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, 2009OR ̈
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes   ̈          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 13, 2009 was 1,504,472.


1




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
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
21Item 3.
Quantitative and Qualitative Disclosure about Market Risk
32Item 4T.
Controls and Procedures
32PART II. OTHER INFORMATION
33Item 1.
Legal Proceedings
33Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
33Item 3.
Defaults Upon Senior Securities
33Item 4.
Submission of Matters to a Vote of Security Holders
33Item 5.
Other Information
33Item 6.
Exhibits
33SIGNATURES
34EXHIBIT INDEX
35







2


PART I FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




RIVER VALLEY BANCORP


Consolidated Condensed Balance Sheets




September 30, 2009


December 31, 2008(Unaudited)(In Thousands, Except Share Amounts)AssetsCash and due from banks

$
5,388


$
3,645Interest-bearing demand deposits


7,079



6,388Cash and cash equivalents


12,467



10,033Investment securities available for sale


71,319



52,284Loans held for sale


469



130Loans


281,187



287,668Allowance for loan losses


(4,774
)


(2,364
)Net loans


276,413



285,304Premises and equipment, net


7,468



7,704Real estate, held for sale


355



259Federal Home Loan Bank stock


4,850



4,850Interest receivable


2,087



2,187Cash value of life insurance


8,117



7,871Other assets


1,713



1,722Total assets

$
385,258


$
372,344LiabilitiesDepositsNon-interest-bearing

$
23,498


$
21,393Interest-bearing


244,352



226,384Total deposits


267,850



247,777Borrowings


87,217



97,217Interest payable


709



704Other liabilities


3,997



2,106Total liabilities


359,773



347,804Commitments and ContingenciesStockholders’ EquityPreferred stock, no par valueAuthorized and unissued - 2,000,000 sharesCommon stock, no par valueAuthorized - 5,000,000 sharesIssued and outstanding – 1,504,472 and 1,500,322 shares


7,469



7,409Retained earnings


17,367



17,384Accumulated other comprehensive income (loss)


649



(253
)Total stockholders’ equity


25,485



24,540Total liabilities and stockholders’ equity

$
385,258


$
372,344




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 30,2009


2008


2009


2008(In Thousands, Except Share Amounts)Interest IncomeLoans receivable

$
12,182


$
13,101


$
4,043


$
4,434Investment securities


2,026



1,853



693



618Interest-earning deposits and other


123



318



42



90Total interest income


14,331



15,272



4,778



5,142Interest ExpenseDeposits


3,803



4,622



1,271



1,467Borrowings


3,221



3,653



1,033



1,222Total interest expense


7,024



8,275



2,304



2,689Net Interest Income


7,307



6,997



2,474



2,453Provision for loan losses


2,573



645



135



245Net Interest Income After Provision for Loan Losses


4,734



6,352



2,339



2,208Other IncomeService fees and charges


1,632



1,599



548



592Net realized gains on sale of available-for-sale securities


97



48



0



0Net gains on loan sales


927



215



156



42Interchange fee income


227



217



80



81Increase in cash value of life insurance


245



239



89



81Trust operations income


96



129



45



33Gain/(loss) on sale of premises, equipmentand real estate held for sale


(41
)


(59
)


5



(22
)Other income


50



99



16



27Total other income


3,233



2,487



939



834Other ExpensesSalaries and employee benefits


3,528



3,564



1,141



1,272Net occupancy and equipment expenses


920



974



304



326Data processing fees


290



285



97



93Advertising


281



278



90



108Legal and professional fees


278



223



87



66Amortization of mortgage servicing rights


108



134



35



36Federal Deposit Insurance Corporation assessment


665



50



240



19Other expenses


1,046



864



304



264Total other expenses


7,116



6,372



2,298



2,184Income Before Income Tax


851



2,467



980



858Income tax expense (benefit)


(79
)


618



231



213Net Income

$
930


$
1,849


$
749


$
645Basic earnings per share

$
.62


$
1.13


$
.50


$
.393Diluted earnings per share


.62



1.12



.50



.390Dividends per share


.63



.63



.21



.21




See Notes to Unaudited Consolidated Condensed Financial Statements.


