EXHIBIT
      13




















RIVER
      VALLEY BANCORP










2005
      ANNUAL REPORT


TO
      SHAREHOLDERS



















Table
          of Contents




To
        Our Shareholders, Customers, and Friends:
 It
          is my
          pleasure to present to you River Valley Bancorp’s tenth Annual Report to
          Shareholders covering the year ending December 31, 2005.
  It
          is
          appropriate to give a bit of historical perspective to an organization
          that no
          longer ranks as a “quaint little bank in a historic river town”. The past decade
          gives us a historical base to benchmark our success. The Corporation has
          grown
          from an institution of approximately $145 million in assets in 1996 to
          in excess
          of $328 million as of December 31, 2005. It has grown from approximately
          $109 million in loans and $125 million in deposits as of December 31, 1996
          to one of approximately $230 million in loans and over $206 million in
          deposits
          as of year-end 2005. Profitability in 1996 was but $73,000, and for the
          year-end
          December 31, 2005 that profitability was approximately
          $2,086,000.
  The
          most
          notable point is not in the dollar amounts or percentage increase, as impressive
          as they may be, but in the fact that the growth was internal and not driven
          by
          acquisitions or mergers. Growth was derived by remaining faithful to a
          strategic
          plan to grow our base and expand into contiguous markets. The once quaint
          little
          bank is not so little; it serves more than one community, it now serves
          the
          historic River Valley. And the only thing quaint about the organization
          is our
          approach to customer service, and that heritage continues to serve us
          well.
  Operationally
          in 2005, the Corporation experienced some of its most impressive balance
          sheet
          growth to date. For the record, assets increased to $328.7 million as of
          December 31, 2005, an increase of 13.6% for the year. Deposits increased by
          $36.2 million to $206.7 million, a 21.2% increase from year-end 2004.
          Outstanding loans decreased by a modest $1.7 million dollars and stood
          at $229.7
          million as of December 31, 2005. Again, net income for 2005 was $2,086,000,
          or a decrease of 11.1% from the $2,347,000 recorded as of year-end 2004.
          The
          combination of slowing loan activity in an errant yield curve environment
          punished most financial institutions and had a negative effect on our earnings
          in 2005. The good news is that our deposit growth came in a favorable blend
          of
          core deposits and certificates that afford us the opportunity to fund growth
          in
          future quarters without heavily borrowing in a rising rate
          environment.
  The
          quality of our assets is strong. Net charge-offs in 2005 was approximately
          $332,000, and equates well to the provision for loan losses of $288,000
          expensed
          in the year. Total delinquency, as defined as delinquent 30 days or more,
          stood
          at 1.46%, a decrease from 1.99% recorded as of year-end 2004. The allowance
          for
          loan losses represents 1.00% of loans outstanding.
  While
          2005 marked ten years of dynamic growth, it also represented the maturing
          of a
          Corporation into an organization that is proud of its past, but posed for
          an
          even brighter future. For your participation, we are extremely
          grateful.
  
 Respectfully
        Submitted,
 
 Matthew P.
        Forrester
 President,
        CEO
  
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  Table
            of Contents
 **2005
            ANNUAL REPORT**
   **TABLE
        OF CONTENTS**
 
 President’s
                  Letter to Shareholders
              
              iBusiness
                  of River Valley
              
              1Market
                  Price of the Corporation’s Common
                  Shares and Related Shareholder Matters
              
              2Selected
                  Consolidated Financial Information
                  and Other Data
              
              3Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              
              5Report
                  of Independent Registered Public
                  Accounting Firm
              
              18Consolidated
                  Balance
                  Sheets
              
              19Consolidated
                  Statements of
                  Income
              
              20Consolidated
                  Statements of Comprehensive
                  Income
              
              21Consolidated
                  Statements of Stockholders’
                  Equity
              
              22Consolidated
                  Statements of Cash
                  Flows
              
              23Notes
                  to Consolidated Financial
                  Statements
              
              24General
                  Information for
                  Shareholders
              
              44Directors
                  and Officers
              
              45
 
  
  **BUSI** **NESS
        OF RIVER VALLEY**
  River
        Valley Bancorp (“River Valley” or the “Corporation”), 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 Corporation
        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”). River Valley Financial and Citizens merged on November 20,
        1997.
  The
        activities of River Valley have been limited primarily to holding the stock
        of
        the Bank. River Valley Financial was organized in 1875 under the laws of
        the
        United States of America. River Valley Financial conducts operations from
        its
        six full-service office locations in Jefferson and Clark Counties in Indiana
        and
        one office in Carroll County, Kentucky. The Bank offers a variety of deposit
        and
        lending services to consumer and commercial customers in Jefferson and
        surrounding counties. The Corporation 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 Savings Association Insurance Fund (“SAIF”) of the
        FDIC.
  1
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            of Contents
 **RIVER
            VALLEY BANCORP**
   **MARKET
        PR** **ICE
        OF THE CORPORATION’S COMMON SHARES**
 **AND
        RELATED SHAREHOLDER MATTERS**
  There
        were 1,592,877 common shares of River Valley Bancorp outstanding at
        February 24, 2006, held of record by approximately 362 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
        Corporation’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 Corporation’s common shares, as
        well as cash distributions paid thereon since December 2003. 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****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**2003**December 31
              
              $
              30.25
              
              $
              29.43
              
              $
              0.170September
                  30
              
              
              20.33
              
              
              19.88
              
              
              0.150June
                  30
              
              
              20.75
              
              
              20.13
              
              
              0.150March
                  31
              
              
              16.08
              
              
              15.62
              
              
              0.125
  The
        high
        and low sale prices for River Valley’s common shares between December 31,
        2005 and February 24, 2006, were $20.50 and $18.10,
        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 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.
  2
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **SELECTED
        CONSOLI** **DATED
        FINANCIAL INFORMATION AND OTHER 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.
  **At
                  December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Selected
                  consolidated financial condition data:**
              
              (In
                  thousands)**Total
                  amount of:**Assets
              
              $
              328,748
              
              $
              289,427
              
              $
              255,076
              
              $
              224,020
              
              $
              191,618Loans
                  receivable - net (1)
              
              
              229,724
              
              
              231,373
              
              
              192,266
              
              
              165,957
              
              
              157,972Cash
                  and cash equivalents
              
              
              17,730
              
              
              12,437
              
              
              12,512
              
              
              18,610
              
              
              5,641Investment
                  securities
              
              
              59,609
              
              
              26,964
              
              
              34,557
              
              
              28,174
              
              
              17,653Deposits
              
              
              206,733
              
              
              170,538
              
              
              179,954
              
              
              161,829
              
              
              145,571FHLB
                  advances and other borrowings
              
              
              96,782
              
              
              94,600
              
              
              50,000
              
              
              40,000
              
              
              26,500Shareholders'
                  equity
              
              
              23,018
              
              
              22,393
              
              
              22,855
              
              
              20,633
              
              
              17,971
 
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Summary
                  of consolidated income data:**
              
              (In
                  thousands, except share data)Total
                  interest income
              
              $
              16,298
              
              $
              13,545
              
              $
              12,653
              
              $
              12,755
              
              $
              13,084Total
                  interest expense
              
              
              8,155
              
              
              5,617
              
              
              5,348
              
              
              5,638
              
              
              6,617Net
                  interest income
              
              
              8,143
              
              
              7,928
              
              
              7,305
              
              
              7,117
              
              
              6,467Provision
                  for losses on loans
              
              
              288
              
              
              338
              
              
              508
              
              
              570
              
              
              450Net
                  interest income after provision for losses on loans
              
              
              7,855
              
              
              7,590
              
              
              6,797
              
              
              6,547
              
              
              6,017Other
                  income
              
              
              2,500
              
              
              2,518
              
              
              3,354
              
              
              3,094
              
              
              1,922General,
                  administrative and other expense
              
              
              7,094
              
              
              6,342
              
              
              5,831
              
              
              5,455
              
              
              4,706Income
                  before income tax expense
              
              
              3,261
              
              
              3,766
              
              
              4,320
              
              
              4,186
              
              
              3,233Income
                  tax expense
              
              
              1,175
              
              
              1,419
              
              
              1,665
              
              
              1,628
              
              
              1,257Net
                  income
              
              $
              2,086
              
              $
              2,347
              
              $
              2,655
              
              $
              2,558
              
              $
              1,976Basic
                  earnings per share
              
              $
              1.32
              
              $
              1.48
              
              $
              1.67
              
              $
              1.64
              
              $
              1.25Diluted
                  earnings per share
              
              $
              1.27
              
              $
              1.42
              
              $
              1.59
              
              $
              1.58
              
              $
              1.22
  (1)
              Includes
                  loans held for sale.
   3
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 **RIVER
            VALLEY BANCORP**
  **SELECTED
        CONSOLIDATED FINANCIAL INFORMATION AND**
 **OTHER
        DATA (CONTINUED)**
 
 **Year
                  Ended December 31,****Selected
                  financial ratios and other data:**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Interest
                  rate spread during period
              
              
              2.79
              %
              
              3.13
              %
              
              3.21
              %
              
              3.39
              %
              
              3.58
              %Net
                  yield on interest-earning assets (1)
              
              
              2.82
              
              
              3.19
              
              
              3.28
              
              
              3.56
              
              
              3.80Return
                  on assets (2)
              
              
              .63
              
              
              .88
              
              
              1.11
              
              
              1.22
              
              
              1.09Return
                  on equity (3)
              
              
              9.06
              
              
              10.46
              
              
              12.22
              
              
              13.21
              
              
              11.27Equity
                  to assets (4)
              
              
              7.00
              
              
              7.73
              
              
              8.96
              
              
              9.21
              
              
              9.38Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              101.29
              
              
              102.51
              
              
              102.86
              
              
              106.18
              
              
              105.94Non-performing
                  assets to total assets (4)
              
              
              .53
              
              
              0.76
              
              
              0.18
              
              
              0.48
              
              
              0.36Allowance
                  for loan losses to total loans outstanding (4)
              
              
              1.00
              
              
              1.01
              
              
              1.07
              
              
              1.27
              
              
              1.25Allowance
                  for loan losses to non-performing loans (4)
              
              
              132.80
              
              
              107.41
              
              
              399.70
              
              
              194.54
              
              
              285.80Net
                  charge-offs to average total loans outstanding
              
              
              0.14
              
              
              0.01
              
              
              0.31
              
              
              0.27
              
              
              0.12General,
                  administrative and other expense to average assets (5)
              
