UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




(MARK
ONE)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended September 30, 2008OR ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ________________ to
      ________________




Commission
file number: 0-21765




RIVER
VALLEY BANCORP


(Exact
name of registrant as specified in its charter)




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




(812)
273-4949


(Registrant’s
telephone number, including area code)




[None]


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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x          No   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):




Large
      Accelerated Filer ̈
            Accelerated
      Filer  ̈Non-Accelerated
      Filer  ̈
              (Do
      not check if a smaller reporting company)
            Smaller
      Reporting Company x




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


Yes   ̈          No  x




The
number of shares of the Registrant’s common stock, without par value,
outstanding as of November 12, 2008 was 1,639,881.







RIVER
VALLEY BANCORP




FORM
10-Q




INDEX





Page No.PART I.
      FINANCIAL INFORMATION
            3Item
      1.
            Financial
      Statements
            3Consolidated
      Condensed Balance Sheets
            3Consolidated
      Condensed Statements of Income
            4Consolidated
      Condensed Statements of Comprehensive Income (Loss)
            5Consolidated
      Condensed Statements of Cash Flows
            6Notes
      to Unaudited Consolidated Condensed Financial Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            14Item
      3.
            Quantitative
      and Qualitative Disclosure about Market Risk
            22Item
      4T.
            Controls
      and Procedures
            23PART
      II. OTHER INFORMATION
            24Item
      1.
            Legal
      Proceedings
            24Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            24Item
      3.
            Defaults
      Upon Senior Securities
            24Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            24Item
      5.
            Other
      Information
            24Item
      6.
            Exhibits
            24SIGNATURES
            25EXHIBIT
      INDEX
            26







2


PART
I FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




RIVER
VALLEY BANCORP


Consolidated
Condensed Balance Sheets




September
      30, 2008
                (Unaudited)
            
            
            December
      31, 2007(In
      Thousands, Except Share Amounts)AssetsCash
      and due from banks
            
            $
            5,306
            
            
            $
            5,131Interest-bearing
      demand deposits
            
            
            3,040
            
            
            
            3,006Cash
      and cash equivalents
            
            
            8,346
            
            
            
            8,137Investment
      securities available for sale
            
            
            52,595
            
            
            
            58,999Loans
      held for sale
            
            
            0
            
            
            
            312Loans
            
            
            281,624
            
            
            
            260,836Allowance
      for loan losses
            
            
            (2,209
            )
            
            
            (2,208
            )Net
      loans
            
            
            279,415
            
            
            
            258,628Premises
      and equipment
            
            
            7,782
            
            
            
            7,631Real
      estate, held for sale
            
            
            173
            
            
            
            184Federal
      Home Loan Bank stock
            
            
            4,850
            
            
            
            4,750Interest
      receivable
            
            
            2,092
            
            
            
            2,396Cash
      value of life insurance
            
            
            7,791
            
            
            
            7,552Other
      assets
            
            
            1,825
            
            
            
            1,472Total
      assets
            
            $
            364,869
            
            
            $
            350,061LiabilitiesDepositsNon-interest-bearing
            
            $
            21,426
            
            
            $
            18,619Interest-bearing
            
            
            213,503
            
            
            
            201,063Total
      deposits
            
            
            234,929
            
            
            
            219,682Borrowings
            
            
            101,218
            
            
            
            102,217Interest
      payable
            
            
            826
            
            
            
            724Other
      liabilities
            
            
            2,374
            
            
            
            1,761Total
      liabilities
            
            
            339,347
            
            
            
            324,384Commitments
      and ContingenciesShareholders’
      EquityPreferred
      stock, no par valueAuthorized
      and unissued - 2,000,000 sharesCommon
      stock, no par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding – 1,639,881 and 1,634,931 shares
            
            
            9,226
            
            
            
            9,160Retained
      earnings
            
            
            17,053
            
            
            
            16,237Accumulated
      other comprehensive income (loss)
            
            
            (757
            )
            
            
            280Total
      shareholders’ equity
            
            
            25,522
            
            
            
            25,677Total
      liabilities and shareholders’ equity
            
            $
            364,869
            
            
            $
            350,061




See Notes
to Unaudited Consolidated Condensed Financial Statements.


3


RIVER
VALLEY BANCORP


Consolidated
Condensed Statements of Income


(Unaudited)




Nine
      Months Ended
                September
      30,
            
            
            Three
      Months Ended
                September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      Thousands, Except Share Amounts)Interest
      IncomeLoans
      receivable
            
            $
            13,101
            
            
            $
            12,862
            
            
            $
            4,434
            
            
            $
            4,418Investment
      securities
            
            
            1,853
            
            
            
            1,960
            
            
            
            618
            
            
            
            672Interest-earning
      deposits and other
            
            
            318
            
            
            
            413
            
            
            
            90
            
            
            
            165Total
      interest income
            
            
            15,272
            
            
            
            15,235
            
            
            
            5,142
            
            
            
            5,255Interest
      ExpenseDeposits
            
            
            4,622
            
            
            
            5,684
            
            
            
            1,467
            
            
            
            1,976Borrowings
            
            
            3,653
            
            
            
            3,484
            
            
            
            1,222
            
            
            
            1,176Total
      interest expense
            
            
            8,275
            
            
            
            9,168
            
            
            
            2,689
            
            
            
            3,152Net
      Interest Income
            
            
            6,997
            
            
            
            6,067
            
            
            
            2,453
            
            
            
            2,103Provision
      for loan losses
            
            
            645
            
            
            
            292
            
            
            
            245
            
            
            
            196Net
      Interest Income After Provision for Loan Losses
            
            
            6,352
            
            
            
            5,775
            
            
            
            2,208
            
            
            
            1,907Other
      IncomeService
      fees and charges
            
            
            1,599
            
            
            
            1,570
            
            
            
            592
            
            
            
            538Net
      realized gains (losses) on sale of available-for-sale
      securities
            
            
            48
            
            
            
            (22
            )
            
            
            0
            
            
            
            0Net
      gains on loan sales
            
            
            215
            
            
            
            85
            
            
            
            42
            
            
            
            40Interchange
      fee income
            
            
            217
            
            
            
            174
            
            
            
            81
            
            
            
            78Increase
      in cash value of life insurance
            
            
            239
            
            
            
            221
            
            
            
            81
            
            
            
            77Trust
      operations income
            
            
            129
            
            
            
            163
            
            
            
            33
            
            
            
            35Other
      income
            
            
            40
            
            
            
            105
            
            
            
            5
            
            
            
            34Total
      other income
            
            
            2,487
            
            
            
            2,296
            
            
            
            834
            
            
            
            802Other
      ExpensesSalaries
      and employee benefits
            
            
            3,564
            
            
            
            3,192
            
            
            
            1,272
            
            
            
            1,099Net
      occupancy and equipment expenses
            
            
            974
            
            
            
            877
            
            
            
            326
            
            
            
            293Data
      processing fees
            
            
            285
            
            
            
            196
            
            
            
            93
            
            
            
            65Advertising
            
            
            278
            
            
            
            245
            
            
            
            108
            
            
            
            89Legal
      and professional fees
            
            
            223
            
            
            
            300
            
            
            
            66
            
            
            
            97Amortization
      of mortgage servicing rights
            
            
            134
            
            
            
            234
            
            
            
            36
            
            
            
            73Other
      expenses
            
            
            914
            
            
            
            818
            
            
            
            283
            
            
            
            276Total
      other expenses
            
            
            6,372
            
            
            
            5,862
            
            
            
            2,184
            
            
            
            1,992Income
      Before Income Tax
            
            
            2,467
            
            
            
            2,209
            
            
            
            858
            
            
            
            717Income
      tax expense
            
            
            618
            
            
            
            586
            
            
            
            213
            
            
            
            185Net
      Income
            
            $
            1,849
            
            
            $
            1,623
            
            
            $
            645
            
            
            $
            532Basic
      earnings per share
            
            $
            1.13
            
            
            $
            1.00
            
            
            $
            .393
            
            
            $
            .33Diluted
      earnings per share
            
            
            1.12
            
            
            
            .98
            
            
            
            .390
            
            
            
            .32Dividends
      per share
            
            
            .63
            
            
            
            .60
            
            
            
            .21
            
            
            
            .20







See Notes
to Unaudited Consolidated Condensed Financial Statements.