4




RIVER VALLEY BANCORP


Consolidated Condensed Statements of Comprehensive Income


(Unaudited)





Nine Months Ended
September 30,


Three Months Ended
September 30,2009


2008


2009


2008(In Thousands)Net income

$
930


$
1,849


$
749


$
645Other 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 $(519), $544, $(492), and $187.


966



(1,007
)


896



(355
)Less: Reclassification adjustment for gains included in net income, net of tax expense of $(33), $(18), $0 and $0


64



30



0



0902



(1,037
)


896



(355
)Comprehensive income

$
1,832


$
812


$
1,645


$
290











See Notes to Unaudited Consolidated Condensed Financial Statements.


5


RIVER VALLEY BANCORP


Consolidated Condensed Statements of Cash Flows


(Unaudited)




Nine Months Ended
September 30,2009

2008(In Thousands)Operating ActivitiesNet income

$
930


$
1,849Adjustments to reconcile net income to net cash provided by operating activitiesProvision for loan losses


2,573



645Depreciation and amortization


344



347Investment securities gains


(97
)


(48
)Loans originated for sale in the secondary market


(41,036
)


(8,685
)Proceeds from sale of loans in the secondary market


41,212



9,098Gain on sale of loans


(927
)


(215
)Amortization of net loan origination cost


104



98Employee Stock Ownership Plan compensation


53



58Net change in:
Interest receivable


100



304Interest payable


5



102Other adjustments


1,678



705Net cash provided by operating activities


4,939



4,258Investing ActivitiesPurchases of securities available for sale


(34,809
)


(20,572
)Proceeds from maturities of securities available for sale


15,575



17,458Proceeds from sale of securities available for sale


1,620



7,971Purchase of Federal Home Loan Bank stock


0



(100
)Net change in loans


5,604



(21,724
)Purchases of premises and equipment


(112
)


(633
)Proceeds from sale of premises and equipment


4



76Proceeds from the sale of foreclosed real estate


441



0Other investing activities


0



148Net cash used in investing activities


(11,677
)


(17,376
)Financing ActivitiesNet change inNon-interest bearing, interest-bearing demand and savings deposits


3,984



(18,110
)Certificates of deposit


16,089



33,358Proceeds from borrowings


6,000



33,000Repayment of borrowings


(16,000
)


(34,000
)Cash dividends


(946
)


(1,031
)Stock options exercised


0



8Net increase in advances by borrowers for taxes and insurance


45



102Net cash provided by financing activities


9,172



13,327Net Change in Cash and Cash Equivalents


2,434



209Cash and Cash Equivalents, Beginning of Period


10,033



8,137Cash and Cash Equivalents, End of Period

$
12,467


$
8,346Additional Cash Flows and Supplementary InformationInterest paid

$
7,019


$
8,173Income tax paid


221



525




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
and Carroll County, Kentucky 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, 2008. 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,
2009, 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, 2008 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 1st 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 condensed financial statements.


7




NOTE 3: EARNINGS PER SHARE




Earnings per share have been computed based upon the weighted average common shares outstanding.







Nine Months Ended
September 30, 2009


Nine Months Ended
September 30, 2008Income


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

$
930



1,502,709


$
.620


$
1,849



1,637,223


$
1.13Effect of dilutive RRP awards and stock options






8,444











15,545Diluted earnings per shareIncome available to common shareholders and assumed conversions

$
930



1,511,153


$
.620


$
1,849



1,652,768


$
1.12







Three Months Ended
September 30, 2009


Three Months Ended
September 30, 2008Income


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

$
749



1,504,472


$
.500


$
645



1,639,881


$
.393Effect of dilutive RRP awards and stock options






7,349











12,497Diluted earnings per shareIncome available to common shareholders and assumed conversions