              
              2.29
              
              
              2.38
              
              
              2.43
              
              
              2.60
              
              
              2.60Dividend
                  payout ratio
              
              
              61.02
              
              
              50.70
              
              
              37.74
              
              
              25.40
              
              
              20.49Number
                  of full service offices (4)
              
              
              7
              
              
              6
              
              
              5
              
              
              4
              
              
              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.
  4
 Table
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 2005
            ANNUAL
            REPORT
  **MANAGEMENT** **’S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**
  **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, 2005, 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 elsewhere in this Annual Report.
  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 thereto presented on pages 24 through
        26
        contains a summary of the Corporation’s significant accounting policies for the
        year ended December 31, 2005. Certain of these policies are important to
        the portrayal of the Corporation’s financial condition, since they require
        management to make difficult, complex or subjective judgments, some of which
        may
        relate to matters that are inherently uncertain. Management believes that
        its
        critical accounting policies include determining the allowance for loan losses
        and the valuation of mortgage servicing rights.
  **Allowance
        For Loan Losses**
  The
        allowance for loan losses is a significant estimate that can and does change
        based on management’s assumptions about specific borrowers and current 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 Corporation’s loan portfolios. In determining the appropriate
        amount of the allowance for loan losses, management makes numerous assumptions,
        estimates and assessments.
  The
        Corporation’s strategy for credit risk management includes conservative,
        centralized credit policies, and uniform underwriting criteria for all loans
        as
        well as an overall credit limit for each customer significantly below legal
        lending limits. The strategy also emphasizes diversification on a geographic,
        industry and customer level, regular credit quality reviews and quarterly
        management reviews of large credit exposures and loans experiencing
        deterioration of credit quality.
  5
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  The
        Corporation’s allowance consists of three components: probable losses estimated
        from individual reviews of specific loans, probable losses estimated from
        historical loss rates, and probable losses resulting from economic or other
        deterioration above and beyond what is reflected in the first two components
        of
        the allowance.
  Larger
        commercial loans that exhibit probable or observed credit weaknesses are
        subject
        to individual review. Where appropriate, reserves are allocated to individual
        loans based on management’s estimate of the borrower’s ability to repay the loan
        given the availability of collateral, other sources of cash flow and legal
        options available to the Corporation. Included in the review of individual
        loans
        are those that are impaired as provided in 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 Corporation evaluates the
        collectibility of both principal and interest when assessing the need for
        a loss
        accrual. Historical loss rates are applied to other commercial loans not
        subject
        to specific reserve allocations.
  Homogenous
        loans, such as consumer installment and residential mortgage loans are not
        individually risk graded. Rather, standard credit scoring systems are used
        to
        assess credit risks. Reserves are established for each pool of loans based
        on
        the expected net charge-offs for one year. Loss rates are based on the average
        net charge-off history by loan category.
  Historical
        loss rates for commercial and consumer loans may be adjusted for significant
        factors that, in management’s judgment, reflect the impact of any current
        conditions on loss recognition. Factors which management considers in the
        analysis include the effects of the national and local economies, trends
        in the
        nature and volume of loans (delinquencies, charge-offs and nonaccrual loans),
        changes in mix, credit score migration comparisons, asset quality trends,
        risk
        management and loan administration, changes in the internal lending policies
        and
        credit standards, collection practices and examination results from bank
        regulatory agencies and the Corporation’s internal loan review.
  An
        unallocated reserve is maintained to recognize the imprecision in estimating
        and
        measuring loss when evaluating reserves for individual loans or pools of
        loans.
        Allowances on individual loans and historical loss rates are reviewed quarterly
        and adjusted as necessary based on changing borrower and/or collateral
        conditions and actual collection and charge-off experience.
  The
        Corporation’s primary market area for lending is southeastern Indiana. When
        evaluating the adequacy of allowance, consideration is given to this regional
        geographic concentration and the closely associated effect changing economic
        conditions have on the Corporation’s customers.
  The
        Corporation has not substantively changed any aspect to its overall approach
        in
        the determination of the allowance for loan losses. There have been no material
        changes in assumptions or estimation techniques as compared to prior periods
        that impacted the determination of the current period allowance.
  **Mortgage
        Servicing Rights**
  The
        Corporation 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.
  6
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **Discussion
        of Changes in Financial Condition from December 31, 2004 to
        December 31, 2005**
  At
        December 31, 2005, River Valley’s consolidated assets totaled $328.7
        million, representing an increase of $39.3 million over the December 31,
        2004 total. This increase in assets was funded by a 21.2% increase in deposits.
        Deposits increased by $36.2 million to a total of $206.7 million at
        December 31, 2005. Savings and demand deposits increased by $24.4 million,
        or 30.6%, during 2005, while certificates of deposit increased by $11.8 million,
        or 13.0%. These increases were attributed to a competitor’s acquisition by
        another financial institution and by being very competitive in our market.
        Shareholders’ equity was $23.0 million as December 31, 2005, a net increase
        of $0.6 million from $22.4 million as of December 31, 2004.
  Liquid
        assets ( *i.e* .,
        cash,
        federal funds sold, interest-earning deposits and certificates of deposit)
        increased by $5.3 million from December 31, 2004 levels to a total of $17.7
        million at December 31, 2005. Investment securities totaled $59.6 million
        at December 31, 2005, an increase of $32.6 million from December 31,
        2004.
  Loans
        receivable, including loans held for sale, totaled $229.7 million at
        December 31, 2005, a decrease of $1.7 million from the $231.4 million total
        at December 31, 2004. There were slight decreases in all loan categories
        except commercial. The volume of loan sales into the secondary mortgage market
        decreased during 2005 from the 2004 volume by $4.2 million, due in large
        part to
        the increase in rates.
  River
        Valley’s consolidated allowance for loan losses totaled approximately $2.3
        million for the year ended December 31, 2005, which represented 1.00% of
        total loans at that date. The allowance for loan losses totaled $2.4 million,
        or
        1.01% of total loans for the period ended December 31, 2004. Non-performing
        loans (defined as loans delinquent greater than 90 days and loans on nonaccrual
        status) totaled $1.7 million and $2.2 million at December 31, 2005 and
        2004, respectively. The consolidated allowance for loan losses represented
        133%
        and 107% of non-performing loans at December 31, 2005 and 2004,
        respectively. Non-performing loans show a $454,000 decrease at December 31,
        2005. The Corporation has continued to de-emphasize consumer lending because
        of
        risk/reward opportunities.
  Although
        management believes that its allowance for loan losses at December 31,
        2005, was adequate based upon the available facts and circumstances, there
        can
        be no assurance that additions to such allowance will not be necessary in
        future
        periods, which could negatively affect the Corporation’s results of
        operations.
  Advances
        from the Federal Home Loan Bank (“FHLB”) and other borrowed money increased by
        $2.2 million from the total at December 31, 2004. The interest rate
        environment has changed but we are still getting the advantage of the long-term
        funding we did in 2004.
  Shareholders’
        equity totaled $23.0 million at December 31, 2005, an increase of $0.6
        million from the $22.4 million total at December 31, 2004. The increase
        resulted primarily from net income offset by cash dividends and an increase
        in
        unrealized losses on securities available for sale.
  **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
  7
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
 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 $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.
  8
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **Comparison
        of Results of Operations for the Years Ended December 31, 2004 and
        2003**
  *General*
  River
        Valley’s net income for the year ended December 31, 2004, totaled $2.35
        million, a decrease of $308,000, or 11.6%, from net income reported in 2003.
        The
        decrease in net income in the 2004 period was primarily attributable to a
        decrease of $1,250,000 in gain on loan sales and an increase in general,
        administrative and other expenses of $511,000 which were in part offset by
        an
        increase in net interest income of $623,000, an increase in service fees
        and
        charges of $289,000, a decrease in the provision for income taxes of $246,000,
        and a decrease in the provision for loan losses of $170,000.
  *Net
        Interest Income*
  Total
        interest income for the year ended December 31, 2004, amounted to $13.5
        million, an increase of $892,000, or 7.0%, from the 2003 total, reflecting
        higher average balances of interest earning assets offset by lower interest
        rates. The average balance of interest-earning assets outstanding year-to-year
        increased by $25.7 million, however, the yield on those assets decreased
        from an
        average yield of 5.68% in 2003 to 5.45% in 2004. Interest income on loans
        totaled $12.5 million for 2004, an increase of approximately $1,100,000,
        or
        9.3%, from 2003. Interest income on investments, FHLB stock and interest-earning
        deposits decreased by $170,000, or 13.5%, due to lower average balances on
        those
        investments.
  Interest
        expense on deposits decreased by $442,000, or 13.6%, to a total of $2.8 million
        for the year ended December 31, 2004, due primarily to lower costs of
        funding higher average balances. The cost of deposits decreased from 1.9%
        in
        2003 to 1.6% in fiscal 2004. Interest expense on borrowings totaled $2.8
        million
        for the year ended December 31, 2004, an increase of $711,000 from 2003.
        The increase resulted primarily from higher average borrowings year-to-year,
        offset by a 43 basis point decrease in average cost.
  As
        a
        result of the foregoing changes in interest income and interest expense,
        net
        interest income increased during 2004 by $623,000, or 8.5%, compared to 2003.
        The interest rate spread decreased by 8 basis points for 2004, to 3.13% from
        3.21% in the 2003 period, while the net interest margin amounted to 3.19%
        in
        2004 and 3.28% in 2003.
  *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 $338,000
        provision for losses on loans in 2004, a decrease of $170,000, or 33.5%,
        compared to the $508,000 provision recorded in 2003. 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 less consumer
        loans.
  Non-performing
        loans for the period ended December 31, 2004 were $2.2 million, an increase
        of approximately $1.7 million from the $0.5 million recorded as of fiscal
        year
        ended 2003. Net charge-offs amounted to $30,000 in 2004, compared to $553,000
        in
        2003. While management believes that the allowance for losses on loans is
        adequate at December 31, 2004, 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, 2004, a
        decrease of $836,000, or 24.9%, compared to 2003, due primarily to a decrease
        in
        net gains on loan sales from $1,644,000 in 2003 to $394,000 in 2004, a decrease
        of $1,250,000 or 76.0%. The volume of loan sales decreased from $70.5 million
        in
        2003 to $18.3 million in 2004. The decline in other income due to the decline
        loan sales was partially offset by an increase in service fees and charges
        of
        $289,000 resulting from new programs and services introduced in late
        2003.
  9
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  *General,
        Administrative and Other Expense*
  General,
        administrative and other expense totaled $6.3 million for the year ended
        December 31, 2004, an increase of $511,000 over the 2003 total. Employee
        compensation and benefits increased by $490,000 in fiscal 2004 as compared
        to
        2003 primarily from additional staffing, cost of living and benefit expense.
        Occupancy and equipment expense increased by $157,000 in 2004 as compared
        to
        2003 due to higher depreciation costs and equipment maintenance expenses.
        These
        increases in other operating expenses were in part offset by a decrease in
        amortization of mortgage servicing rights of $215,000 which are adjusted
        each
        quarter based on valuation results.
  *Income
        Taxes*
  The
        provision for income taxes decreased by $246,000, or 14.8%, for the year
        ended
        December 31, 2004, as compared to 2003. The effective tax rates were
 37.7% and 38.5% for the years ended December 31, 2004 and 2003,
        respectively.
  10
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **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,****2005**
              