4




RIVER
VALLEY BANCORP


Consolidated
Condensed Statements of Comprehensive Income (Loss)


(Unaudited)





Nine
      Months Ended
                September
      30,
            
            
            Three
      Months Ended
                September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      Thousands)Net
      income
            
            $
            1,849
            
            
            $
            1,623
            
            
            $
            645
            
            
            $
            532Other
      comprehensive income, net of taxUnrealized
      gains (losses) on securities available for saleUnrealized
      holding gains (losses) arising during the period, net of tax expense
      (benefit) of $(544), $74, $(187), and $259.
            
            
            (1,007
            )
            
            
            132
            
            
            
            (355
            )
            
            
            462Less:
      Reclassification adjustment for gains (losses) included in net income, net
      of tax benefit (expense) of $(18), $9, $0 and $0
            
            
            30
            
            
            
            (13
            )
            
            
            0
            
            
            
            0(1,037
            )
            
            
            145
            
            
            
            (355
            )
            
            
            462Comprehensive
      income
            
            $
            812
            
            
            $
            1,768
            
            
            $
            290
            
            
            $
            994























See Notes
to Unaudited Consolidated Condensed Financial Statements.


5


RIVER
VALLEY BANCORP


Consolidated
Condensed Statements of Cash Flows


(Unaudited)




Nine
      Months Ended September 30,2008
            
            2007(In
      Thousands)Operating
      ActivitiesNet
      income
            
            $
            1,849
            
            
            $
            1,623Adjustments
      to reconcile net income to net cash provided by operating
      activitiesProvision
      for loan losses
            
            
            645
            
            
            
            292Depreciation
      and amortization
            
            
            347
            
            
            
            444Investment
      securities (gains) losses
            
            
            (48
            )
            
            
            22Loans
      originated for sale in the secondary market
            
            
            (8,685
            )
            
            
            (5,003
            )Proceeds
      from sale of loans in the secondary market
            
            
            9,098
            
            
            
            4,813Gain
      on sale of loans
            
            
            (215
            )
            
            
            (85
            )Amortization
      of net loan origination cost
            
            
            98
            
            
            
            93Employee
      Stock Ownership Plan compensation
            
            
            58
            
            
            
            136Net
      change in:
            Interest
      receivable
            
            
            304
            
            
            
            (239
            )Interest
      payable
            
            
            102
            
            
            
            13Other
      adjustments
            
            
            705
            
            
            
            281Net
      cash provided by operating activities
            
            
            4,258
            
            
            
            2,390Investing
      ActivitiesPurchases
      of securities available for sale
            
            
            (20,572
            )
            
            
            (14,341
            )Proceeds
      from maturities of securities available for sale
            
            
            17,458
            
            
            
            7,345Proceeds
      from sale of securities available for sale
            
            
            7,971
            
            
            
            8,917Purchase
      of Federal Home Loan Bank stock
            
            
            (100
            )
            
            
            (150
            )Net
      change in loans
            
            
            (21,724
            )
            
            
            (11,435
            )Purchases
      of premises and equipment
            
            
            (633
            )
            
            
            (306
            )Proceeds
      from sale of premises and equipment
            
            
            76
            
            
            
            103Other
      investing activities
            
            
            148
            
            
            
            (1
            )Net
      cash used in investing activities
            
            
            (17,376
            )
            
            
            (9,868
            )Financing
      ActivitiesNet
      change inNon-interest
      bearing, interest-bearing demand and savings deposits
            
            
            (18,110
            )
            
            
            3,128Certificates
      of deposit
            
            
            33,358
            
            
            
            (449
            )Short
      term borrowings
            
            
            0
            
            
            
            0Proceeds
      from borrowings
            
            
            33,000
            
            
            
            25,000Repayment
      of borrowings
            
            
            (34,000
            )
            
            
            (23,000
            )Cash
      dividends
            
            
            (1,031
            )
            
            
            (973
            )Excess
      tax benefit on stock options exercised
            
            
            0
            
            
            
            8Stock
      options exercised
            
            
            8
            
            
            
            90Purchase
      of stock
            
            
            0
            
            
            
            (183
            )Acquisition
      of stock for stock benefit plans
            
            
            0
            
            
            
            (107
            )Advances
      by borrowers for taxes and insurance
            
            
            102
            
            
            
            39Net
      cash provided by financing activities
            
            
            13,327
            
            
            
            3,553Net
      Change in Cash and Cash Equivalents
            
            
            209
            
            
            
            (3,925
            )Cash
      and Cash Equivalents, Beginning of Period
            
            
            8,137
            
            
            
            11,808Cash
      and Cash Equivalents, End of Period
            
            $
            8,346
            
            
            $
            7,883Additional
      Cash Flows and Supplementary InformationInterest
      paid
            
            $
            8,173
            
            
            $
            9,155Income
      tax paid
            
            
            525
            
            
            
            496




See Notes
to Unaudited Consolidated Condensed Financial Statements.


6


RIVER
VALLEY BANCORP





NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS







River Valley
Bancorp (the “Corporation” or the “Company”) is a unitary savings and loan
holding company whose activities are primarily limited to holding the stock of
River Valley Financial Bank (“River Valley” or the “Bank”). The Bank
conducts a general banking business in southeastern Indiana which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for consumer, residential and commercial purposes. River
Valley’s profitability is significantly dependent on net interest income, which
is the difference between interest income generated from interest-earning assets
(i.e. loans and investments) and the interest expense paid on interest-bearing
liabilities (i.e. customer deposits and borrowed funds). Net interest income is
affected by the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level of
interest rates paid or received by the Bank can be significantly influenced by a
number of competitive factors, such as governmental monetary policy, that are
outside of management’s control.






NOTE 1: BASIS OF
PRESENTATION




The
accompanying unaudited consolidated condensed financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. Accordingly, these financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto of the Corporation included in the Annual Report on Form 10-K for the
year ended December 31, 2007. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) which are necessary
for a fair presentation of the financial statements have been included. The
results of operations for the three-month and nine-month periods ended September
30, 2008, are not necessarily indicative of the results which may be expected
for the entire year. The consolidated condensed balance sheet of the Corporation
as of December 31, 2007 has been derived from the audited consolidated balance
sheet of the Corporation as of that date.