$
749



1,511,821


$
.500


$
645



1,652,378


$
.390








Options to purchase 5,000 shares of common stock at an exercise price of $22.25 per share were outstanding for the three and nine month periods ending September 30, 2009 and September 30, 2008.  Options to purchase 19,000 shares of common stock at $14.56 per share were outstanding for the three and nine month periods ending September
30, 2009 and the three month period ended September 30, 2008. Options to purchase 8,400 shares of common stock at $13.25 per share were outstanding for the three months ended September 30, 2009. These groups of options were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares.  In addition, options to purchase 15,000 shares of common stock at exercise prices ranging from $5.38 to $6.99 were outstanding at
September 30, 2009 and were included in the diluted shares outstanding for the three and nine month periods ended September 30, 2009.


8




NOTE 4: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS




Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards Codification (ASC) Topic 820.  ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC Topic 820 has been applied prospectively as of the
beginning of the period.




ASC Topic 820 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.  ASC Topic 820 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 liabilitiesLevel 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 liabilitiesLevel 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.  The Corporation does not currently hold any Level 1 securities.  If quoted market prices are not available, then fair values are estimated by using pricing models which utilize certain
market information or quoted prices of securities with similar characteristics (Level 2). For securities where quoted prices, market prices of similar securities or pricing models which utilize observable inputs are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality.  Rating
agency industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into calculations.  Level 2 securities include mortgage and other asset backed securities, federal agency securities and certain municipal securities.  Securities classified within Level 3 of the hierarchy include pooled trust preferred securities which are less liquid securities.


9




The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2009 and December 31, 2008, respectively (in thousands).




September 30, 2009Fair 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)(In Thousands)Available-for-sale securities:Federal agencies

$
26,472


$
0


$
26,472


$
0Mortgage and other asset backed securities


22,560



0



22,560



0State and municipals


19,288



0



19,288



0Corporate


2,999



0



2,142



857Total

$
71,319


$
0


$
70,462


$
857







December 31, 2008Fair 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)(In Thousands)Available-for-sale securities:Federal agencies

$
13,362


$
0


$
13,362


$
0Mortgage and other asset backed securities


18,949



0



18,949



0State and municipals


16,332



0



16,332



0Corporate


3,641



0



2,558



1,083Total

$
52,284


$
0


$
51,201


$
1,083






10




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, 2009


Nine Months Ended
September 30, 2008Beginning balance

$
1,083


$
888Total realized and unrealized gains and lossesAmortization included in net income


3



0Unrealized losses included in other comprehensive income


(216
)


(190
)Purchases, issuances and settlements including pay downs


(13
)


1,793Transfers in and/or out of Level 3


0



(1,791
)Ending balance

$
857


$
700
  Available-For-Sale Securities(In Thousands)Three Months Ended
September 30, 2009


Three Months Ended
September 30, 2008Beginning balance

$
1,065


$
2,490Total realized and unrealized gains and lossesAmortization included in net income


1



0Unrealized losses included in other comprehensive income


(203
)


(1
)Purchases, issuances and settlements including pay downs


(6
)


2Transfers in and/or out of Level 3


0



(1,791
)Ending balance

$
857


$
700






11




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 tables present 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 ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2009 and December 31, 2008, respectively (in
thousands).




September 30, 2009Fair 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)(In Thousands)Impaired loans

$
4,255


$
0


$
0


$
4,255Real estate held for sale


355



0



0



355Mortgage Servicing Rights


412



0



0



412
    December 31, 2008Fair 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)(In Thousands)Impaired loans

$
2,512


$
0


$
0


$
2,512Mortgage servicing rights


119



0



0



119







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 the year ended December 31, 2008 and the nine months ended September 30, 2009, 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 $2,512,000 and $4,255,000 for the respective periods.  These valuations 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.


12




Real Estate Held For Sale




Real estate held for sale is carried at the fair value at the date acquired less estimated cost to sell and is periodically evaluated for impairment.  Real estate held for sale recorded during 2009 and outstanding at September 30, 2009, is disclosed as a nonrecurring measurement.