              **2004**
              
              **2003****Average**
                **outstanding**
                **balance**
              
              **Interest**
                **earned/**
                **paid**
              
              **Yield/**
                **rate**
              
              **Average**
                **outstanding**
                **balance**
              
              **Interest**
                **earned/**
                **paid**
              
              **Yield/**
                **rate**
              
              **Average**
                **outstanding**
                **balance**
              
              **Interest**
                **earned/**
                **paid**
              
              **Yield/**
                **rate**(Dollars
                  in Thousands)**Assets**Interest-earning
                  assets:Interest-earning
                  deposits
              
              $
              5,397
              
              $
              238
              
              
              4.41
              %
              $
              6,224
              
              $
              112
              
              
              1.80
              %
              $
              8,774
              
              $
              112
              
              
              1.28
              %Other
                  securities (1)
              
              
              47,845
              
              
              1,589
              
              
              3.32
              
              
              26,354
              
              
              850
              
              
              3.23
              
              
              32,652
              
              
              1,029
              
              
              3.15Mortgage-backed
                  securities (1)
              
              
              93
              
              
              4
              
              
              4.30
              
              
              143
              
              
              4
              
              
              2.80
              
              
              355
              
              
              9
              
              
              2.54Loans
                  receivable (2)
              
              
              231,217
              
              
              14,297
              
              
              6.18
              
              
              213,000
              
              
              12,457
              
              
              5.85
              
              
              179,026
              
              
              11,395
              
              
              6.36FHLB
                  stock
              
              
              3,959
              
              
              170
              
              
              4.29
              
              
              2,840
              
              
              122
              
              
              4.30
              
              
              2,053
              
              
              107
              
              
              5.21Total
                  interest-earning assets
              
              
              288,511
              
              
              16,298
              
              
              5.65
              
              
              248,561
              
              
              13,545
              
              
              5.45
              
              
              222,860
              
              
              12,653
              
              
              5.68Non-interest
                  earning assets, net of allowance for loan losses
              
              
              21,163
              
              
              
              
              
              
              
              
              17,901
              
              
              
              
              
              
              
              
              17,067Total
                  assets
              
              **$**
              **309,674**
              
              
              
              
              
              
              
              **$**
              **266,462**
              
              
              
              
              
              
              
              **$**
              **239,927****Liabilities/shareholder
                  equity**Interest-bearing
                  liabilities:Savings
                  deposits
              
              $
              42,776
              
              $
              692
              
              
              1.62
              
              $
              48,237
              
              $
              485
              
              
              1.01
              
              $
              43,454
              
              
              468
              
              
              1.08Interest-bearing
                  demand (3)
              
              
              45,400
              
              
              217
              
              
              0.48
              
              
              34,405
              
              
              110
              
              
              0.32
              
              
              32,018
              
              
              129
              
              
              .40Certificates
                  of deposit
              
              
              94,168
              
              
              2,784
              
              
              2.96
              
              
              92,347
              
              
              2,223
              
              
              2.41
              
              
              95,559
              
              
              2,663
              
              
              2.79FHLB
                  advances and other borrowings
              
              
              102,501
              
              
              4,462
              
              
              4.35
              
              
              67,491
              
              
              2,799
              
              
              4.15
              
              
              45,636
              
              
              2,088
              
              
              4.58Total
                  interest-bearing liabilities
              
              
              284,845
              
              
              8,155
              
              
              2.86
              
              
              242,480
              
              
              5,617
              
              
              2.32
              
              
              216,667
              
              
              5,348
              
              
              2.47Other
                  liabilities
              
              
              1,862
              
              
              
              
              
              
              
              
              1,545
              
              
              
              
              
              
              
              
              1,528Total
                  liabilities
              
              
              286,707
              
              
              
              
              
              
              
              
              244,025
              
              
              
              
              
              
              
              
              218,195Total
                  equity
              
              
              22,967
              
              
              
              
              
              
              
              
              22,437
              
              
              
              
              
              
              
              
              21,732Total
                  liabilities and equity
              
              **$**
              **309,674**
              
              
              
              
              
              
              
              **$**
              **266,462**
              
              
              
              
              
              
              
              **$**
              **239,927**Net
                  interest earning assets
              
              **$**
              **3,666**
              
              
              
              
              
              
              
              **$**
              **6,081**
              
              
              
              
              
              
              
              **$**
              **6,193**Net
                  interest income
              
              
              
              
              **$**
              **8,143**
              
              
              
              
              
              
              
              **$**
              **7,928**
              
              
              
              
              
              
              
              **$**
              **7,305**Interest
                  rate spread (4)
              
              
              
              
              
              
              
              
              **2.79**
              **%**
              
              
              
              
              
              
              
              **3.13**
              **%**
              
              
              
              
              
              
              
              **3.21**
              **%**Net
                  yield on weighted average interest-earning assets (5)
              
              
              
              
              
              
              
              
              **2.82**
              **%**
              
              
              
              
              
              
              
              **3.19**
              **%**
              
              
              
              
              
              
              
              **3.28**
              **%**Average
                  interest-earning assets to average bearing liabilities
              
              
              
              
              
              
              
              
              **101.29**
              **%**
              
              
              
              
              
              
              
              **102.51**
              **%**
              
              
              
              
              
              
              
              **102.86**
              **%**
 
 (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 $17,346, $15,066 and
                  $13,021.
 (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.
  11
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
 **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,****2005
                  vs. 2004**
              
              **2004
                  vs. 2003****Volume**
              
              **Increase**
                **(decrease)**
                **due
                  to**
                **Rate**
              
              **Total**
              
              **Volume**
              
              **Increase**
                **(decrease)**
                **due
                  to**
                **Rate**
              
              **Total**(In
                  thousands)Interest-earning
                  assets:Interest-earning
                  deposits and other
              
              $
              9
              
              $
              165
              
              $
              174
              
              $
              (2
              )
              $
              17
              
              $
              15Investment
                  securities
              
              
              711
              
              
              28
              
              
              739
              
              
              (209
              )
              
              24
              
              
              (185
              )Loans
                  receivable, net
              
              
              1,102
              
              
              738
              
              
              1,840
              
              
              2,040
              
              
              (978
              )
              
              1,062Total
              
              
              1,822
              
              
              931
              
              
              2,753
              
              
              1,829
              
              
              (937
              )
              
              892Interest-bearing
                  liabilities:Deposits
              
              
              27
              
              
              848
              
              
              875
              
              
              (29
              )
              
              (413
              )
              
              (442
              )FHLB
                  advances and other borrowings
              
              
              1,518
              
              
              145
              
              
              1,663
              
              
              922
              
              
              (211
              )
              
              711Total
              
              
              1,545
              
              
              993
              
              
              2,538
              
              
              893
              
              
              (624
              )
              
              269Net
                  change in interest income
              
              **$**
              **277**
              
              **$**
              **(62**
              **)**
              **$**
              **215**
              
              **$**
              **936**
              
              **$**
              **(313**
              **)**
              **$**
              **623**
   **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, 2005 (the latest information available) and
        December 31, 2004, 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.
  12
 Table
            of Contents
 2005
            ANNUAL
            REPORT
 
 **As
                  of December 31, 2****0****05**
                (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(1)
              36,914
              (4,292)
              -10%-300(1)
              —
              —
              —
 
 
 **As
                  of December 31, 2004**
                (Dollars
                  in thousands)**Change
                  in Interest Rates(basis points)**
              **Estimated
                  NPV**
              **Amount
                  of Change**
              **Percent**+300
              $37,924
              $1,412
              4%+200
              38,152
              1,639
              4%+100
              37,743
              1,231
              3%—
              36,512
              —
              —-100
              34,410
              (2,103)
              -6%-200(1)
              —
              —
              —-300(1)
              —
              —
              —
  (1)
                At
                    December 31, 2004, the OTS did not provide information as to interest
                    rate risk for 200 and 300 point decreases, and at December 31,
                    2005,
                    information for 200 point decreases was provided.
  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
        Corporation’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 Corporation 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, 2005,
        River Valley Financial Bank had commitments to originate loans totaling $2.3
        million and in addition, had undisbursed loans in process, unused lines of
        credit and standby letters of credit totaling $28.5 million. At such date,
        River
        Valley Financial bank had $484,000 in commitments to sell loans and no
        outstanding commitment to purchase loans. The Corporation considers River
        Valley
        Financial Bank’s liquidity and capital resources sufficient to meet outstanding
        short and long term needs.
 13
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  The
        Corporation’s liquidity, primarily represented by cash and cash equivalents, is
        a result of the funds provided by or used in the Corporation’s operating,
        investing and financing activities. These activities are summarized below
        for
        the years ended December 31, 2005, 2004 and 2003:
  **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**(In
                  thousands)Cash
                  flows from operating activities
              
              $
              3,471
              
              $
              2,374
              
              $
              5,043Cash
                  flows from investing activities:Purchase
                  of securities
              
              
              (48,816
              )
              
              (14,133
              )
              
              (17,151
              )Proceeds
                  from maturities of securities
              
              
              15,521
              
              
              7,221
              
              
              5,387Proceeds
                  from sales of securities
              
              
              0
              
              
              14,034
              
              
              5,095Net
                  loan originations
              
              
              711
              
              
              (39,119
              )
              
              (27,287
              )Other
              
              
              (2,607
              )
              
              (2,390
              )
              
              (4,383
              )Cash
                  flows from financing activities:Net
                  increase (decrease) in deposits
              
              
              36,195
              
              
              (9,416
              )
              
              18,125Net
                  increase in borrowings
              
              
              2,182
              
              
              44,383
              
              
              10,000Purchase
                  of stock
              
              
              (201
              )
              
              (1,895
              )
              
              (366
              )Other
              
              
              (1,163
              )
              
              (1,134
              )
              
              (561
              )Net
                  increase (decrease) in cash and cash equivalents
              