NOTE 2: PRINCIPLES OF
CONSOLIDATION




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


7




NOTE 3: EARNINGS PER
SHARE




Earnings
per share have been computed based upon the weighted average common shares
outstanding. Unearned Employee Stock Ownership Plan shares have been excluded
from the computation of average common shares outstanding.




Nine
      Months Ended
                September
      30, 2008
            
            Nine
      Months Ended
                September
      30, 2007Income
            
            Weighted
      Average Shares
            
            Per
      Share Amount
            
            Income
            
            Weighted
      Average Shares
            
            Per
      Share Amount(In
      Thousands, Except Share Amounts)Basic
      earnings per shareIncome
      available to common shareholders
            
            $
            1,849
            
            
            1,637,223
            
            $
            1.13
            
            $
            1,623
            
            
            1,621,862
            
            $
            1.00Effect
      of dilutive RRP awards and stock options
            
            
            
            
            
            15,545
            
            
            
            
            
            
            
            
            26,546Diluted
      earnings per shareIncome
      available to common shareholders and assumed conversions
            
            $
            1,849
            
            
            1,652,768
            
            $
            1.12
            
            $
            1,623
            
            
            1,648,408
            
            $
            .98









Three
      Months Ended
                September
      30, 2008
            
            Three
      Months Ended
                September
      30, 2007Income
            
            Weighted
      Average Shares
            
            Per
      Share Amount
            
            Income
            
            Weighted
      Average Shares
            
            Per
      Share Amount(In
      Thousands, Except Share Amounts)Basic
      earnings per shareIncome
      available to common shareholders
            
            $
            645
            
            
            1,639,881
            
            $
            .393
            
            $
            532
            
            
            1,629,132
            
            $
            .33Effect
      of dilutive RRP awards and stock options
            
            
            
            
            
            12,497
            
            
            
            
            
            
            
            
            24,111Diluted
      earnings per shareIncome
      available to common shareholders and assumed conversions
            
            $
            645
            
            
            1,652,378
            
            $
            .390
            
            $
            532
            
            
            1,653,243
            
            $
            .32




Options
to purchase 5,000 shares of common stock at $22.25 per share were outstanding
for the three and nine month periods ending September 30, 2008 and September 30,
2007.  Options to purchase 2,891 shares of common stock at $14.56 per
share were outstanding for the three month period ending September 30,
2008.  Neither group of options were included in the computation of
diluted earnings per share because the option price was greater than the average
market price of the common shares.




8




NOTE 4: CHANGE IN ACCOUNTING
PRINCIPLE




Effective
January 1, 2008, the Corporation adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements (FAS 157).  FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  FAS 157has been applied prospectively
as of the beginning of the period.




FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The
standard describes three levels of inputs that may be used to measure fair
value:




Level
      1
            Quoted
      prices in active markets for identical assets or
    liabilities




Level
      2
            Observable
      inputs other than Level 1 prices, such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilities




Level
      3
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities




Following
is a description of the valuation methodologies used for instruments measured at
fair value on a recurring basis and recognized in the accompanying balance
sheet, as well as the general classification of such instruments pursuant to the
valuation hierarchy.




Available-for-Sale
Securities




Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows.  Level 2 securities include collateralized mortgage
obligations, mortgage backed securities, federal agency securities and certain
municipal securities.  In certain cases where Level 1 or Level 2
inputs are not available, securities are classified within Level 3 of the
hierarchy and include corporate investments including trust preferred stock
pools which are less liquid securities.




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the FAS 157 fair value hierarchy in which
the fair value measurements fall at September 30, 2008 (In
thousands).




Fair
      Value Measurements UsingFair
      Value
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Available-for-sale
      securities
            
            
            $ 
      52,595
            
            
            
            $ 
      -0-
            
            
            
            $ 
      51,895
            
            
            
            $ 
      700







9









The
following is a reconciliation of the beginning and ending balances of recurring
fair value measurements recognized in the accompanying balance sheet using
significant unobservable (Level 3) inputs:




Available-For-Sale
      Securities(In
      Thousands)Nine
      Months Ended
              September
      30, 2008
            
            
            Three
      Months Ended
              September
      30, 2008Beginning
      balance
            
            $
            888
            
            
            $
            2,490Total
      realized and unrealized gains and lossesAmortization
      included in net income
            
            
            -0-
            
            
            
            -0-Unrealized
      (losses) included in other comprehensive income
            
            
            (190
            )
            
            
            (1
            )Purchases,
      issuances and settlements including paydowns
            
            
            1,793
            
            
            
            2Transfers
      out of Level 3
            
            
            (1,791
            )
            
            
            (1,791
            )Ending
      balance
            
            $
            700
            
            
            $
            700Total
      gains or losses for the period included in net income attributable to the
      change in unrealized gains or losses related to assets and liabilities
      still held at the reporting date
            
            
            
            
            
            $
            -0-






Realized
and unrealized gains and (losses) included in net income for the period from
January 1, 2008, through September 30, 2008, are reported in the consolidated
statements of income as follows (In Thousands):




Nine
      Months Ended
              September
      30, 2008Operating
      Income
            
            
            Other
      Income (Expense)Total
      gains and losses
            
            $
            -0-
            
            
            $
            48Change
      in unrealized gains or losses relating to assets still held at the balance
      sheet date
            
            $
            -0-
            
            
            $
            -0-







Three
      Months Ended
              September
      30, 2008Operating
      Income
            
            
            Other
      Income (Expense)Total
      gains and losses
            
            $
            -0-
            
            
            $
            -0-Change
      in unrealized gains or losses relating to assets still held at the balance
      sheet date
            
            $
            -0-
            
            
            $
            -0-









10




Following
is a description of the valuation methodologies used for instruments measured at
fair values on a non-recurring basis and recognized in the accompanying balance
sheet, as well as the general classification of such instruments pursuant to the
valuation hierarchy.




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
non-recurring basis and the level within the FAS 157 fair value hierarchy in
which the fair value measurements fall at September 30, 2008 (In
Thousands).




Fair
      Value Measurements UsingFair
      Value
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Impaired
      loans
            
            $
            64
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            64Mortgage
      Servicing Rights
            
            $
            114
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            114




Impaired
Loans




Impaired
loans are carried at the present value of estimated future cash flows using the
loan’s existing rate, or the fair value of collateral if the loan is collateral
dependent.  Loans are evaluated for impairment quarterly. During 2008,
certain of these impaired loans were impaired for the first time, partially
charged-off or re-evaluated, resulting in a remaining balance for these loans,
net of specific allowance, of $64,000. This valuation would be considered Level
3.  Level 3 inputs for impaired loans included current and prior
appraisals, discounting factors, the borrowers’ financial results and other
considerations including expected cash flows.




Mortgage
Servicing Rights




Mortgage
servicing rights are initially recorded at fair value and are subsequently
reported at amortized cost and periodically evaluated for impairment as
described in SFAS No. 156, Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140.New mortgage
servicing rights recorded during the current accounting period are recorded at
fair value and are disclosed as a nonrecurring measurement.




Mortgage
servicing rights recorded as an asset and into income during the three months
ended September 30, 2008 totaled $27,500, and during the nine months ended
September 30, 2008 totaled $113,500. Mortgage servicing rights do not trade in
an active, open market with readily observable prices.  Accordingly,
fair values of new mortgage servicing rights are estimated using discounted cash
flow models.  Due to the nature of the valuation inputs, recording
initial mortgage servicing rights are classified within Level 3 of the
hierarchy.