During the nine months ended September 30, 2009, transfers to real estate held for sale were made, and remained outstanding at period end, with a fair value totaling $355,000.  Due to the nature of the valuation inputs, recorded initial real estate held for sale is classified within Level 3 of the hierarchy.







Mortgage Servicing Rights




Mortgage servicing rights are initially recorded at fair value and are subsequently reported at amortized cost and periodically evaluated for impairment.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 nine months ended September 30, 2009 and the year ended December 31, 2008 totaled $412,000 and $119,000, respectively. 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.




The following methods and assumptions were used to estimate the fair value of each class of financial instrument:




Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value.




Loans Held for Sale - Fair values are based on quoted market prices.




Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.




Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.




FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.




Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance
sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.




Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt.




Other Borrowings - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt.




Advance Payment by Borrowers for Taxes and Insurance - The fair value approximates carrying value.




Off-Balance Sheet Commitments - Commitments include commitments to originate mortgage and consumer loans and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amounts of these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments.


13




The estimated fair values of the Corporation’s financial instruments are as follows:





September 30, 2009CarryingAmount


FairValue(In Thousands)AssetsCash and cash equivalents

$
12,467


$
12,467Investment securities available for sale


71,319



71,319Loans including loans held for sale, net


276,882



284,232Interest receivable


2,087



2,087Stock in FHLB


4,850



4,850LiabilitiesDeposits


267,850



271,382FHLB advances


80,000



84,764Other borrowings


7,217



7,218Interest payable


709



709Advance payments by borrowers for taxes and insurance


155



155Off-Balance Sheet Assets (Liabilities)Commitments to extend credit


0



0Standby letters of credit


0



0





14




NOTE 5:  INVESTMENT SECURITIES




The amortized cost and approximate fair values of securities are as follows:




Amortized Cost


Gross Unrealized Gains


Gross Unrealized Losses


Approximate Fair Value(In Thousands)Available-for-sale Securities:September 30, 2009:Federal agencies

$
26,111


$
381


$
20


$
26,472Mortgage and other asset backed securities


21,572



989



1



22,560State and municipals


18,771



628



111



19,288Corporate


3,861



61



923



2,999Totals

$
70,315


$
2,059


$
1,055


$
71,319







The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 2009, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.




Available-for-saleAmortized Cost


FairValue(In Thousands)Within one year

$
1,469


$
1,486One to five years


14,948



15,235Five to ten years


13,109



13,350After ten years


19,218



18,68848,744



48,759Mortgage and other asset backed securities


21,571



22,560Totals

$
70,315


$
71,319







The carrying value of securities pledged as collateral, to secure public deposits, borrowings and for other purposes, was $22,593,000 at September 30, 2009.




Gross gains of $97,000 resulting from sales of available-for-sale securities were realized for 2009.




Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost.  Total fair value of these investments at September 30, 2009 was $6,529,000, which is approximately 9.2% of the Corporation’s available-for-sale investment portfolio.




As discussed below, management believes the declines in fair value for these securities are temporary.




15


Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting credit portion of the loss would be recognized in net income and the non-credit portion of the loss would be recognized in accumulated other comprehensive income in the period the other-than-temporary
impairment is identified.




The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009:




September 30, 2009Less than 12 Months

12 Months or More

TotalDescription of Securities

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses(In Thousands)Federal agencies

$
2,976

$
20

$
0

$
0

$
2,976

$
20Mortgage and other asset backed securities


41


1


0


0


41


1State and Municipal


543


7


2,112


104


2,655


111Corporate


0


0


857


923


857


923Total temporarily impaired securities

$
3,560

$
28

$
2,969

$
1,027

$
6,529

$
1,055








Federal Agencies




The unrealized losses on the Corporation’s investments in direct obligations of U.S. government agencies were primarily caused by interest rate changes.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments.  Because
the Corporation does not intend to sell the investments and it is not likely that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2009.







Mortgage and Other Asset Backed Securities




The unrealized losses on the Corporation’s investment in mortgage-backed securities were primarily caused by interest rate changes.  The Corporation expects to recover the amortized cost basis over the term of the securities.  Because the decline in market value is attributable to changes in interest rates and not
credit quality, and because the Corporation does not intend to sell the investments and it is not likely that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2009.