              **$**
              **5,293**
              
              **$**
              **(75**
              **)**
              **$**
              **6,098**
              **)**
  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
        $2.3
        million at December 31, 2005.
  River
        Valley Financial exceeded all of its regulatory capital requirements at
        December 31, 2005. The following table summarizes River Valley Financial’s
        regulatory capital requirements and regulatory capital at December 31,
        2005:
  **OTS
                  Requirement**
              
              **Actual
                  Amount****Percent
                  of Assets**
              
              **Amount**
              
              **Percent
                  of Assets (1)**
              
              **Amount**
              
              **Amount
                  of Excess**(Dollars
                  in thousands)Tangible
                  capital
              
              
              1.50%
              
              $
              4,918
              
              
              8.5%
              
              $
              27,993
              
              $
              23,075Core
                  capital (2)
              
              
              4.00%
              
              
              13,114
              
              
              8.5%
              
              
              27,993
              
              
              14,879Risk-based
                  capital
              
              
              8.00%
              
              
              18,303
              
              
              13.1%
              
              
              29,967
              
              
              11,664
  (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.
  14
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **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, the Corporation does not have any off-balance
        sheet
        arrangements that have or are reasonably likely to have a current or future
        effect on the Corporation’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 corporation is a
        party
        and under which the corporation 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.
  **Contractual
        Obligations**
  The
        Corporation’s contractual obligations as of December 31, 2005 are
        summarized in the following table.
  **Payments
                  due by period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than 1 year**
              
              **2
                  to 3years**
              
              **4
                  to 5years**
              
              **More
                  than 5 years**Long
                  Term Debt (1)
              
              $
              82,217
              
              $
              9,000
              
              $
              24,000
              
              $
              17,000
              
              $
              32,217Capital
                  Leases (2)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Operating
                  Leases (3)
              
              
              2,393
              
              
              115
              
              
              231
              
              
              213
              
              
              1,834Purchase
                  Obligations (4)
              
              
              72
              
              
              72
              
              
              —
              
              
              —
              
              
              —Dividends
                  Declared (5)
              
              
              311
              
              
              311
              
              
              —
              
              
              —
              
              
              —Total
                  (6)
              
              $
              132,419
              
              $
              12,449
              
              $
              1,345
              
              $
              56,723
              
              $
              61,902
  (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 3, 2005, and payable on January
                  13,
                  2006. 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.
  15
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
   
 
  
  
  
  
  
  
  
  
  **River
        Valley Bancorp**
  Accountants’
        Report and Consolidated Financial Statements
 December
        31, 2005 and 2004
 
 
 
 
 
 
 
 
  16
 Table
            of Contents
 2005
            ANNUAL
            REPORT
   
  
  
  
  **River
        Valley Bancorp**
  **December
        31, 2005, 2004 and 2003**
  
  **Contents**
  
 Report
                  of Independent Registered Public Accounting Firm
              
              18Consolidated
                  Financial StatementsBalance
                  Sheets
              
              19Statements
                  of Income
              
              20Statements
                  of Comprehensive Income
              
              21Statements
                  of Stockholders’ Equity
              
              22Statements
                  of Cash Flows
              
              23Notes
                  to Financial Statements
              
              24
  
  17
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
   **Report
        of Indepen** **dent
        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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of its operations and its cash
        flows for each of the three years in the period ended December 31, 2005, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  Indianapolis,
        Indiana
 January
        27, 2006
   18
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Consolidated
        Balan** **ce
        Sheets**
 **December
        31, 2005 and 2004**
 
 **2005**
              
              **2004**(In
                  Thousands, Except Share Amounts)**Assets**Cash
                  and due from banks
              
              $
              4,749
              
              $
              4,911Interest-bearing
                  demand deposits
              
              
              12,933
              
              
              7,526Fed
                  funds sold
              
              
              48
              
              
              —Cash
                  and cash equivalents
              
              
              17,730
              
              
              12,437Investment
                  securities available for sale
              
              
              59,609
              
              
              26,964Loans
                  held for sale
              
              
              —
              
              
              337Loans,
                  net of allowance for loan losses of $2,320 and $2,364
              
              
              229,724
              
              
              231,036Premises
                  and equipment
              
              
              8,189
              
              
              6,798Real
                  estate, held for sale
              
              
              271
              
              
              —Federal
                  Home Loan Bank stock
              
              
              4,050
              
              
              3,281Interest
                  receivable
              
              
              2,060
              
              
              1,599Cash
                  value of life insurance
              
              
              5,523
              
              
              5,302Other
                  assets
              
              
              1,592
              
              
              1,673Total
                  assets
              
              $
              328,748
              
              $
              289,427**Liabilities**DepositsNoninterest-bearing
              
              $
              19,270
              
              $
              15,066Interest-bearing
              
              
              187,463
              
              
              155,472Total
                  deposits
              
              
              206,733
              
              
              170,538Borrowings
              
              
              96,782
              
              
              94,600Interest
                  payable
              
              
              554
              
              
              382Other
                  liabilities
              
              
              1,661
              
              
              1,514Total
                  liabilities
              
              
              305,730
              
              
              267,034**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 - 1,596,309 and 1,584,377 shares
              
              
              8,973
              
              
              8,843Retained
                  earnings
              
              
              14,663
              
              
              13,800Shares
                  acquired by stock benefit plans
              
              
              (152
              )
              
              (215
              )Accumulated
                  other comprehensive loss
              
              
              (466
              )
              
              (35
              )Total
                  stockholders’ equity
              
              
              23,018
              
              
              22,393Total
                  liabilities and stockholders’ equity
              
              $
              328,748
              
              $
              289,427
 
 *See
        Notes to Consolidated Financial Statements*
  19
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Consolidated
        State** **ments
        of Income**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **2005**
              
              **2004**
              
              **2003**(In
                  Thousands, Except Per Share Amounts)**Interest
                  Income**Loans
                  receivable
              
              $
              14,297
              
              $
              12,457
              
              $
              11,395Investment
                  securities
              
              
              1,593
              
              
              854
              
              
              1,039Interest-earning
                  deposits and other
              
              
              408
              
              
              234
              
              
              219Total
                  interest income
              
              
              16,298
              
              
              13,545
              
              
              12,653**Interest
                  Expense**Deposits
              
              
              3,693
              
              
              2,818
              
              
              3,260Borrowings
              
              
              4,462
              
              
              2,799
              
              
              2,088Total
                  interest expense
              
              
              8,155
              
              
              5,617
              
              
              5,348**Net
                  Interest Income**
              
              
              8,143
              
              
              7,928
              
              
              7,305Provision
                  for loan losses
              
              
              288
              
              
              338
              
              
              508**Net
                  Interest Income After Provision for Loan Losses**
              
              
              7,855
              
              
              7,590
              
              
              6,797**Other
                  Income**Service
                  fees and charges
              
              
              1,890
              
              
              1,761
              
              
              1,472Net
                  realized gains on sales of available-for-sale securities
              
              
              —
              
              
              24
              
              
              4Net
                  gains on loan sales
              
              
              299
              
              
              394
              
              
              1,644Increase
                  in cash value of life insurance
              
              
              202
              
              
              208
              
              
              133Other
                  income
              
              
              109
              
              
              131
              
              
              101Total
                  other income
              
              
              2,500
              
              
              2,518
              
              
              3,354**Other
                  Expenses**Salaries
                  and employee benefits
              
              
              3,841
              
              
              3,405
              
              
              2,915Net
                  occupancy and equipment expenses
              
              
              1,094
              
              
              976
              
              
              819Data
                  processing fees
              
              
              127
              
              
              144
              
              
              163Advertising
              
              
              267
              
              
              221
              
              
              242Mortgage
                  servicing rights
              
              
              196
              
              
              192
              
              
              407Office
                  supplies
              
              
              190
              
              
              168
              
              
              161Professional
                  fees
              
              
              280
              
              
              204
              
              
              131Other
                  expenses
              
              
              1,099
              
              
              1,032
              
              
              993Total
                  other expenses
              
              
              7,094
              
              
              6,342
              
              
              5,831**Income
                  Before Income Tax**
              
              
              3,261
              
              
              3,766
              
              
              4,320Income
                  tax expense
              
              
              1,175
              
              
              1,419
              
              
              1,665**Net
                  Income**
              
              $
              2,086
              
              $
              2,347
              
              $
              2,655**Basic
                  Earnings per Share**
              
              $
              1.32
              
              $
              1.48
              
              $
              1.67**Diluted
                  Earnings per Share**
              
              $
              1.27
              
              $
              1.42
              
              $
              1.59
 
 
 *See
        Notes to Consolidated Financial Statements*
  20
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Consolidated
        Statements of** **Comprehensive Income**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **2005**
              
              **2004**
              
              **2003**(In
                  Thousands)**Net
                  Income**
              
              $
              2,086
              
              $
              2,347
              
              $
              2,655Other
                  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 $(285), $(179) and $(68)
              
              
              (431
              )
              
              (276
              )
              
              (104
              )Less:
                  Reclassification adjustment for gains included in net income, net
                  of tax
                  expense of $0, $10 and $2
              
              
              —
              
              
              14
              
              
              2(431
              )
              
              (290
              )
              
              (106
              )**Comprehensive
                  Income**
              
              $
              1,655
              
              $
              2,057
              
              $
              2,549
 
 
 
 
 
 
 
 *See
        Notes to Consolidated Financial Statements*
  21
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Consolidated
        Stateme** **nts
        of Stockholders’ Equity**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **Shares**
                
                **Common
                    Stock**
                
                **Retained
                    Earnings**
                
                **Shares
                    Acquired by Stock Benefit Plans**
                
                **Accumulated**
                  **Other**
                  **Comprehensive**
                  **Income**
                  **(Loss)**
                
                **Total****Balances,
                    January 1, 2003**
                
                
                1,621,688
                
                $
                7,957
                
                $
                12,654
                
                $
                (339
                )
                $
                361
                
                $
                20,633Net
                    income
                
                
                
                
                
                
                
                
                2,655
                
                
                
                
                
                
                
                
                2,655Unrealized
                    losses on securities, net of reclassification adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (106
                )
                
                (106
                )Cash
                    dividends ($.595 per share)
                
                
                
                
                
                
                
                
                (955
                )
                
                
                
                
                
                
                
                (955
                )Exercise
                    of stock options
                
                
                44,992
                
                
                313
                
                
                
                
                
                
                
                
                
                
                
                313Tax
                    benefit of stock options exercised and RRP
                
                
                
                
                
                236
                
                
                
                
                
                
                
                
                
                
                
                236Amortization
                    of expense related to stock benefit plans
                
                
                
