                1,945
                
                $
                2,086
                
                $
                2,347Items
                    not requiring (providing) cash
                
                
                (57
                )
                
                117
                
                
                (1,991
                )Net
                    cash provided by operating activities
                
                
                1,888
                
                
                2,203
                
                
                356**Financing
                    Activities**Purchase
                    of stock
                
                
                (46
                )
                
                (248
                )
                
                (1,895
                )Proceeds
                    from exercise of stock options
                
                
                266
                
                
                72
                
                
                118Proceeds
                    from borrowings
                
                
                0
                
                
                —
                
                
                —Tax
                    benefit on stock options exercised
                
                
                51
                
                
                —
                
                
                —Cash
                    dividends
                
                
                (1,249
                )
                
                (1,211
                )
                
                (1,110
                )Net
                    cash used in financing activities
                
                
                (978
                )
                
                (1,387
                )
                
                (2,887
                )**Net
                    Change in Cash and Cash Equivalents**
                
                
                910
                
                
                816
                
                
                (2,531
                )**Cash
                    and Cash Equivalents at Beginning of Year**
                
                
                1,345
                
                
                529
                
                
                3,060**Cash
                    and Cash Equivalents at End of Year**
                
                $
                2,255
                
                $
                1,345
                
                $
                529
 
  **Note
                    19:**
                **Quarterly
                    Results of Operations
                    (Unaudited)**
  **Q****uarter**
                  **Ending**
                