State and Municipal




The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were primarily caused by interest rate changes.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments.  Because
the Corporation does not intend to sell the investments and it is not likely that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2009.




16


Corporate Securities




The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation.  The two, ALESCO 9A and PRETSL XXVII Ltd, had unrealized losses at September 30, 2009 of $671,000 and $252,000, respectively.  These two securities
are rated Ba1 and A3, respectively, by Moodys indicating these securities are considered of moderate investment quality and credit risk.  Both issues are of either the highest or second highest tranche of the total issue, and have good collateral coverage at those tranche levels, thus providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is temporary and indicates thin trading activity
rather than a true decline in the value of the investment.  Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral position of the tranches, projected cash flows and the credit ratings.  The Corporation does not intend to sell the investments and it is not likely that the Corporation will be required to sell the investments before recovery, which may be maturity, and expects to receive all contractual cash flows
related to these investments.  Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired.




17




NOTE 6:  ALLOWANCE FOR LOAN LOSSES




The following tables analyze the changes in the allowance during the three and nine month periods ended September 30, 2009 and  September 30, 2008 respectively.





Allowance for Loan Losses(In Thousands)Nine Months Ended
September 30, 2009


Nine Months Ended
September 30, 2008Balance at beginning of period

$
2,364


$
2,208Charge offs:Real estate loans


(131
)


(534
)Consumer loans


(107
)


(132
)Commercial loans


(34
)


(83
)Total charge offs


(272
)


(749
)Recoveries


109



105Net charge offs


(163
)


(644
)Provision for losses on loans


2,573



645Balance at end of period

$
4,774


$
2,209







Allowance for Loan Losses(In Thousands)Three Months Ended
September 30, 2009


Three Months Ended
September 30, 2008Balance at beginning of period

$
4,677


$
2,129Charge offs:Real estate loans


(19
)


(80
)Consumer loans


(34
)


(49
)Commercial loans


0



(83
)Total charge offs


(53
)


(212
)Recoveries


15



47Net charge offs


(38
)


(165
)Provision for losses on loans


135



245Balance at end of period

$
4,774


$
2,209




18




NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS




In June 2009, the Financial Accounting Standards Board, (FASB) issued an accounting standard which established the Codification to become the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the SEC) and
its staff.  All guidance contained in the Codification carries an equal level of authority.  The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics.  The Corporation adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended September 30, 2009.  The adoption of this accounting standard, which was subsequently
codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on retained earnings and will have no impact on the Corporation’s financial position or results of operations.




In June 2009, the FASB issued new accounting guidance related to accounting for transfers of financial assets.  The Board’s objective in issuing this new guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about
a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  This
guidance must be applied to transfers occurring on or after the effective date.  Management has determined the adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.




In June 2009, the FASB issued new accounting guidance on consolidation of variable interest entities, which include: 1) the elimination of the exemption for qualifying special purpose entities, 2) a new approach for determining who should consolidate a variable interest entity, and 3) changes to when it is necessary to reassess who should
consolidate a variable interest entity.  This new guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.  Management has determined the adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.




In May 2009, the FASB issued new accounting guidance on subsequent events.  The objective of this guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The new accounting guidance
was effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009.  Management has determined the adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.




In April 2009, the FASB issued new accounting guidance requiring interim disclosures about fair value of financial instruments.  This guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and to require those disclosures
in summarized financial information at interim reporting periods.  This guidance shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  Management has determined the adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.


19




In April 2009, the FASB issued new accounting guidance for recognition and presentation of other-than-temporary impairments.  This new guidance amended the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements.  This new guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  An entity shall disclose information for interim and annual periods that enables users of its financial statements to understand the types of available-for-sale and held-to maturity debt and equity securities held, including information about investments in an unrealized loss
position for which an other-than-temporary impairment has or has not been recognized.  In addition, for interim and annual periods, an entity shall disclose information that enables users of financial statements to understand the reasons that a portion of an other-than-temporary impairment of a debt security was not recognized in earnings and the methodology and significant inputs used to calculate the portion of the total other-than-temporary impairment that was recognized in earnings.  The
new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  Management has determined the adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.