                
                
                299
                
                
                
                
                
                146
                
                
                
                
                
                445Purchase
                    of stock
                
                
                (20,000
                )
                
                (100
                )
                
                (266
                )
                
                
                
                
                
                
                
                (366
                )**Balances,
                    December 31, 2003**
                
                
                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
                )
                $
                (23,018
                )
 
 
 *See
        Notes to Consolidated Financial Statements*
  22
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Consolidat** **ed
        Statements of Cash Flows**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **2005**
              
              **2004**
              
              **2003**(In
                  Thousands**)****Operating
                  Activities**Net
                  income
              
              $
              2,086
              
              $
              2,347
              
              $
              2,655Items
                  not requiring (providing) cashProvision
                  for loan losses
              
              
              288
              
              
              338
              
              
              508Depreciation
                  and amortization
              
              
              595
              
              
              580
              
              
              507Deferred
                  income tax
              
              
              25
              
              
              3
              
              
              517Investment
                  securities gains
              
              
              —
              
              
              (24
              )
              
              (4
              )Loans
                  originated for sale in the secondary market
              
              
              (13,565
              )
              
              (18,346
              )
              
              (68,536
              )Proceeds
                  from sale of loans in the secondary market
              
              
              14,026
              
              
              18,305
              
              
              70,512Gain
                  on sale of loans
              
              
              (299
              )
              
              (394
              )
              
              (1,644
              )Amortization
                  of deferred loan origination cost
              
              
              122
              
              
              109
              
              
              138Amortization
                  of expense related to stock benefit plans
              
              
              312
              
              
              400
              
              
              445(Gain)
                  loss on sale of premises and equipment
              
              
              21
              
              
              —
              
              
              —Net
                  change inInterest
                  receivable
              
              
              (461
              )
              
              (110
              )
              
              (22
              )Interest
                  payable
              
              
              172
              
              
              1
              
              
              (78
              )Other
                  adjustments
              
              
              149
              
              
              (835
              )
              
              45Net
                  cash provided by operating activities
              
              
              3,471
              
              
              2,374
              
              
              5,043**Investing
                  Activities**Purchase
                  of FHLB stock
              
              
              (695
              )
              
              (992
              )
              
              (48
              )Purchases
                  of securities available for sale
              
              
              (48,816
              )
              
              (14,133
              )
              
              (17,151
              )Proceeds
                  from maturities of securities available for sale
              
              
              15,521
              
              
              7,221
              
              
              5,387Proceeds
                  from sales of securities available for sale
              
              
              —
              
              
              14,034
              
              
              5,095Net
                  change in loans
              
              
              711
              
              
              (39,119
              )
              
              (27,287
              )Purchases
                  of premises and equipment
              
              
              (2,007
              )
              
              (1,398
              )
              
              (749
              )Proceeds
                  from sale of premises and equipment
              
              
              —
              
              
              —
              
              
              1Proceeds
                  from sale of real estate acquired through foreclosure
              
              
              95
              
              
              —
              
              
              48Premiums
                  paid on life insurance
              
              
              —
              
              
              —
              
              
              (3,635
              )Net
                  cash used in investing activities
              
              
              (35,191
              )
              
              (34,387
              )
              
              (38,339
              )**Financing
                  Activities**Net
                  change inNoninterest-bearing,
                  interest-bearing demand and savings deposits
              
              
              24,413
              
              
              (5,472
              )
              
              19,051Certificates
                  of deposit
              
              
              11,782
              
              
              (3,944
              )
              
              (926
              )Short-term
                  borrowings
              
              
              (7,818
              )
              
              22,383Proceeds
                  from borrowings
              
              
              32,000
              
              
              35,000
              
              
              16,000Repayment
                  of borrowings
              
              
              (22,000
              )
              
              (13,000
              )
              
              (6,000
              )Cash
                  dividends
              
              
              (1,211
              )
              
              (1,110
              )
              
              (878
              )Purchase
                  of stock
              
              
              (201
              )
              
              (1,895
              )
              
              (366
              )Proceeds
                  from exercise of stock options
              
              
              72
              
              
              118
              
              
              313Advances
                  by borrowers for taxes and insurance
              
              
              22
              
              
              (13
              )
              
              4Acquisition
                  of stock for stock benefit plans
              
              
              (46
              )
              
              (129
              )
              
              —Net
                  cash provided by financing activities
              
              
              37,013
              
              
              31,938
              
              
              27,198**Net
                  Change in Cash and Cash Equivalents**
              
              
              5,293
              
              
              (75
              )
              
              (6,098
              )**Cash
                  and Cash Equivalents, Beginning of Year**
              
              
              12,437
              
              
              12,512
              
              
              18,610**Cash
                  and Cash Equivalents, End of Year**
              
              $
              17,730
              
              $
              12,437
              
              $
              12,512**Additional
                  Cash Flows Information**Interest
                  paid
              
              $
              7,983
              
              $
              5,616
              
              $
              5,426Income
                  tax paid
              
              
              1,459
              
              
              833
              
              
              1,435
 
 *See
        Notes to Consolidated Financial Statements*
  23
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Not** **e
        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 subsidiaries, 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.
  **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
  24
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  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, 2005, 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.
  **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 16. The Company accounts for this plan under the recognition
        and measurement principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations. No stock-based employee compensation cost is reflected
        in net income, as all options granted under those plans had an exercise price
        equal to the market value of the underlying common stock on the grant date.
        The
        following table illustrates
  25
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  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**
                
                **2003**Net
                    income, as reported
                
                $
                2,086
                
                $
                2,347
                
                $
                2,655Less:
                    Total stock-based employee compensation cost determined under
                    the fair
                    value based method, net of income taxes
                
                
                (12
                )
                
                (23
                )
                
                (25
                )Pro
                    forma net income
                
                $
                2,074
                
                $
                2,324
                
                $
                2,630Earnings
                    per shareBasic
                    - as reported
                
                $
                1.32
                
                $
                1.48
                
                $
                1.67Basic
                    - pro forma
                
                $
                1.31
                
                $
                1.46
                
                $
                1.65Diluted
                    - as reported
                
                $
                1.27
                
                $
                1.42
                
                $
                1.59Diluted
                    - pro forma
                
                $
                1.27
                
                $
                1.40
                
                $
                1.57
   **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 and have been restated to give effect to a 2-for-1 stock split
        on the
        Company’s outstanding shares announced on December 9, 2003. Unearned ESOP shares
        have been excluded from the computation of average shares
        outstanding.
  **Reclassifications** of
        certain amounts in the 2004 and 2003 consolidated financial statements have
        been
        made to conform to the 2005 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, 2005 was
        $1,918,000.
  **Note
        3:**  **Investment
        Securities**
  **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
   26
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
 
 **2004****Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Fair**
                **Value**Available
                  for saleFederal
                  agencies
              
              $
              25,478
              
              $
              42
              
              $
              107
              
              $
              25,413State
                  and municipal
              
              
              1,430
              
              
              10
              
              
              2
              
              
              1,438Mortgage
                  and other asset-backed securities
              
              
              113
              
              
              —
              
              
              —
              
              
              113Total
                  investment securities
              
              $
              27,021
              
              $
              52
              
              $
              109
              
              $
              26,964
  The
        amortized cost and fair value of securities available for sale at December
        31,
        2005, 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
              
              $
              11,997
              
              $
              11,892One
                  to five years
              
              
              46,825
              
              
              46,167Five
                  to ten years
              
              
              1,008
              
              
              998More
                  than ten years
              
              
              469
              
              
              46960,299
              
              
              59,526Mortgage
                  and other asset-backed securities
              
              
              83
              
              
              83Totals
              
              $
              60,382
              
              $
              59,609
  Securities
        with a carrying value of $15,723,000 and $11,912,000 were pledged at
        December 31, 2005 and 2004 to secure repurchase agreements. Securities with
        a carrying value of $13,742,000 and $10,475,000 were pledged at
        December 31, 2005 and 2004 to secure FHLB advances. Securities with a
        carrying value of $20,603,000 and $3,021,000 were pledged at December 31,
        2005 and 2004 to secure certain deposits and for other purposes as permitted
        or
        required by law.
  There
        were no sales of securities available for sale in 2005. Proceeds from sales
        of
        securities available for sale during 2004 and 2003 were $14,034,000 and
        $5,095,000. Gross gains of $29,000 and $10,000 and gross losses of $5,000
        and
        $6,000 were realized on those sales.
  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, 2005 and 2004, were $54,933,000 and $20,080,000, which is
        approximately 92.2 percent and 74.5 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.
  27
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  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.
  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, 2005 and
        December 31, 2004:
  **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**2004****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
              
              $
              18,857
              
              $
              107
              
              $
              —
              
              $
              —
              
              $
              18,857
              
              $
              107State
                  and Municipal
              
              
              1,223
              
              
              2
              
              
              —
              
              
              —
              
              
              1,223
              
              
              2Total
                  temporarily impaired securities
              
              $
              20,080
              
              $
              109
              
              $
              —
              
              $
              —
              
              $
              20,080
              
              $
              109
  **Note
        4:**  **Loans
        and Allowance**
 **2005**
              
              **2004**Residential
                  real estateOne-to-four
                  family residential
              
              $
              97,605
              
              $
              104,466Multi-family
                  residential
              
              
              8,412
              
              
              8,100Construction
              
              
              13,549
              
              
              20,046Nonresidential
                  real estate and land
              
              
              82,054
              
              
              67,635Commercial
              
              
              28,148
              
              
              32,581Consumer
                  and other
              
              
              6,940
              
              
              8,888236,708
              
              
              241,716Unamortized
                  deferred loan costs
              
              
              488
              
              
              496Undisbursed
                  loans in process
              
              
              (5,152
              )
              
              (8,812
              )Allowance
                  for loan losses
              
              
              (2,320
              )
              
              (2,364
              )Total
                  loans
              
              $
              229,724
              
              $
              231,036
  28
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
 
 **2005**
              
              **2004**
              
              **2003**Allowance
                  for loan lossesBalances,
                  January 1
              
              $
              2,364
              
              $
              2,056
              
              $
              2,101Provision
                  for losses
              
              
              288
              
              
              338
              
              
              508Recoveries
                  on loans
              
              
              75
              
              
              144
              
              
              190Loans
                  charged off
              
              
              (407
              )
              
              (174
              )
              
              (743
              )Balances,
                  December 31
              
              $
              2,320
              
              $
              2,364
              
              $
              2,056
   Information
        on impaired loans is summarized below.
  **2005**
              