                **Interest**
                  **Income**
                
                **Interest**
                  **Expense**
                
                **Net
                    Interest**
                  **Income**
                
                **Provision**
                  **For**
                  **Loan
                    Losses**
                
                **Net**
                  **Income**
                
                **Basic**
                  **Earnings**
                  **Per**
                  **Share**
                
                **Diluted**
                  **Earnings**
                  **Per**
                  **Share**2006March
                
                $
                4,444
                
                $
                2,498
                
                $
                1,946
                
                $
                84
                
                $
                403
                
                $
                0.25
                
                $
                0.25June
                
                
                4,750
                
                
                2,724
                
                
                2,026
                
                
                84
                
                
                503
                
                
                0.31
                
                
                0.31September
                
                
                4,707
                
                
                2,834
                
                
                1,873
                
                
                48
                
                
                473
                
                
                0.29
                
                
                0.29December
                
                
                5,009
                
                
                2,997
                
                
                2,012
                
                
                48
                
                
                566
                
                
                0.35
                
                
                0.34$
                18,910
                
                $
                11,053
                
                $
                7,857
                
                $
                264
                
                $
                1,945
                
                $
                1.21
                
                $
                1.182005March
                
                $
                3,785
                
                $
                1,793
                
                $
                1,992
                
                $
                72
                
                $
                515
                
                $
                0.33
                
                $
                0.31June
                
                
                4,002
                
                
                1,927
                
                
                2,075
                
                
                72
                
                
                630
                
                
                0.40
                
                
                0.38September
                
                
                4,116
                
                
                2,086
                
                
                2,030
                
                
                72
                
                
                576
                
                
                0.36
                
                
                0.35December
                
                
                4,395
                
                
                2,349
                
                
                2,046
                
                
                72
                
                
                365
                
                
                0.23
                
                
                0.23$
                16,298
                
                $
                8,155
                
                $
                8,143
                
                $
                288
                
                $
                2,086
                
                
                1.32
                
                
                1.27
  76
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
 
  **Note
                    20:**
                **Future
                    Accounting Pronouncements**
  In
          March
          2006, the Financial Accounting Standards Board (FASB) issued Statement
          No. 156, *Accounting
          for Servicing of Financial Assets* −an
          amendment of FASB Statement No. 140. This Statement provides the following:
          1)
          revised guidance on when a servicing asset and servicing liability should
          be
          recognized; 2) requires all separately recognized servicing assets and
          servicing
          liabilities to be initially measured at fair value, if practicable; 3)
          permits
          an entity to elect to measure servicing assets and servicing liabilities
          at fair
          value each reporting date and report changes in fair value in earnings
          in the
          period in which the changes occur; 4) upon initial adoption, permits a
          onetime
          reclassification of available−for−sale securities to trading securities for
          securities which are identified as offsetting the entity's exposure to
          changes
          in the fair value of servicing assets or liabilities that a servicer elects
          to
          subsequently measure at fair value; and 5) requires separate presentation
          of
          servicing assets and servicing liabilities subsequently measured at fair
          value
          in the statement of financial position and additional footnote disclosures.
          This
          standard is effective as of the beginning of an entity's first fiscal year
          that
          begins after September 15, 2006 with the effects of initial adoption being
          reported as a cumulative−effect adjustment to retained earnings. Management does
          not intend to carry servicing rights at fair value and therefore does not
          expect
          the adoption of this statement to have a material impact on its consolidated
          financial position or results of operations.
  In
          September 2006, the FASB issued Statement No. 157, *Fair
          Value Measurements* .
          This
          Statement defines fair value, establishes a framework for measuring fair
          value
          and expands disclosures about fair value measurements. This Statement
          establishes a fair value hierarchy about the assumptions used to measure
          fair
          value and clarifies assumptions about risk and the effect of a restriction
          on
          the sale or use of an asset. The standard is effective for fiscal years
          beginning after November 15, 2007. The Company has not completed its evaluation
          of the impact of the adoption of this standard.
  In
          July
          2006, the FASB issued FASB Interpretation No. 48, *Accounting
          for Uncertainty in Income Taxes* −
an
          interpretation of FASB Statement No. 109 (FIN 48), which prescribes a
          recognition threshold and measurement attribute for the financial statement
          recognition and measurement of a tax position taken or expected to be taken
          in a
          tax return. FIN 48 also provides guidance on derecognition, classification,
          interest and penalties, accounting in interim periods, disclosure and
          transition. FIN 48 is effective for fiscal years beginning after December
          15,
          2006. The
          Company does not expect the adoption of FIN 48 to have a material impact
          on its
          consolidated financial position or results of operations.
  
   77
  **River
          Valley Bancorp**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 (Table
          Dollar Amounts in Thousands
 Except
          Per Share Amounts)
   In
          September 2006, the FASB Emerging Issues Task Force finalized Issue No.
          06−5, *Accounting
          for Purchases of Life Insurance* −
          Determining the Amount That Could Be Realized in Accordance with FASB Technical
          Bulletin No. 85−4 (Accounting for Purchases of Life Insurance). This issue
          requires that a policyholder consider contractual terms of a life insurance
          policy in determining the amount that could be realized under the insurance
          contract. It also requires that if the contract provides for a greater
          surrender
          value if all individual policies in a group are surrendered at the same
          time,
          that the surrender value be determined based on the assumption that policies
          will be surrendered on an individual basis. Lastly, the issue discusses
          whether
          the cash surrender value should be discounted when the policyholder is
          contractually limited in its ability to surrender a policy. This issue
          is
          effective for fiscal years beginning after December 15, 2006. The Company
          does
          not expect this issue to have a material impact on its consolidated financial
          position or results of operations.
  On
          February 15, 2007, the FASB issued its Statement No. 159, *The
          Fair Value Option for Financial Assets and Financial Liabilities—Including an
          Amendment of FASB Statement No. 115* .
          FAS 159
          permits entities to elect to report most financial assets and liabilities
          at
          their fair value with changes in fair value included in net income. The
          fair
          value option may be applied on an instrument-by-instrument or instrument
          class-by-class basis. The option is not available for deposits withdrawable
          on
          demand, pension plan assets and obligations, leases, instruments classified
          as
          stockholders’ equity, investments in consolidated subsidiaries and variable
          interest entities and certain insurance policies. The new standard is effective
          at the beginning of the Company’s fiscal year beginning January 1, 2008, and
          early application may be elected in certain circumstances. The Company
          expects
          to first apply the new standard at the beginning of its 2008 fiscal year.
          The
          Company is currently evaluating and has not yet determined the impact the
          new
          standard is expected to have on its financial position, results of operations
          or
          cash flows.
 