NOTE 5: RECENT ACCOUNTING
PRONOUNCEMENTS




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115,” which was effective for the Corporation on January 1,
2008.  The fair value option established by this Statement permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at each subsequent
reporting date.  The fair value option a) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for
by the equity method; b) is irrevocable (unless a new election date occurs); and
c) is applied only to entire instruments and not to portions of
instruments.  Management did not elect the fair value option for any
financial assets or liabilities.


11




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” which
replaces SFAS No. 141, “Business Combinations.”  This Statement
retains the fundamental requirements in SFAS No. 141 that the acquisition method
of accounting (formerly referred to as purchase method) is used for all business
combinations and that an acquirer is identified for each business
combination.  This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as of the date that the acquirer achieves
control.  This Statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values.  This
Statement requires the acquirer to recognize acquisition-related costs and
restructuring costs separately from the business combination as period expense.
This statement requires that loans acquired in a purchase business combination
be the present value of amounts to be received.  Valuation allowances
should reflect only those losses incurred by the investor after
acquisition.   This Statement is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Management is currently in the process of determining what
effect the provisions of this statement will have on the Corporation’s financial
position or results of operations.  Management does not anticipate
that the provisions of this statement will have any impact on the financial
position or results of operation of the Corporation.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an Amendment to ARB No. 51.”  This
Statement establishes new accounting and reporting standards that require the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s
equity.  The Statement also requires the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income.  This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Management is currently in the process of determining what
effect the provisions of this statement will have on the Corporation’s financial
position or results of operations.  Management does not anticipate
that the provisions of this statement will have any impact on the financial
position or results of operation of the Corporation.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No.
133.”  This Statement changes the disclosure requirements for
derivative instruments and hedging activities.  Entities are required
to provide enhanced disclosures about a) how and why an entity uses derivative
instruments, b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  Management is currently in the
process of determining what effect the provisions of this statement will have on
the Corporation’s consolidated financial statements.






NOTE 6:  
RECLASSIFICATIONS




Certain
reclassifications have been made to the 2007 consolidated condensed financial
statements to conform to the September 30, 2008 presentation.






NOTE 7:   SUBSEQUENT
EVENT:  REPURCHASE OF COMMON SHARES




On
November 10, 2008, the Corporation received a letter from the Office of Thrift
Supervision (“OTS”) stating the OTS’ non-objection to the Bank paying a cash
dividend to the Corporation of approximately $2,200,000.  The purpose
of the dividend is to fund the repurchase of 139,559 common shares of the
Corporation from one of the Corporation’s largest shareholders, Tontine
Financial Partners, L.P. On November 13, 2008, the Corporation repurchased those
common shares on the market for $13.00 per share, for an aggregate purchase
price of $1,814,267.


12




NOTE
8:  SUBSEQUENT EVENT:  ECONOMIC RECOVERY
PROGRAMS




The
global and U.S. economies are experiencing significantly reduced business
activity as a result of, among other factors, disruptions in the financial
system during the past year, and in particular, the last several weeks. Dramatic
declines in the housing market during the past year, with falling home prices
and increasing foreclosures and unemployment, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities, have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail.




Reflecting
concern about the stability of the financial markets generally and the strength
of counterparties, many lenders and institutional investors have reduced, and in
some cases, ceased to provide funding to borrowers, including other financial
institutions. The availability of credit, confidence in the financial sector,
and level of volatility in the financial markets have been significantly
adversely affected as a result. In recent weeks, volatility and disruption in
the capital and credit markets has reached unprecedented levels. In some cases,
the markets have produced downward pressure on stock prices and credit capacity
for certain issuers without regard to those issuers’ underlying financial
strength.




In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Department
of Treasury (the “Treasury”) has the authority to, among other things, purchase
up to $700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.




On
October 14, 2008, the Treasury also announced it will offer to qualifying U.S.
banking organizations the opportunity to sell preferred stock, along with
warrants to purchase common stock, to the Treasury on what may be considered
attractive terms under the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program (the “CPP”). The CPP allows financial institutions, like the
Corporation, to issue non-voting preferred stock to the Treasury in an amount
ranging between 1% and 3% of its total risk-weighted assets.




Although
the Company’s fundamental banking practices and policies have protected it from
the significant write-downs and disruption being experienced in the industry,
the Company will continue to monitor and enhance its stability in this uncertain
environment. Accordingly, although the Bank currently meets all applicable
regulatory capital requirements and remains well capitalized, it is close to the
applicable well capitalized threshold, and the Corporation has preliminarily
determined that obtaining additional capital pursuant to the CPP for
contribution in whole or in part to the Bank is advisable. As a result, the
Corporation filed on November13, 2008, an initial
application pursuant to the CPP with its regulator, the OTS, seeking approval to
sell $8,100,000 in preferred stock to the Treasury (which will equal
approximately 3% of its total risk weighted assets as of September 30,
2008).




The
general terms of the preferred stock to be issued by the Corporation under the
CPP are expected to be as follows:




•
            Dividends
      at the rate of 5% per annum, payable quarterly in arrears, are required to
      be paid on the preferred stock for the first five years and dividends at
      the rate of 9% per annum are required thereafter until the stock is
      redeemed by the Corporation;




•
            Without
      the prior consent of the Treasury, the Corporation will be prohibited from
      increasing its common stock dividends or repurchasing its common stock for
      the first three years while Treasury is an
  investor;




•
            During
      the first three years the preferred stock is outstanding, the Corporation
      will be prohibited from repurchasing such preferred stock, except with the
      proceeds from a sale of Tier 1 qualifying common or other preferred stock
      of the Corporation in an offering that raises at least 25% of the initial
      offering price of the preferred stock sold to the Treasury ($2,025,000,
      assuming the Corporation issues $8,100,000 in preferred stock to the
      Treasury under the CPP). After the first three years, the preferred stock
      can be redeemed at any time with any available
  cash;








13




•
            Under
      the CPP, the Corporation is also required to issue the Treasury warrants
      entitling the Treasury to buy an amount of the Corporation’s common stock
      equal to 15% of the Treasury’s total investment in the preferred stock
      (estimated to be approximately 88,363 shares of common stock based on the
      closing price of the common stock on November 12, 2008);
    and




•
            The
      Corporation must agree to certain compensation restrictions for its senior
      executive officers and restrictions on the amount of executive
      compensation which is tax
deductible.




The
Corporation’s participation in the CPP will remain subject to various
contingencies, including, but not limited to, acceptance by the Treasury of its
application, review and approval of the preferred stock investment documents by
the Corporation’s Board of Directors, and verification that the Corporation can
otherwise comply with various other detailed requirements of the investment. In
the event the Corporation ultimately elects to participate in the CPP, the
Corporation anticipates using the proceeds from the preferred stock sale to
increase its overall capital levels at the Bank level, provide funds for
additional loans, and for other general corporate purposes.