              **2004**Impaired
                  loans with an allowance
              
              $
              1,096
              
              $
              867Impaired
                  loans for which the discounted cash flows or collateral value exceeds
                  the
                  carrying value of the loan
              
              
              2,404
              
              
              1,959$
              3,500
              
              $
              2,826Allowance
                  for impairment loans (included in the Company’s allowance for loan
                  losses)
              
              $
              293
              
              $
              136
  
 **2005**
              
              **2004**
              
              **2003**Average
                  balance of impaired loans
              
              $
              3,417
              
              $
              2,058
              
              $
              1,242Interest
                  income recognized on impaired loans
              
              
              246
              
              
              139
              
              
              107Cash-basis
                  interest included above
              
              
              243
              
              
              133
              
              
              97
  At
        December 31, 2005 and 2004, the Company had non-accruing loans totaling
        $1,747,000 and $2,201,000, respectively. At December 31, 2005 and 2004, there
        were no accruing loans delinquent 90 days or more.
  **Note
        5:**  **Premises
        and Equipment**
 
 **2005**
              
              **2004**Land
              
              $
              1,499
              
              $
              1,499Buildings
              
              
              6,484
              
              
              3,967Equipment
              
              
              3,044
              
              
              3,422Construction
                  in progress
              
              
              —
              
              
              772Total
                  cost
              
              
              11,027
              
              
              9,660Accumulated
                  depreciation and amortization
              
              
              (2,838
              )
              
              (2,862
              )Net
              
              $
              8,189
              
              $
              6,798
  29
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        6:**  **Deposits**
  **2005**
              
              **2004**Demand
                  deposits
              
              $
              75,854
              
              $
              51,055Savings
                  deposits
              
              
              28,438
              
              
              28,825Certificates
                  and other time deposits of $100,000 or more
              
              
              45,757
              
              
              35,153Other
                  certificates and time deposits
              
              
              56,684
              
              
              55,505Total
                  deposits
              
              $
              206,733
              
              $
              170,538
  Certificates
        and other time deposits maturing in
  2006
              
              $
              67,9342007
              
              
              21,9762008
              
              
              7,1422009
              
              
              3,7952010
              
              
              1,594Thereafter
              
              
              —$
              102,441
   **Note
        7:**  **Borrowings**
  **2005**
              
              **2004**Repurchase
                  agreements
              
              $
              14,565
              
              $
              22,383Federal
                  Home Loan Bank advances
              
              
              75,000
              
              
              65,000Subordinated
                  debentures
              
              
              7,217
              
              
              7,217Total
                  borrowings
              
              $
              96,782
              
              $
              94,600
  Securities
        sold under agreements to repurchase consist of obligations of the Bank to
        other
        parties. The obligations are secured by investment securities, which collateral
        is held by a safekeeping agent. The maximum amount of outstanding agreements
        at
        any month end during 2005 totaled $25,338,000, and the daily average of such
        agreements totaled $18,898,000. Repurchase agreements have a term of one
        business day.
  Maturities
        by year for advances at December 31, 2005 are $9,000,000 in 2006, $14,000,000
        in
        2007, $10,000,000 in 2008, $7,000,000 in 2009, $10,000,000 in 2010 and
        $25,000,000 thereafter. The weighted-average interest rate at December 31,
        2005
        and 2004 was 4.34% and 4.10%.
  The
        Federal Home Loan Bank advances are secured by loans and investment securities
        totaling $141,684,000 at December 31, 2005. Advances are subject to
        restrictions or penalties in the event of prepayment.
  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
  30
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  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.
  In
        the
        2003 financial statements, the Company had consolidated the Trust through
        which
        it has issued trust preferred securities (TPS) and reported the TPS as
“guaranteed preferred beneficial interests in the Company’s subordinated
        debentures” in the consolidated balance sheets. The Financial Accounting
        Standards Board (FASB) had previously issued FASB Interpretation No. 46 (FIN
        46)
        and, in December 2003, issued a revision to FIN 46 to clarify certain provisions
        which affected the accounting for TPS. As a result of the provisions in FIN
        46,
        the Trust was deconsolidated in 2004, with the Company accounting for its
        investment in the Trust as assets, its subordinated debentures as debt, and
        the
        interest paid thereon as interest expense. During 2003, the Company classified
        the TPS as debt and the dividends as interest but eliminated its common stock
        investment and dividends received from the Trust. The prior period financial
        information has not been adjusted to give effect to the revised provisions
        of
        FIN 46 as the changes are not material to the financial statements and would
        have had no effect on previously reported net interest margin, net income
        or
        earnings per share.
  **Note
        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
        $88,654,000, $88,696,000 and $91,639,000 at December 31, 2005, 2004 and
        2003.
  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.
 
 **2005**
              
              **2004**
              
              **2003**Mortgage
                  Servicing RightsBalances,
                  January 1
              
              $
              1,047
              
              $
              1,209
              
              $
              881Servicing
                  rights capitalized
              
              
              175
              
              
              198
              
              
              630Amortization
                  of servicing rights
              
              
              (383
              )
              
              (360
              )
              
              (302
              )839
              
              
              1,047
              
              
              1,209Valuation
                  allowance
              
              
              —
              
              
              (187
              )
              
              (355
              )Balances,
                  December 31
              
              $
              839
              
              $
              860
              
              $
              854
  Activity
        in the valuation allowance for mortgage servicing rights was as
        follows:
  **2005**
              
              **2004**
              
              **2003**Balance,
                  beginning of year
              
              $
              187
              
              $
              355
              
              $
              250Additions
              
              
              —
              
              
              —
              
              
              105Reduction
              
              
              (187
              )
              
              (168
              )
              
              —Balance,
                  end of year
              
              $
              —
              
              $
              187
              
              $
              355
  31
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        9:**  **Income
        Tax**
  **2005**
              
              **2004**
              
              **2003**Income
                  tax expense (benefit)Currently
                  payableFederal
              
              $
              933
              
              $
              1,159
              
              $
              878State
              
              
              217
              
              
              257
              
              
              269DeferredFederal
              
              
              16
              
              
              7
              
              
              459State
              
              
              9
              
              
              (4
              )
              
              59Total
                  income tax expense
              
              $
              1,175
              
              $
              1,419
              
              $
              1,665Reconciliation
                  of federal statutory to actual tax expense (benefit)Federal
                  statutory income tax at 34%
              
              $
              1,109
              
              $
              1,280
              
              $
              1,469Effect
                  of state income taxes
              
              
              149
              
              
              167
              
              
              217Qualified
                  Zone Academy credit
              
              
              (57
              )
              
              (62
              )
              
              (65
              )Cash
                  value of life insurance
              
              
              (69
              )
              
              (71
              )
              
              (45
              )ESOP
                  expense in excess of cost
              
              
              69
              
              
              100
              
              
              102Other
              
              
              (26
              )
              
              5
              
              
              (13
              )Actual
                  tax expense
              
              $
              1,175
              
              $
              1,419
              
              $
              1,665Effective
                  tax rate
              
              
              36.0%
              
              
              37.7%
              
              
              38.5%
  32
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (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:
  **2005**
              
              **2006****Assets**Allowance
                  for loan losses
              
              $
              898
              
              $
              909Deferred
                  compensation
              
              
              256
              
              
              188Pensions
                  and employee benefits
              
              
              —
              
              
              17Purchase
                  accounting adjustments
              
              
              56
              
              
              61Securities
                  available for sale
              
              
              307
              
              
              22Investment
                  valuation allowance
              
              
              103
              
              
              102Other
              
              
              35
              
              
              —Total
                  assets
              
              
              1,655
              
              
              1,299**Liabilities**Depreciation
                  and amortization
              
              
              (427
              )
              
              (437
              )Loan
                  fees
              
              
              (189
              )
              
              (191
              )Pensions
                  and employee benefits
              
              
              (33
              )
              
              —Mortgage
                  servicing rights
              
              
              (325
              )
              
              (331
              )Federal
                  Home Loan Bank stock dividends
              
              
              (103
              )
              
              (74
              )Prepaid
                  expenses
              
              
              (129
              )
              
              (100
              )Other
              
              
              (34
              )
              
              (10
              )Total
                  liabilities
              
              
              (1,240
              )
              
              (1,143
              )$
              415
              
              $
              156
  There
        was
        no income tax expense attributable to securities gains in 2005. Income tax
        expense attributable to securities gains was $10,000 and $2,000 for the years
        ended December 31, 2004 and 2003.
  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.
  **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.
  33
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
 
 Financial
        instruments whose contract amount represents credit risk as of December 31
        were
        as follows:
  **2005**
              
              **2004**Commitments
                  to
                  extend credit
              
              $
              25,205
              
              $
              24,739Standby
                  letters of credit
              
              
              497
              
              
              210
  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, 2005 and 2004 was $114,000
        and $107,000.
 Future
        minimum lease payments under the leases are:
  2006
              
              $
              1152007
              
              
              1152008
              
              
              1162009
              
              
              1222010
              
              
              91Thereafter
              
              
              1,834Total
                  minimum lease payments
              
              $
              2,393
  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:**  **Stockholders’
        Equity**
  On
        December 9, 2003, the Company announced a 2-for-1 stock split, under which
        each
        share of its common stock outstanding at the close of business on
        December 26, 2003 was converted into two shares of common stock. The
        additional certificates were distributed to stockholders on January 9,
        2004. As a result of the stock split, the number of shares outstanding increased
        from 823,340 to 1,646,680 shares. Unless otherwise noted, all share and per
        share data have been restated for the 2-for-1 split.
  34
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        12:**  **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, 2005, the stockholder’s equity of the Bank was $28,596,000, of
        which approximately $25,974,000 was restricted from dividend distribution
        to the
        Company.
  **Note
        13:**  **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.
  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, 2005 and 2004,
        the Bank is categorized as well capitalized and met all subject capital adequacy
        requirements. There are no conditions or events since December 31, 2005 that
        management believes have changed the Bank’s classification.
  