  
  78


**I** **TEM
        9.****CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE.**
  There
        are
        no such changes and disagreements to report during the applicable
        period.
   **ITE** **M****9A.****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 the
                  Securities Exchange Act of 1934, as amended (the “**Exchange
                  Act**”)),
                  as of the end of the most recent fiscal quarter covered by this
                  annual
                  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 that it files
                  or
                  submits under the Exchange Act is recorded, processed, summarized
                  and
                  reported within the time period 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
                  disclosure.
  (b)
              *Changes
                  in internal controls 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.
   **ITEM** **9B.****OTHER
        INFORMATION.**
  There
        is
        no information that was required to be disclosed on a Form 8-K during the
        fourth
        quarter but was not reported.
   **PART
        III**
  **ITEM** **10.****DIRECTORS,
        EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**
  The
        information required by this item with respect to directors is incorporated
        by
        reference to the sections of the Holding Company’s Proxy Statement for its
        Annual Shareholder Meeting to be held on April 18, 2007 (the “ **2007
        Proxy Statement** ”)
        with
        the caption “Proposal I - Election of Directors.” Information concerning the
        Registrant’s executive officers is included in Item 4.5 in Part I of this
        report. Information with respect to corporate governance is incorporated
        by
        reference to the section of the 2007 Proxy Statement with the caption “Corporate
        Governance.” Information regarding compliance with Section 16(a) of the Exchange
        Act is incorporated by reference to the section of the 2007 Proxy Statement
        captioned “Section 16(a) Beneficial Ownership Reporting
        Compliance.”
  The
        Company has adopted a code of ethics that applies, among other persons, to
        its
        principal executive officer, principal financial officer, principal accounting
        officer or controller, or persons performing similar functions. A copy of
        that
        Code of Ethics was filed as an exhibit to the Company’s Form 10-KSB filed for
        the year ended December 31, 2003, and a link to that filing is posted at
        our website at http://www.rvfbank.com under “About Our Stock.” In addition, the
        Company will provide a copy, without charge, upon a request directed to Matthew
        P. Forrester, 430 Clifty Drive, P.O. Box 1590, Madison, Indiana 47250, (812)
        273-4944 (fax).
  79
  **ITEM** **11.EXECUTIVE
        COMPENSATION.**
  The
        information required by this item with respect to executive compensation
        is
        incorporated by reference to the sections of the 2007 Proxy Statement with
        the
        captions “Proposal I - Election of Directors,” “Corporate Governance,”
“Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation
        of Directors for 2006” and “Compensation. Committe Report.”
   **ITEM** **1****2.****SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
        MATTERS.**
  The
        information required by this item is incorporated by reference to the sections
        of the 2007 Proxy Statement with the captions “Principal Holders of Common
        Stock” and “Proposal I - Election of Directors.”
  The
        following table sets forth certain information pertaining to the Bank’s equity
        compensation plans:
  **Equity
        Compensation Plan Information**
  **Plan
                  Category**
              
              **Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights**
                **(a)**
              
              **Weighted-average
                  exercise price of outstanding options, warrants and
                  rights**
                **(b)**
              
              **Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in
                  column(a))**
                **(c)**Equity
                  compensation plans approved by security holders
              
              
              61,864(1
              )
              $
              8.85
                  (1
              )
              
              40,508Equity
                  compensation plans not approved by security holders
              
              
              (2
              )
              
              (2
              )Total
              
              
              
              
              $
              (3
              )
 
 (1)
                  River Valley Bancorp Stock Option Plan.(2)
                  River Valley Bancorp Recognition and Retention Plan and Trust
                  (“**RRP**”).
                  Column (a) includes 4,350 shares granted to management but not
                  yet vested.
                  In addition, 70,640 shares granted to management have fully vested,
                  and
                  shares have been issued to management in connection
                  therewith.(3)
                  The total in Column (b) includes only the weighted-average price
                  of stock
                  options, as the restricted shares awarded under the RRP plan have
                  no
                  exercise price.
   **ITE** **M
        1****3.****CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE.**
  The
        information required by this item is incorporated by reference to the sections
        of the 2007 Proxy Statement with the captions “Corporate Governance” and
“Transactions with Certain Related Persons.”
   **ITEM
        1** **4.**  **PRINCIPAL
        ACCOUNTING FEES AND SERVICES** **.**
  The
        information required by this item with respect to principal accounting fees
        and
        services is incorporated by reference to the sections of the 2007 Proxy
        Statement with the captions “Accountants,” and “Accountant’s
        Fees.”
  80
  **PART
        IV**
  **ITE** **M
        1****5.****EXHIBITS,
        FINANCIAL STATEMENT SCHEDULES.**
  The
        following documents are filed as part of this report:
 **1.****Financial
                  Statements**:See
                  “Contents” of Consolidated Financial Statements in Item 8 of this Annual
                  Report on Form 10-K, which is incorporated herein by this
                  reference.**2.****Financial
                  Statement Schedules:**
                All
                  schedules are omitted as the required information either is not
                  applicable
                  or is included in the Consolidated Financial Statements or related
                  Notes
                  contained in Item 8.**3.****Exhibits:**The
                  exhibits listed in the Exhibit Index are filed with or incorporated
                  herein
                  by reference.**Copies
                  of any Exhibits are available from the Company upon request by
                  contacting
                  Matthew P. Forrester, 430 Clifty Drive, P.O. Box 1590, Madison,
                  Indiana
                  47250, (812) 273-4944
                  (fax).**
 