Also on
October 14, 2008, after receiving a recommendation from the boards of the FDIC
and the Board of Governors of the Federal Reserve System, and consulting with
the President, Secretary Paulson signed the systemic risk exception to the
Federal Deposit Insurance Act, enabling the FDIC to temporarily provide a 100%
guarantee of the senior debt of all FDIC-insured institutions and their holding
companies, as well as unlimited deposit insurance on funds in non-interest
bearing transaction deposit accounts under a Temporary Liquidity Guarantee
Program. Coverage under the Temporary Liquidity Guarantee Program is available
until December 5, 2008, without charge and thereafter at a cost of 75 basis
points per annum for senior unsecured debt and 10 basis points per annum for
non-interest bearing transaction deposits. Prior to December 5, 2008, in order
to avoid the increased insurance premiums,  the Bank must inform the
FDIC whether it will opt out of either the temporary senior unsecured debt
guarantee program or the enhanced deposit insurance program or both. The
Corporation is assessing its participation in the Temporary Liquidity Guarantee
Program but has not yet made a definitive decision as to whether it will
participate.






ITEM
2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS




FORWARD LOOKING
STATEMENTS




This
Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements which constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this Form 10-Q and include statements regarding the intent, belief, outlook,
estimate or expectations of the Corporation (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Corporation. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; regulatory changes; or turmoil and
governmental intervention in the financial services industry.




EFFECT OF CURRENT
EVENTS




Although
the Company’s fundamental banking practices and policies have protected it from
the significant write-downs, impairments and disruption being experienced in the
industry, management continues to assess the impact on the Corporation of the
uncertain economic and regulatory environment affecting the country at large and
the financial services industry in particular.  The Corporation has
decided to file an application under the Troubled Asset Relief
Program  (“TARP”) Capital Purchase Program (“CPP”) seeking approval to
sell $8,100,000 in preferred stock to the Treasury.  See Note 7,
Subsequent Event, to the Corporation’s Unaudited Consolidated Condensed
Financial Statements, included in this Form 10-Q and incorporated herein, for
further information related to this decision.


14




Both the
level of turmoil in the financial services industry and the Corporation’s
participation in the TARP’s CPP will present unusual risks and challenges for
the Corporation, as described below:




The Current
Economic Environment Poses Challenges For Us and Could Adversely Affect Our
Financial Condition and Results of Operations. We are operating in a
challenging and uncertain economic environment, including generally uncertain
national conditions and local conditions in our markets. The capital and credit
markets have been experiencing volatility and disruption for more than 12
months. In recent weeks, the volatility and disruption has reached unprecedented
levels. The risks associated with our business become more acute in periods of a
slowing economy or slow growth. Financial institutions continue to be affected
by sharp declines in the real estate market and constrained financial markets.
While we are taking steps to decrease and limit our exposure to problem loans,
we nonetheless retain direct exposure to the residential and commercial real
estate markets, and we are affected by these events.




Our loan
portfolio includes commercial real estate loans, residential mortgage loans, and
construction and land development loans. Continued declines in real estate
values, home sales volumes and financial stress on borrowers as a result of the
uncertain economic environment, including job losses, could have an adverse
effect on our borrowers or their customers, which could adversely affect our
financial condition and results of operations. In addition, a possible national
economic recession or further deterioration in local economic conditions in our
markets could drive losses beyond that which is provided for in our allowance
for loan losses and result in the following other consequences: increases in
loan delinquencies, problem assets and foreclosures may increase; demand for our
products and services may decline; deposits may decrease, which would adversely
impact our liquidity position; and collateral for our loans, especially real
estate, may decline in value, in turn reducing customers’ borrowing power, and
reducing the value of assets and collateral associated with our existing
loans.




Impact of Recent
and Future Legislation. Congress and the Treasury Department have
recently adopted legislation and taken actions to address the disruptions in the
financial system and declines in the housing market. See Note 7, Subsequent
Event, to the Corporation’s Unaudited Consolidated Condensed Financial
Statements, included in this Form 10-Q and incorporated herein.  It is
not clear at this time what impact the Emergency Economic Stabilization Act
(“EESA”), TARP, other liquidity and funding initiatives of the Treasury and
other bank regulatory agencies that have been previously announced, and any
additional programs that may be initiated in the future, will have on the
financial markets and the financial services industry. The extreme levels of
volatility and limited credit availability currently being experienced could
continue to affect the U.S. banking industry and the broader U.S. and global
economies, which will have an effect on all financial institutions, including
the Corporation.




In
addition to the legislation mentioned above, federal and state governments could
pass additional legislation responsive to current credit conditions. As an
example, the Bank could experience higher credit losses because of federal or
state legislation or regulatory action that reduces the amount the Bank’s
borrowers are otherwise contractually required to pay under existing loan
contracts. Also, the Bank could experience higher credit losses because of
federal or state legislation or regulatory action that limits its ability to
foreclose on property or other collateral or makes foreclosure less economically
feasible.




Possible
Increases in Insurance Premiums. The Federal Deposit Insurance
Corporation (“FDIC”) insures the Bank’s deposits up to certain limits. The FDIC
charges us premiums to maintain the Deposit Insurance Fund. The Bank is
considering participating in the FDIC’s Temporary Liquidity Guarantee Program,
which could increase its insurance premiums up to 85 basis points per annum with
respect to the Bank’s deposits.




Current
economic conditions have increased expectations for bank failures. The FDIC
takes control of failed banks and ensures payment of deposits up to insured
limits using the resources of the Deposit Insurance Fund. The FDIC has
designated the Deposit Insurance Fund long-term target reserve ratio at 1.25
percent of insured deposits. Due to recent bank failures, the FDIC insurance
fund reserve ratio has fallen below 1.15 percent, the statutory minimum. The
FDIC has developed a proposed restoration plan that will uniformly increase
insurance assessments by 7 basis points (annualized). The plan also proposes
changes to the deposit insurance assessment system requiring riskier
institutions to pay a larger share. Further increases in premium assessments
would increase the Corporation’s expenses.


15




Our Participation
in the TARP Capital Purchase Program May Adversely Affect the Value of Our
Common Stock and the Rights of Our Common Stockholders.The terms of the
preferred stock the Corporation will issue under the TARP CPP if its application
is accepted and the transaction closes could reduce investment returns to the
Corporation’s common stockholders by restricting dividends, diluting existing
shareholders’ ownership interests, and restricting capital management practices.
Without the prior consent of the Treasury, the Corporation will be prohibited
from increasing its common stock dividends or repurchasing shares of its common
stock for the first three years while the Treasury holds the preferred
stock.




Also, the
preferred stock requires quarterly dividends to be paid at the rate of 5% per
annum for the first five years and 9% per annum thereafter until the stock is
redeemed by the Corporation. The payments of these dividends will decrease the
excess cash the Corporation otherwise has available to pay dividends on its
common stock and to use for general corporate purposes, including working
capital.




Finally,
the Corporation will be prohibited from continuing to pay dividends on its
common stock unless it has fully paid all required dividends on the preferred
stock issued to the Treasury. Although the Corporation fully expects to be able
to pay all required dividends on the preferred stock (and to continue to pay
dividends on its common stock at current levels), there is no guarantee that it
will be able to do so in the future.




The Soundness of
Other Financial Institutions Could Adversely Affect Us. Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. We have exposure to many different
industries and counterparties, and we routinely execute transactions with
counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit risk in
the event of default by our counterparty or client. In addition, our credit risk
may be exacerbated when the collateral held by us cannot be realized or is
liquidated at prices not sufficient to recover the full amount of the loan or
derivative exposure due us. There is no assurance that any such losses would not
materially and adversely affect our results of operations or
earnings.