  35
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts **)**
 
 **Actual**
              
              **Required
                  for Adequate Capital**
              
              **To
                  Be Well Capitalized****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio****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**2004**Total
                  risk-based capital(to
                  risk-weighted assets)
              
              $
              29,407
              
              
              12.7
              %
              $
              18,496
              
              
              8.0
              %
              $
              23,120
              
              
              10.0
              %Tier
                  1 capital(to
                  risk-weighted assets)
              
              
              27,352
              
              
              11.8
              %
              
              9,248
              
              
              4.0
              %
              
              13,872
              
              
              6.0
              %Core
                  capital(to
                  adjusted total assets)
              
              
              27,352
              
              
              9.5
              %
              
              11,506
              
              
              4.0
              %
              
              14,383
              
              
              5.0
              %Core
                  capital(to
                  adjusted tangible assets)
              
              
              27,352
              
              
              9.5
              %
              
              5,753
              
              
              2.0
              %
              
              —
              
              
              N/ATangible
                  capital(to
                  adjusted total assets)
              
              
              27,352
              
              
              9.5
              %
              
              4,315
              
              
              1.5
              %
              
              —
              
              
              N/A
  **Note
        14:**  **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 $191,000 and $45,000 for
        the
        years ended December 31, 2005 and 2004.
  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 $51,000, $45,000 and $43,000 for the years ended
        December 31, 2005, 2004 and 2003.
  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
  36
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  Bank
        is
        the beneficiary. Expense recognized under the supplemental retirement plan
        totaled approximately $80,000, $64,000 and $51,000 for the years ended
        December 31, 2005, 2004 and 2003.
  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. There were no unearned
        ESOP shares at December 31, 2005 and 13,102 at December 31, 2004 that had a
        fair value of $295,000. Shares are released to participants proportionately
        as
        the loan is repaid. 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, are treated as
        compensation expense. Compensation expense is recorded equal to the fair
        market
        value of the stock when contributions, which are determined annually by the
        Board of Directors of the Company and Bank, are made to the ESOP. ESOP expense
        for the years ended December 31, 2005, 2004 and 2003 was $269,000, $373,000
        and $410,000. At December 31, 2005, the ESOP had 190,440 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. At December 31, 2003, the ESOP had 161,396
        allocated shares, 29,044 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, 2005, 74,366
        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 $32,000, $50,000 and $35,000 for
        the
        years ended December 31, 2005, 2004 and 2003.
  **Note
        15:**  **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, 2005
              
              $
              1,951Change
                  in composition
              
              
              (1,038
              )New
                  loans, including renewals
              
              
              686Payments,
                  etc.,
                  including renewals
              
              
              (294
              )Balances,
                  December 31, 2005
              
              $
              1,305
  Deposits
        from related parties held by the Bank at December 31, 2005 and 2004 totaled
        $1,190,000 and $2,789,000.
  37
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        16:**  **Stock
        Option Plan**
  Under
        the
        Company’s incentive stock option plan, which is accounted for under the
        recognition and measurement principles of Accounting Principles Board Opinion
        (APB) No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations, the Company grants selected executives and other
        key
        employees stock option awards which vest at a rate of 20 percent a year.
        During 1997, the Company authorized the grant of options for up to 238,050
        shares of the Company’s common stock. The exercise price of each option, which
        has a ten-year life, was equal to the market price of the Company’s stock on the
        date of grant; therefore, no compensation expense is recognized.
  Although
        the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma
        disclosures of net income and earnings per share as if the Company had accounted
        for its employee stock options under that Statement. The fair value of each
        option grant was estimated on the grant date using an option-pricing model
        with
        the following assumptions:
  **2004**Risk-free
                  interest rates
              
              
              2.4%Dividend
                  yields
              
              
              2.9%Volatility
                  factors of expected market price of common stock
              
              
              12.4%Weighted-average
                  expected life of the options
              
              
              7
                  years
  The
        pro
        forma effect on net income is disclosed in Note 1.
  The
        following is a summary of the status of the Company’s stock option plan and
        changes in that plan as of and for the years ended December 31, 2005, 2004
        and
        2003.
  **2005**
              
              **2004**
              
              **2003****Options**
              
              
              **Shares**
              
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              
              **Shares**
              
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              
              **Shares**
              
              
              **Weighted**
                **Average**
                **Exercise
                  Price**Outstanding,
                  beginning of year
              
              
              110,922
              
              $
              8.13
              
              
              125,276
              
              $
              7.63
              
              
              170,268
              
              $
              7.58Granted
              
              
              —
              
              
              —
              
              
              5,000
              
              
              22.67
              
              
              —
              
              
              —Exercised
              
              
              (12,722
              )
              
              6.90
              
              
              (16,154
              )
              
              7.76
              
              
              (44,992
              )
              
              7.36Forfeited/expired
              
              
              —
              
              
              —
              
              
              (3,200
              )
              
              13.25
              
              
              —
              
              
              —Outstanding,
                  end of year
              
              
              98,200
              
              $
              8.29
              
              
              110,922
              
              $
              8.13
              
              
              125,276
              
              $
              7.63Options
                  exercisable at year end
              
              
              89,400
              
              
              
              
              
              89,922
              
              
              
              
              
              94,076Weighted-average
                  fair value of options granted during the year
              
              
              
              
              $
              —
              
              
              
              
              $
              2.13
              
              
              
              
              $
              —
  As
        of
        December 31, 2005, options totaling 20,148 have exercise prices ranging from
        $5.38 to $6.32 and a weighted-average remaining contractual life of 4.0 years,
        options totaling 63,852 have exercise prices ranging from $6.99 to $7.39
        and a
        weighted-average remaining contractual life of 2.7 years, options totaling
        800
        have an exercise price of $8.95 and a weighted-average remaining contractual
        life of 5.5 years, and options totaling 8,400 have an exercise price of $13.25
        and a weighted-average remaining contractual life of 6.7 years and options
        totaling 5,000 have an exercise price of $22.67 and a weighted-average remaining
        contractual life of 8.3 years.
  38
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        17:**  **Earnings
        Per Share**
  **2005**
              
              **2004**
              
              **2003****Income**
              
              **Weighted-**
                **Average**
                **Shares**
              
              **Per**
                **Shares**
                **Amount**
              
              **Income**
              
              **Weighted-**
                **Average**
                **Shares**
              
              **Per**
                **Shares**
                **Amount**
              
              **Income**
              
              **Weighted-**
                **Average**
                **Shares**
              
              **Per**
                **Shares**
                **Amount****Basic
                  Earnings Per Share**Income
                  available to common stockholders
              
              $
              2,086
              
              
              1,579,762
              
              $
              1.32
              
              $
              2,347
              
              
              1,586,889
              
              $
              1.48
              
              $
              2,655
              
              
              1,590,732
              
              $
              1.67**Effect
                  of Dilutive Stock Options**
              
              
              
              
              
              59,778
              
              
              
              
              
              
              
              
              70,015
              
              
              
              
              
              
              
              
              79,418**Diluted
                  Earnings Per Share**Income
                  available to common stockholders and assumed conversions
              
              $
              2,086
              
              
              1,639,540
              
              $
              1.27
              
              $
              2,347
              
              
              1,656,904
              
              $
              1.42
              
              $
              2,655
              
              
              1,670,150
              
              $
              1.59
  Options
        to purchase 5,000 shares of common stock at an exercise price of $22.67 per
        share were outstanding at December 31, 2005, but were not included in the
        computation of diluted earnings per share because the options were
        anti-dilutive.
  **Note
        18:**  **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 Equivalent** s
        - 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.
  39
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Short-Term
        Borrowings** - The
        fair value of short-term borrowings approximates carrying value.
  **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:
 
 **2005**
              
              **2004****Carrying
                  Amount**
              
              **Fair
                  Value**
              
              **Carrying
                  Amount**
              
              **Fair
                  Value****Assets**Cash
                  and cash equivalents
              
              $
              17,730
              
              $
              17,730
              
              $
              12,437
              
              $
              12,437Investment
                  securities available for sale
              
              
              59,609
              
              
              59,609
              
              
              26,964
              
              
              26,964Loans
                  including loans held for sale, net
              
              
              229,724
              
              
              229,475
              
              
              231,373
              
              
              233,190Interest
                  receivable
              
              
              2,059
              
              
              2,059
              
              
              1,599
              
              
              1,599Stock
                  in FHLB
              
              
              4,050
              
              
              4,050
              
              
              3,281
              
              
              3,281**Liabilities**Deposits
              
              
              206,733
              
              
              205,906
              
              
              170,538
              
              
              170,624Short-term
                  borrowings
              
              
              14,565
              
              
              14,565
              
              
              22,383
              
              
              22,383FHLB
                  advances
              
              
              75,000
              
              
              73,738
              
              
              65,000
              
              
              65,092Other
                  borrowings
              
              
              7,217
              
              
              7,153
              
              
              7,217
              
              
              7,345Interest
                  payable
              
              
              554
              
              
              554
              
              
              382
              
              
              382Advance
                  payments by borrowers for taxes and insurance
              
              
              72
              
              
              72
              
              
              50
              
              
              50**Off-Balance
                  Sheet Assets (Liabilities)**Commitments
                  to extend credit
              
              
              —
              
              
              —
              
              
              —
              
              
              —Standby
                  letters of credit
              
              
              —
              
              
              —
              
              
              —
              
              
              —
  40
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        19:**  **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:
   **Condensed
        Balance Sheets**
  **2005**
              
              **2004****Assets**Cash
                  and due from banks
              
              $
              1,345
              
              $
              529Investment
                  in common stock of the Bank
              
              
              28,596
              
              
              28,378Investment
                  in RVB Trust I
              
              
              217
              
              
              217Other
                  assets
              
              
              589
              
              
              786Total
                  assets
              
              $
              30,747
              
              $
              29,910**Liabilities**Borrowings
              
              $
              7,217
              
              $
              7,217Dividends
                  payable
              
              
              311
              
              
              300Other
                  liabilities
              
              
              202
              
              
              —Total
                  liabilities
              
              
              7,730
              
              
              7,517**Stockholders’
                  Equity**
              
              
              23,017
              
              
              22,393Total
                  liabilities and stockholders’ equity
              
              $
              30,747
              
              $
              29,910
    **Condensed
        Statements of Income**
  **2005**
              
              **2004**
              
              **2003****Income**Dividends
                  from the Bank
              
              $
              2,000
              
              $
              500
              
              $
              632Other
                  income
              
              
              19
              
              
              32
              
              
              63Total
                  income
              
              
              2,019
              
              
              532
              
              
              695**Expenses**Interest
                  expense
              
              
              462
              
              
              462
              
              
              346Other
                  expenses
              
              
              166
              
              
              148
              
              
              232Total
                  expenses
              
              
              628
              
              
              610
              
              
              578**Income
                  (loss) before income tax and equity in undistributed income of
                  subsidiary**
              
              
              1,391
              
              
              (78
              )
              
              117Income
                  tax benefit (expense)
              
              
              269
              
              
              (229
              )
              
              204**Income
                  before equity in undistributed income of
                  subsidiary**
              