   81
  **S** **IGNATURES**
  In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  RIVER
                  VALLEY BANCORPDate:
                  March 13, 2007
              By:
              /s/
                  Matthew P. ForresterMatthew
                  P. Forrester, President and Chief Executive Officer
 
 In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 **Signatures**
              **Title**
              
              **Date**(1)
                  Principal Executive Officer:
              
              ))/s/
                  Matthew P. Forrester
              
              )
              March
                  13, 2007Matthew
                  P. Forrester
              President
                  and Chief Executive Officer
              ))(2)
                  Principal Financial and Accounting Officer:
              
              )
                ))/s/
                  Larry C. Fouse
              
              )
              March
                  13, 2007Larry
                  C. Fouse
              Treasurer
              ))(3)
                  The Board of Directors:
              
              ))/s/
                  Robert W. Anger
              
              )
              March
                  13, 2007Robert
                  W. Anger
              Director
              )))/s/
                  Matthew P. Forrester
              
              )
              March
                  13, 2007Matthew
                  P. Forrester
              Director
              )))/s/
                  Michael J. Hensley
              
              )
              March
                  13, 2007Michael
                  J. Hensley
              Director
              )))/s/
                  L. Sue Livers
              
              )
              March
                  13, 2007L.
                  Sue Livers
              Director
              )))/s/
                  Fred W. Koehler
              
              )
              March
                  13, 2007Fred
                  W. Koehler
              Director
              )))/s/
                  Charles J. McKay
              
              )
              March
                  13, 2007Charles
                  J. McKay
              Director
              )
  
   82
   **EXHIBIT
        INDEX**
  **Exhibit
                  No.**
              
              **Description**3
              (1)
              
              Registrant’s
                  Articles of Incorporation are incorporated by reference to Exhibit
                  3(1) to
                  the Registration Statement on Form S-1 (Registration No. 333-05121)
                  (the
                  “Registration Statement”)(2)
              
              Amended
                  Code of By-Laws is incorporated by reference to Exhibit 3(2) to
                  the
                  Registrant’s Form 10-KSB filed on March 31, 20054
              (1)
              
              Form
                  of Fixed/Floating Rate Junior Subordinated Deferrable Interest
                  Debentures
                  Indenture, dated March 26, 2003, incorporated by reference to Exhibit
                  4.1
                  of Registrant’s Form 10-QSB filed May 15, 2003(2)
              
              Form
                  of Fixed/Floating Rate Junior Subordinated Deferrable Interest
                  Debentures
                  Trust Agreement, dated March 26, 2003, incorporated by reference
                  to
                  Exhibit 4.2 of Registrant’s Form 10-QSB filed May 15,
                  2003(3)
              
              Form
                  of Fixed/Floating Rate Junior Subordinated Deferrable Interest
                  Guarantee
                  Agreement, dated March 26, 2003, incorporated by reference to Exhibit
                  4.3
                  of Registrant’s Form 10-QSB filed May 15, 200310
              (1)*
              
              Employment
                  Agreement between River Valley Financial Bank and Matthew P.
                  Forresteris
                  incorporated by reference to Exhibit 10(1) to the Registrant’s Form
                  10-KSB filed on March 31, 2005(2)*
              