Future Reduction
in Liquidity in the Banking System. The Federal Reserve Bank has been
providing vast amounts of liquidity in to the banking system to compensate for
weaknesses in short-term borrowing markets and other capital markets. A
reduction in the Federal Reserve’s activities or capacity could reduce liquidity
in the markets, thereby increasing funding costs to the Bank or reducing the
availability of funds to the Bank to finance its existing
operations.






CRITICAL ACCOUNTING
POLICIES




The notes
to the consolidated financial statements contain a summary of the Company’s
significant accounting policies presented on pages 56 through 58 of the Annual
Report to Shareholders for the year ended December 31, 2007. Certain of these
policies are important to the portrayal of the Company’s financial condition,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Management believes that its critical accounting policies include determining
the allowance for loan losses and the valuation of mortgage servicing
rights.






ALLOWANCE FOR LOAN
LOSSES




The
allowance for loan losses is a significant estimate that can and does change
based on management’s assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses on at least a quarterly basis. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the loan portfolio, the current condition and amount of
loans outstanding, identified problem loans and the probability of collecting
all amounts due.




The
allowance for loan losses represents management’s estimate of probable losses
inherent in the Corporation’s loan portfolios. In determining the appropriate
amount of the allowance for loan losses, management makes numerous assumptions,
estimates and assessments.


16




The
Corporation’s strategy for credit risk management includes conservative,
centralized credit policies, and uniform underwriting criteria for all loans as
well as an overall credit limit for each customer significantly below legal
lending limits. The strategy also emphasizes diversification on a geographic,
industry and customer level, regular credit quality reviews and quarterly
management reviews of large credit exposures and loans experiencing
deterioration of credit quality.




The
Corporation’s allowance consists of three components: probable losses estimated
from individual reviews of specific loans, probable losses estimated from
historical loss rates, and probable losses resulting from economic or other
deterioration above and beyond what is reflected in the first two components of
the allowance.




Larger
commercial loans that exhibit probable or observed credit weaknesses are subject
to individual review. Where appropriate, reserves are allocated to individual
loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow and legal
options available to the Corporation. Included in the review of individual loans
are those that are impaired as provided in SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Any allowances for impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan’s effective interest rate or fair value of the underlying collateral. The
Corporation evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical loss rates are applied to
other commercial loans not subject to specific reserve allocations.




Homogenous
loans, such as consumer installment and residential mortgage loans are not
individually risk graded. Rather, standard credit scoring systems are used to
assess credit risks. Reserves are established for each pool of loans based on
the expected net charge-offs for one year. Loss rates are based on the average
net charge-off history by loan category.




Historical
loss rates for commercial and consumer loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition. Factors which management considers in the
analysis include the effects of the national and local economies, trends in the
nature and volume of loans (delinquencies, charge-offs and non-accrual loans),
changes in mix, 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 Clark, Floyd and Jefferson
counties in southeastern Indiana and portions of northeastern Kentucky. When
evaluating the adequacy of allowance, consideration is given to this regional
geographic concentration and the closely associated effect changing economic
conditions have on the Corporation’s customers.




The
Corporation has not substantively changed any aspect to its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period
allowance.


17




VALUATION OF MORTGAGE
SERVICING RIGHTS




The
Company recognizes the rights to service mortgage loans as separate assets in
the consolidated balance sheet. The total cost of loans when sold is allocated
between loans and mortgage servicing rights based on the relative fair values of
each. Mortgage servicing rights are subsequently carried at the lower of the
initial carrying value, adjusted for amortization, or fair value. Mortgage
servicing rights are evaluated for impairment based on the fair value of those
rights. Factors included in the calculation of fair value of the mortgage
servicing rights include, estimating the present value of future net cash flows,
market loan prepayment speeds for similar loans, discount rates, servicing
costs, and other economic factors. Servicing rights are amortized over the
estimated period of net servicing revenue. It is likely that these economic
factors will change over the life of the mortgage servicing rights, resulting in
different valuations of the mortgage servicing rights. The differing valuations
will affect the carrying value of the mortgage servicing rights on the
consolidated balance sheet as well as the income recorded from loan servicing in
the income statement. As of September 30, 2008 and December 31, 2007, mortgage
servicing rights had carrying values of $264,000 and $284,000
respectively.






FINANCIAL
CONDITION




At
September 30, 2008, the Corporation’s consolidated assets totaled $364.9
million, an increase of $14.8 million, or 4.2% from December 31, 2007.An increase in
the Bank’s loan portfolio of $20.8 million year-to-date was comprised primarily
of consumer loans for 1-4 family residential owner-occupied property ($7.8
million), 1-4 family investment property ($7.8), commercial real estate loans
($3.0 million) and commercial purpose loans, most specifically agricultural crop
loans and small business loans, ($3.0 million).Loans for multi-family
housing and consumer installment loans dropped over the period.  Loan
growth was funded partially by called and matured investments and by increases
in deposits for the period.  Over the same, period interest receivable
on interest earning assets decreased by $303,000, or 12.7%, reflecting the drop
in interest rates resulting from the January, March, and May reductions of
the Prime rate by the Federal Reserve (Fed).  Most radically affected
by the drops in the Prime interest rate were commercial loans and home equity
lines of credit which change directly with the rate.  The average
yield on loans at September 30, 2008 was 6.35%, a decrease of .71% from the rate
of 7.06% at the same period in 2007. Other increases for the period included a
2.0% increase in premises and equipment, reflecting the opening of the new
branch in Floyds Knobs, Indiana and a 23.9% increase in non-earning “Other
Assets,” primarily prepaid expenses and deferred tax assets.




The
Corporation’s consolidated allowance for loan losses totaled $2.2 million at
both September 30, 2008 and December 31, 2007, compared to the total
at September 30, 2007of $2.0 million.  These levels represented
..78%, .85%, and .78 % of total loans, respectively.  Non-performing
loans (defined as loans delinquent greater than 90 days and loans on non-accrual
status) totaled $1.0 million, $1.8 million, and $1.9 million for the same
periods.  From December 31, 2007 to September 30, 2008 the allowance
for loan losses was funded at a level in line with current and estimated charge
offs.  With the exception of a few loans delinquent due to
administrative delays in refinancing, the Bank’s non-performing loans represent
loans in the lengthy process of foreclosure, for which appropriate specific loss
reserves have been established. The provision for loan losses increased to
$245,000 for the quarter ended September 30, 2008, as compared to $196,000 for
the same period in 2007 and $645,000 for the nine months ended September 30,
2008 as compared to $292,000 for the same period in 2007.




Although
management believes that its allowance for loan losses at September 30, 2008,
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.  Management is diligent in the monitoring of delinquent
loans and in the analysis of the factors affecting the allowance.  At
September 30, 2008 the Bank held one piece of repossessed real estate valued at
$173,000 as compared to two pieces with a combined value of $184,000 at December
31, 2007.




Deposits
totaled $234.9 million at September 30, 2008, an increase of $15.2 million, or
6.9%, compared to total deposits at December 31, 2007. During the nine-month
period, transactional deposit accounts increased by $2.8 million while interest
bearing accounts increased $12.4 million.  Deposit increases for the
period came primarily from school and governmental accounts as the school year
began and tax receipts were received.