              
              1,660
              
              
              151
              
              
              321Equity
                  in undistributed income of the Bank
              
              
              426
              
              
              2,196
              
              
              2,334**Net
                  Income**
              
              $
              2,086
              
              $
              2,347
              
              $
              2,655
  41
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
 
  **Condensed
        Statements of Cash Flows**
  **2005**
              
              **2004**
              
              **2003****Operating
                  Activities**Net
                  income
              
              $
              2,086
              
              $
              2,347
              
              $
              2,655Items
                  not requiring (providing) cash
              
              
              117
              
              
              (1,991
              )
              
              (2,625
              )Net
                  cash provided by operating activities
              
              
              2,203
              
              
              356
              
              
              30**Financing
                  Activities**Purchase
                  of stock
              
              
              (248
              )
              
              (1,895
              )
              
              (366
              )Proceeds
                  from exercise of stock options
              
              
              72
              
              
              118
              
              
              313Proceeds
                  from borrowings
              
              
              —
              
              
              —
              
              
              7,000Capital
                  contribution to subsidiary
              
              
              —
              
              
              —
              
              
              (4,000
              )Cash
                  dividends
              
              
              (1,211
              )
              
              (1,110
              )
              
              (878
              )Net
                  cash provided by (used in) financing activities
              
              
              (1,387
              )
              
              (2,887
              )
              
              2,069**Net
                  Change in Cash and Cash Equivalents**
              
              
              816
              
              
              (2,531
              )
              
              2,099**Cash
                  and Cash Equivalents at Beginning of Year**
              
              
              529
              
              
              3,060
              
              
              961**Cash
                  and Cash Equivalents at End of Year**
              
              $
              1,345
              
              $
              529
              
              $
              3,060
  **Note
        20:**  **Quarterly
        Results of Operations (Unaudited)**
  **Quarter**
                **Ending**
              
              **Interest**
                **Income**
              
              **Interest**
                **Expense**
              
              **Net**
                **Interest**
                **Income**
              
              **Provision**
                **For**
                **Loan
                  Losses**
              
              **Net**
                **Income**
              
              **Basic**
                **Earnings**
                **Per
                  Share**
              
              **Diluted**
                **Earnings**
                **Per
                  Share**2005March
              
              $
              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
              
              
              1.272004March
              
              $
              3,208
              
              $
              1,282
              
              $
              1,926
              
              $
              102
              
              $
              609
              
              $
              0.38
              
              $
              0.36June
              
              
              3,206
              
              
              1,317
              
              
              1,889
              
              
              92
              
              
              545
              
              
              0.34
              
              
              0.33September
              
              
              3,428
              
              
              1,413
              
              
              2,015
              
              
              72
              
              
              646
              
              
              0.41
              
              
              0.39December
              
              
              3,703
              
              
              1,605
              
              
              2,098
              
              
              72
              
              
              547
              
              
              0.35
              
              
              0.34$
              13,545
              
              $
              5,617
              
              $
              7,928
              
              $
              338
              
              $
              2,347
              
              
              1.48
              
              
              1.42
  42
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **River
        Valley Bancorp**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 (Table
        Dollar Amounts in Thousands:
 Except
        Per Share Amounts)
  **Note
        21:**  **Future
        Accounting Pronouncements**
  ***Share-Based
        Compensation***
  In
        December 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which
        eliminates the ability to account for share-based compensation transactions
        using Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        generally requires that such transactions be accounted for using a fair
        value-based method. On April 14, 2005, the SEC amended the compliance date
        for
        SFAS 123R from the beginning of the first interim or annual period that begins
        after June 15, 2005 to the next fiscal year beginning after June 15, 2005.
        The
        Company adopted SFAS 123R as of January 1, 2006. The effect on the Company’s
        results of operations depends on the level of future option grants and the
        calculation of the fair value of the options granted at such future date,
        as
        well as the vesting periods provided and possible performance condition
        requirements, and so cannot currently be predicted for future awards.
  SFAS
        123R
        applies to all awards granted after the effective date and to awards modified,
        repurchased, or cancelled after that date. The statement establishes standards
        for accounting for share-based payment transactions. Share-based payment
        transactions are those in which an entity exchanges its equity instruments
        for
        goods or services or in which an entity incurs liabilities in exchange for
        goods
        or services that are based on the fair value of the entity’s equity instruments
        or that may be settled by the issuance of these equity instruments. SFAS
        123R
        covers a wide range of share-based compensation arrangements including stock
        options, restricted share plans, performance-based awards, share appreciation
        rights and employee stock purchase plans.
  As
        of
        January 1, 2006, the Company applied SFAS 123R using the modified prospective
        method. This method requires that compensation expense be recorded for all
        unvested stock options and restricted stock awards over the requisite service
        period (generally the vesting schedule). For liability-classified awards,
        the
        Company measures the cost of employee services received in exchange for an
        award
        based on its current fair value. The fair value is re-measured subsequently
        at
        each reporting date through the settlement date, and changes in fair value
        are
        recognized as compensation cost. For equity-classified awards, the grant
        date
        fair value is recognized in earnings over the requisite service period.
  ***Earnings
        Per Share***
  The
        FASB
        has issued a proposed amendment to SFAS No. 128, *Earnings
        Per Share* ,
        to
        clarify guidance for mandatorily convertible instruments, the treasury stock
        method, contingently issuable shares, and contracts that may be settled in
        cash
        or share. The primary impact on the Company of the proposed Statement is
        the
        change to the treasury stock method for year-to-date diluted earnings per
        share.
  Currently,
        SFAS No. 128 requires that the number of incremental shares included in the
        denominator be determined by computing a year-to-date weighted-average of
        the
        number of incremental shares included in each quarterly diluted EPS computation.
        Under this proposed Statement, the number of incremental shares included
        in
        year-to-date diluted earnings per share would be computed using the average
        market price of common shares for the year-to-date period, independent of
        the
        quarterly computations. This computational change is not expected to have
        a
        significant impact on the Company’s diluted earnings per sha re.
  43
 Table
            of Contents
 **RIVER
            VALLEY BANCORP**
  **GENE** **RAL
        INFORMATION FOR SHAREHOLDERS**
 
  **Transfer
                  Agent and Registrar:**
              **Shareholder
                  and General Inquiries**:Registrar
                  and Transfer Company
              River
                  Valley Bancorp10
                  Commerce Drive
              Attn:
                  Matthew P. ForresterCranford,
                  NJ 07016-3572
              430
                  Clifty Drive, P.O. Box 1590Tel:
                  1-800-368-5948
              Madison,
                  Indiana 47250www.rtco.com
              Tel:
                  (812) 273-4949Fax:
                  (812) 273-4944**Corporate
                  Counsel:**
              **Special
                  Counsel:**Lonnie
                  D. Collins, Attorney
              Barnes
                  & Thornburg LLP307
                  Jefferson Street
              11
                  S. Meridian StreetMadison,
                  Indiana 47250
              Indianapolis,
                  Indiana 46204Tel:
                  (812) 265-3616
              Tel:
                  (317) 236-1313Fax:
                  (812) 273-3143
              Fax:
                  (317) 231-7433
  
  **Annual
        and Other Reports:**
  Additional
        copies of this Annual Report to Shareholders and copies of the most recent
        Form
        10-K may be obtained without charge by contacting the Corporation.
  
  **Offices
        of River Valley Financial Bank:**
 Hilltop:
                430
                    Clifty DriveDowntown:
                233
                    East Main StreetDrive
                    thru:
                401
                    East Main StreetWal-Mart:
                567
                    Ivy Tech DriveSellersburg:
                8005
                    Highway 311Hanover:
                10
                    Medical PlazaCharlestown:
                1025
                    Highway 62Carrollton,
                    KY:
                1501
                    Highland Avenue
  **Internet
        and E-MAIL Address:** rvfbank.com
  
  **Annual
        Meeting:**
  The
        Annual Meeting of Shareholders of River Valley Bancorp will be held on
        Wednesday, April 19, 2006, at 3:00 PM, at 430 Clifty Drive, Madison, IN
        47250.
  44
 Table
            of Contents
 2005
            ANNUAL
            REPORT
  **DIREC** **TORS
        OF THE CORPORATION AND THE BANK**
 
  Fred
                  W. Koehler
              Matthew
                  P. Forrester
              Lonnie
                  D. Collins*Chairman*
              *Director
                  & President*
              *Board
                  Secretary*Robert
                  W. Anger
              Michael
                  J. Hensley*Director*
              *Director*L.
                  Sue Livers
              Charles
                  J. McKay*Director*
              *Director*
 
  
 **EXECUTIVE
        OFFICERS OF RIVER VALLEY FINANCIAL BANK**
 
  Matthew
                  P. Forrester
              Barbara
                  J. Eades
              Loy
                  M. Skirvin*President,
                  CEO*
              *Vice
                  President of Retail Banking*
              *Vice
                  President of Human Resources*Anthony
                  D. Brandon
              Larry
                  C. Fouse
              Vickie
                  Grimes*Executive
                  Vice President*
              *Vice
                  President of Finance*
              *Internal
                  Auditor*Mark
                  A. Goley
              Deanna
                  J. Liter*Vice
                  President of Lending*
              *Vice
                  President of Data Services*Gregory
                  T. Siegrist
              John
                  Muessel*Vice
                  President Business Development*
              *Vice
                  President Trust Officer*
 
 
 **OFFICERS
        AND MANAGERS OF RIVER VALLEY FINANCIAL BANK**
  *Loan
                  Officers*
                Theresa
                  A. Dryden
                Sherri
                  Furnish
                Rick
                  T. Nelson
                Robert
                  J. Schoenstein -*AVP*
                
                *Customer
                  Service**Managers*
                Stephanie
                  Cross
                Rebecca
                  Hammond -*AVP*
                Lacey
                  Kelly
                Monica
                  Middleton
                Melissa
                  Shelton
                Sandy
                  Stilwell
              *Other
                  Managers*
                Rebecca
                  Cole -*Collection
                  Officer*
                Roger
                  Ellis -*Credit
                  Analyst*
                Laura
                  Denning*-
                  Loan Processing Manager*
                Luann
                  Nay -*Loan
                  Administrator*
                Mary
                  Ellen Wehner -*Commercial
                  Loan Operations Manager*
                Teresa
                  Smith -*Data
                  Processing Manager*
                Amelia
                  Melton -*CPA,
                  Accounting Manager*
                Linda
                  Wakefield -*Accounting
                  Coordinator*
                Crystal
                  Barnes -*Compliance
                  Manager*
                Debbie
                  Finnegan -*Compliance
                  Trainee*
                Linda
                  Stark -*Trust
                  Administration*
                Mary
                  Ellen McClelland -*Administrative
                  Assistant*