              Director
                  Deferred Compensation Master Agreement is incorporated by reference
                  to
                  Exhibit 10(8) to the Registration Statement(3)*
              
              Director
                  Deferred Compensation Joinder Agreement − Robert W. Anger is incorporated
                  by reference to Exhibit 10(10) to the Registration Statement(4)*
              
              Director
                  Deferred Compensation Joinder Agreement − Earl W. Johann is incorporated
                  by reference to Exhibit 10(12) to the Registration Statement(5)*
              
              Director
                  Deferred Compensation Joinder Agreement − Frederick W. Koehler is
                  incorporated by reference to Exhibit 10(13) to the Registration
                  Statement(6)*
              
              Director
                  Deferred Compensation Joinder Agreement − Michael Hensley is incorporated
                  by reference to Exhibit 10(15) to the Registration Statement(7)*
              
              Exempt
                  Loan and Share Purchase Agreement between Trust under River Valley
                  Bancorp
                  Employee Stock Ownership Plan and Trust Agreement and River Valley
                  Bancorp
                  is incorporated by reference to Exhibit 10(22) to the Registration
                  Statement(8)*
              
              River
                  Valley Bancorp Recognition and Retention Plan and Trust is incorporated
                  by
                  reference to Exhibit 10(8) to the Form 10-KSB filed March 31,
                  2005(9)*
              
              River
                  Valley Bancorp Stock Option Plan is incorporated by reference to
                  Exhibit
                  10(9) to the Form 10-KSB filed March 31, 2005(10)*
              
              Employment
                  Agreement between River Valley Financial Bank and Gregory T. Siegrist
                  is
                  incorporated by reference to Exhibit 10 of Registrant’s Form 10-QSB filed
                  November 15, 2004
   
  **Exhibit
                  No.**
              
              **Description**(11)*
              
              First
                  Amendment of the Director Deferred Compensation Master Agreement
                  is
                  incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
                  March 21, 2005(12)*
              
              Form
                  of Employee Incentive Stock Option Agreement under the River Valley
                  Bancorp Stock Option Plan is incorporated by reference to Exhibit
                  10(12)
                  of Registrant’s Form 10-KSB filed March 31, 2005(13)*
              
              Form
                  of Director Non-Qualified Stock Option Agreement is incorporated
                  by
                  reference to Exhibit 10(13) of Registrant’s 10-KSB filed on March 31,
                  2005(14)*
              
              Form
                  of Award Notification under the River Valley Bancorp Recognition
                  and
                  Retention Plan and Trust is incorporated by reference to Exhibit
                  10(14) of
                  Registrant’s 10-KSB filed on March 31, 2005(15)*
              
              First
                  Amendment of the Director Deferred Compensation Master Agreement
                  is
                  incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K
                  filed on March 21, 2005(16)*
              
              Employment
                  Agreement between River Valley Financial Bank and Anthony D. Brandon
                  is
                  incorporated by reference to Exhibit 10.1 to the Registrant’s 8-K filed on
                  August 4, 2005(17)*
              
              River
                  Valley Financial Bank Split Dollar Insurance Plan, effective
                  January 1, 2007, is incorporated by reference to Exhibit 10.1 to the
                  Form 8-K filed on January 31, 2007(18)*
              
              Supplemental
                  Life Insurance Agreement, dated January 25, 2007, between
                  River Valley Financial Bank and Matthew Forrester, is incorporated by
                  reference to Exhibit 10.2 to the Form 8-K filed on January 31,
                  2007(19)*
              
              Salary
                  Continuation Agreement, dated January 25, 2007, between River Valley
                  Financial Bank and Matthew Forrester, is incorporated by reference
                  to
                  Exhibit 10.3 to the Form 8-K filed on January 31, 200714
              
              
              Code
                  of Ethics is incorporated by reference to Exhibit 14 of Registrant’s Form
                  10-KSB filed March 30, 200421
              
              
              Subsidiaries
                  of the Registrant23
              
              
              Consent
                  of BKD, LLP31
              (1)
              
              CEO
                  Certification(2)
              
              CFO
                  Certification32
              
              
              Section
                  906 Certification*
                  Indicates exhibits that describe or evidence management contracts
                  and
                  plans required to be filed as exhibits.