18




Borrowings
totaled $101.2 million at September 30, 2008 versus $102.2 million on December
31, 2007.  Of total borrowings, $94.0 million and $95.0 million
represented Federal Home Loan Bank (FHLB) advances with average rates of
4.62% and 4.64% at the respective dates. The Bank has experienced a slower drop
in the overall cost of funds as a result of these longer term borrowing rates,
which average slightly less than 1% over the highest paying certificate of
deposit rate for the Bank.




Shareholders’
equity totaled $25.5 million at September 30, 2008, a slight decrease of
$154,000, or .6% from the $25.7 million at December 31, 2007.  Of this
change, $1.8 million was income from operations, $1.0 million was paid out in
dividends to shareholders, and $1.0 million was a decrease in equity resulting
from the change from a net gain position on unrealized gains/losses on available
for sale securities to a net loss position.




The Bank
is required to maintain minimum regulatory capital pursuant to federal
regulations. At September 30, 2008, the Bank’s regulatory capital exceeded all
applicable regulatory capital requirements.






COMPARISON
OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007




GENERAL




The
Corporation’s net income for the nine months ended September 30, 2008, totaled
$1.8 million, an increase of $226,000 or 13.9% from the $1,623,000 reported for
the period ended September 30, 2007.The increase in income
in the 2008 period was primarily attributable to improvements in both the spread
on interest bearing items, with net interest income increasing by 15.3%
year-to-year, and in non-interest income, most specifically income from the gain
on loan sales to the secondary market, which were up by 152% over 2007
levels.






NET INTEREST
INCOME




Total
interest income for the nine months ended September 30,2008 increased only
slightly by $37,000, or .2%, to $15.3 million from the $15.2 million recorded
for the same period in 2007.  Despite strong growth in the underlying
assets, income increased only slightly as the effect of the rate changes by the
Federal Reserve earlier this year were felt.




Total
interest expense for the same period exhibited significant declines with a
decrease of $894,000, or 9.7%, from $9.2 million at September 30, 2007 to $8.3
million at September 30, 2008.  For the nine months ended September
30, 2008 interest expense from deposits totaled $4.6 million while interest
expense from borrowings totaled $3.7 million, as compared to $5.7 million and
$3.5 million for the same period in 2007.  Of the overall decrease in
interest expense, $1.1 million, or 18.7%, was attributable to interest expense
on deposits as the effect of the Fed rate cuts continued to affect the
Bank.  Over the same period, the Bank experienced a slight increase of
$169,000, or 4.9%, on interest expense for borrowings as the average balance of
funds borrowed from the FHLB increased.




Net
Interest Income increased to $7.0 million for the nine months ended September
30, 2008 from $6.1 million for the same period in 2007, an increase of
$930,000, or 15.3%.  This increase reflects both strong loan growth
and the effects of the interest rate environment on the spread between interest
earning assets and interest bearing liabilities.


19




PROVISION FOR LOSSES ON
LOANS




A
provision for losses on loans is charged to income to bring the total allowance
for loan losses to a level considered appropriate by management based upon
historical experience, the volume and type of lending conducted by the Bank, the
status of past due principal and interest payment, general economic conditions,
particularly as such conditions relate to the Bank’s market area, and other
factors related to the collectibility of the Bank’s loan portfolio. As a result
of such analysis, management recorded a $645,000 provision for losses on loans
for the nine months ended September 30, 2008, as compared to $292,000 for the
same period in 2007. Non-performing loans as of September 30, 2008 were $1.0
million, a drop of $803,000, or 44%, from the $1.8 million at the same point in
2007, reflecting the charge off of some long standing problem loans and
aggressive management of past due accounts. The increase in the provision
year-to-year has been predicated primarily on estimated losses with some impact
for the current economic environment.  While management believes that
the allowance for losses on loans is adequate at September 30, 2008, based upon
the available facts and circumstances, there can be no assurance that the loan
loss allowance will be adequate to cover losses on non-performing assets in the
future.






OTHER
INCOME




Other
income increased slightly by $191,000, during the nine months ended September
30, 2008 to $2.5 million, as compared to the $2.3 million reported for the same
period in 2007.  This increase was fueled primarily by sales of 1-4
family residential loans to the secondary market and gains on the sale of
investments during the period offset by losses on sales of foreclosed
property.  Unlike interest income, “Other Income” is not always
readily predictable and is subject to variations depending on outside
influences.






OTHER
EXPENSE




Other
Expense increased by $510,000, or 8.7%, to $6.4 million during the nine months
ended September 30, 2008, as compared to the $5.9 million reported for the same
period in 2007.  Increases in personnel and occupancy costs relative
to the opening of the Floyds Knobs, Indiana branch contributed to this increase,
along with data processing costs relative to ATM usage, and loan administration
costs, which mirror loan growth and loan sales, and increases in the FDIC
assessment.  Decreases in professional fees from the higher fees
reported in 2007 (which higher 2007 fees were a result of implementation of
Sarbanes-Oxley, as well as additional costs arising from the litigation
described in Item 1 of Part II of this Form 10-Q) and in the amortization
expense relative to servicing rights on mortgages sold to Freddie Mac (FM) (due
to declines in FM sales over the past three years) offset some of the expense
increase.






INCOME
TAXES




The
provision for income taxes totaled $618,000 for the nine months ended September
30, 2008, an increase of $32,000, or 5.4%, over the $586,000 for the same period
in 2007.  The effective tax rate for the nine months ended September
30, 2008 was 25.1% as compared to 26.5% for the same period in
2007.  The decrease continues to reflect the effect of tax-exempt
income from cash surrender value life insurance and municipal
investments.


20




COMPARISON
OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007




GENERAL




The
Corporation’s net income for the three months ended September 30, 2008, totaled
$645,000, with an increase of $113,000 or 21.1% from the $532,000 reported for
the period ended September 30, 2007.The Corporation
experienced several positive events that contributed to this increase including,
but not limited to, a widening of the spread between interest earned and
interest expensed, and increases in fees earned on overdrawn checking
accounts.  Meanwhile expense increases included increased ATM costs
and staffing, occupancy, and promotional costs for the new branch in Floyds
Knobs, Indiana. Expense increases were offset by the continued decline in
the expense for the amortization of mortgage servicing rights from prior year
loan sales.  Professional fees also dropped year to year from the
higher expenses that were incurred in 2007 from the Bank’s implementation of
Sarbanes-Oxley legislation and additional costs arising from the litigation
described in Item 1 of Part II of this Form 10-Q. The Corporation funded the
provision for loan losses at $245,000 for the three months ended September 30,
2008 as compared to $196,000 for the same period in 2007 reflecting anticipated
losses identified through the analysis of delinquent and problem
loans.






NET INTEREST
INCOME




Total
interest income for the three months ended September 30, 2008 amounted to $5.1
million, a slight decrease of $112,000, or 2.1%, from the $5.3 million reported
for the comparable period in 2007.  This decrease reflects the effects
of an increase in average interest-earning assets in the face of a declining
average rate as the loan portfolio catches up to the rate reductions implemented
by the Federal Reserve earlier this year.  The average loan rate
dropped from 7.06% at September 30, 2007 to 6.35% at September 30, 2008, a drop
of .71%.




Interest
expense on deposits decreased by $509,000, or 25.8%, to a total of $1.5 million
for the three months ended September 30, 2008 as compared to $2.0 million for
the comparable period in 2007, due to the decrease in the average rate paid on
deposits outstanding year-to-year. Interest expense on borrowings totaled $1.2
million for the three months ended September 30, 2008, only a slight increase of
$47,000, from the $1.2 million reported for the comparable period in
2007.  During the period the average balance for advances from the
FHLB increased while the average rate paid on those borrowings decreased
from 4.69% at September 30, 2007 to 4.62% at the same point in
2008.




Net
interest income increased to $2.5 million at September 30, 2008 from $2.1
million for the same period in 2007, a gain of almost $350,000, or
16.6%.  This increase was primarily due to the widening of the
interest spread and an increase of nearly $16.6 million in interest earning
assets, period to period.






PROVISION FOR LOSSES ON
LOANS




A
provision for losses on loans is charged to income to bring the total allowance
for loan losses to a level considered appropriate by management based upon
historical experience, the volume and type of lending conducted by the Bank, the
status of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to the Bank’s market area, and other
factors related to the collectibility of the Bank’s loan portfolio. As a result
of such analysis, management recorded a $245,000 provision for losses on loans
for the three months ended September 30, 2008 and $196,000 for the same period
in 2007. The 2008 provision amount was predicated on the increase in the balance
of the loan portfolio, coupled with the increase in the level of delinquent
loans year-to-year and most especially, analysis of troubled loans currently in
the process of foreclosure. While management believes that the allowance for
losses on loans is adequate at September 30, 2008, based upon the available
facts and circumstances, there can be no assurance that the loan loss allowance
will be adequate to cover losses on non-performing assets in the
future.


21




OTHER
INCOME




Other
income increased by 4.0% or $32,000, during the three months ended September 30,
2008 to $834,000, as compared to the $802,000 reported for the same period in
2007. The change was primarily attributable to increased income from fees
charged for overdrawn checking accounts, with slight increases in income from
the sale of loans in the secondary market and from the increase in the cash
surrender value of bank owned life insurance.  Unlike interest income,
“Other Income” is not always readily predictable and is subject to variations
depending on outside influences.






OTHER
EXPENSE




Other
expense increased by 9.6%, from $2.0 million at September 30, 2007 to $2.2
million at September 30, 2008.  Period to period increases in
personnel costs, reflecting the addition of professional staff, increased
building, occupancy, and promotional costs, reflective of branch updating and
the opening of the Floyds Knobs, Indiana branch, and increased data processing
expenses contributed most significantly to the increase.  Declines in
the amortization expense for mortgage servicing rights and in professional fees
paid period to period helped to defray some of the increases.  The
Corporation also experienced an increase in the assessment paid to the FDIC
during the period, signifying the end of the assessment credit granted in
2007.






INCOME
TAXES




The
provision for income taxes totaled $213,000 for the three months ended September
30, 2008, an increase of $28,000, or 15.2%, as compared to the $185,000
reported for the same period in 2007. The effective tax rate for the three
months ended September 30, 2008, was 24.8% as compared to 25.8% for the same
period in 2007.






OTHER




The
Securities and Exchange Commission maintains a Web site that contains reports,
proxy information statements, and other information regarding registrants that
file electronically with the Commission, including the Corporation. The address
is http://www.sec.gov.




L IQUIDITY
RESOURCES




Historically,
the Bank has maintained its liquid assets at a level believed adequate to meet
requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows.  Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is
maintained.  Cash for these purposes is generated through loan sales
and repayments, increases in deposits, and through the sale or maturity of
investment securities.  Loan payments are a relatively stable source
of funds, while deposit flows are influenced significantly by the level of
interest rates and general money market conditions.  Borrowings may be
used to compensate for reductions in other sources of funds such as
deposits.  As a member of the Federal Home Loan Bank (FHLB) system,
the Bank may borrow from the FHLB of Indianapolis.  At September 30,
2008, the Bank had $94.0 million in such borrowings.  In addition, at
September 30, 2008 the Bank had commitments to fund loan originations of $3.1
million, unused home equity lines of credit of $15.5 million and unused
commercial lines of credit of $11.4 million.  Commitments to sell
loans as of that date were $238,000.  Generally, a significant portion
of amounts available in lines of credit will not be drawn.






ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
applicable for Smaller Reporting Companies.


22




ITEM
4T. CONTROLS AND PROCEDURES




A. Evaluation of disclosure
controls and procedures. The Corporation’s chief executive officer and
chief financial officer, after evaluating the effectiveness of the Corporation’s
disclosure controls and procedures (as defined in Sections 13a-15(e) and
15d-15(e) of regulations promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”)), as of the end of the most recent fiscal
quarter covered by this quarterly report (the “Evaluation Date”), have concluded
that as of the Evaluation Date, the Corporation’s disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by the Corporation in reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and are designed to
ensure that information required to be disclosed in those reports is accumulated
and communicated to management as appropriate to allow timely decisions
regarding required disclosure.




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


23




PART
II. OTHER INFORMATION




ITEM 1.  LEGAL PROCEEDINGS




As
previously reported in the Company’s Form 10-K for the year ended December 31,
2007, on April 27, 2007, Cecilia Means filed a putative class action complaint
in the Marion County Superior Court, Marion County, Indiana, on behalf of
herself and others who paid funds into a pre-need trust (the “Pre-Need Trust”)
for burial services and merchandise from Grandview Memorial Gardens, against the
Bank, a former trustee of the Pre-Need Trust; three other banks that serve or
have served as trustees of the Pre-Need Trust; and the current and former owners
of Grandview Memorial Gardens.  The complaint alleges that the Bank
and other trustees did not properly account for funds placed in the Pre-Need
Trust and did not properly verify the legitimacy of disbursements from the
Pre-Need Trust in violation of certain state statutes and in breach of the
trustees’ alleged fiduciary duties.  The complaint is not specific as
to the amount of damages sought but states that the plaintiff believes that the
Pre-Need Trust has an estimated $4 million in unfunded liabilities.




The Bank denies the plaintiffs’ allegations but,
as previously reported, the Bank, along with the other trustee defendants, has
agreed to terms for a settlement of the plaintiffs’ claims. The settlement has
been submitted to the court for approval, and the court has signed a preliminary
approval order.  A final hearing on the approval order has been set
for January 23, 2009.






ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None.






ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES




None.






ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS




None.






ITEM 5.  OTHER INFORMATION




None.






ITEM 6.  EXHIBITS




31(1)
            CEO
      Certification required by 17 C.F.R. Section
  240.13a-14(a)31(2)
            CFO
      Certification required by 17 C.F.R. Section
  240.13a-14(a)32
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002







24




SIGNATURES




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







RIVER
      VALLEY BANCORPDate:
      November 14, 2008
            By:
            /s/
      Matthew
      P. ForresterMatthew
      P. ForresterPresident
      and Chief Executive OfficerDate:
      November 14, 2008
            By:
            /s/
      Vickie
      L. GrimesVickie
      L. GrimesVice
      President of Finance







25




EXHIBIT
INDEX





No.
            
            Description
            
            Location31(1)
            
            CEO
      Certification required by 17 C.F.R. Section 240.13a-14(a)
            
            Attached31(2)
            
            CFO
      Certification required by 17 C.F.R. Section 240.13a-14(a)
            
            Attached32
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
            
            Attached











26