In April 2009, the FASB issued new accounting guidance on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity
for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  This new guidance requires a reporting entity to disclose in interim and annual periods the inputs and valuation
techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.  This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively.  Management has determined the adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.







NOTE 8:  RECLASSIFICATIONS




Certain reclassifications have been made to the 2008 consolidated condensed financial statements to conform to the September 30, 2009 presentation.







NOTE 9:  ECONOMIC RECOVERY PROGRAMS




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 would 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 to issue non-voting preferred stock to the Treasury in an amount ranging between 1% and 3% of its total risk-weighted assets.  The Corporation has determined that it will not participate in the TARP’s CPP.




The American Recovery and Reinvestment Act of 2009 (“ARRA”), signed into law on February 17, 2009, amended the EESA as it applies to institutions that received financial assistance under TARP. ARRA, more commonly known as the economic stimulus or economic recovery package, includes a wide variety of programs intended to stimulate
the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until the institution has repaid the Treasury.


20




Before and after EESA and ARRA, there have been numerous actions by the Federal Reserve Board, Congress, the Treasury, the FDIC, the IRS, the SEC and others to further the economic and banking industry stabilization efforts. It remains unclear at this time what further legislative and regulatory measures will be implemented affecting the
Corporation. To date, the Corporation or the Bank has elected to participate only in the FDIC’s Debt Guarantee Program, which provides for the guarantee of eligible newly issued senior unsecured debt of participating entities, and the FDIC’s Transaction Account Guarantee Program, which provides, without charge to depositors, a full guarantee on all non-interest bearing transaction accounts held by any depositor, regardless of dollar amount, through June 30, 2010 (recently extended from December 31,
2009).  Both of these programs are part of the FDIC’s Temporary Liquidity Guarantee Program.




The Board of the FDIC also adopted an interim rule imposing a 5 basis point special assessment on insured institutions as of June 30, 2009 which was payable on September 30, 2009. The special assessment due in September was $178,000.  In addition, the FDIC has adopted a final rule mandating prepayment on December 30, 2009, of all
quarterly risk-based assessments for the fourth quarter of 2009, and all of 2010, 2011 and 2012 (along with the third quarter assessment regularly due on that date).




In September 2009, the Board of Directors of the FDIC approved an extension of the temporary increase in the standard maximum deposit insurance amount to $250,000 through December 31, 2013.









NOTE 10:  SUBSEQUENT EVENTS




Subsequent events have been evaluated through November 16, 2009, which is the date the financial statements were issued.




On October 6, 2009, the Corporation filed a Form D with the Securities and Exchange Commission to report that it is engaged in a private placement of up to $8,000,000 of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, without par value, liquidation preference $1,000 per share (the “Series A Preferred Stock”). The Series
A Preferred Stock is being offered and sold to investors with whom or which the Corporation has an existing relationship.


The Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 7.25% per annum for the first five years and 9% per annum thereafter, payable quarterly. The Series A Preferred Stock will be non-voting except with respect to certain matters affecting the rights of the holders thereof, and may be redeemed
by the Corporation after five years for 100% of the liquidation preference plus any declared but unpaid dividends. The Series A Preferred Stock will have a liquidation preference of $1,000 per share.
  The minimum amount that must be raised in the offering is $5,000,000. The Corporation expects to close the transaction on or before December 31, 2009. Fifty percent of the net proceeds of the offering will be contributed to the Corporation’s bank subsidiary, River Valley Financial Bank.







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.




21





EFFECT OF CURRENT EVENTS




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. 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. The 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, the government has responded with a number of new and amended regulatory provisions. Many of these provisions directly or indirectly impact the Corporation, including the EESA,
TARP and the related CPP program, and changes to the federal deposit insurance program.




It is not clear at this time what impact the EESA, the TARP CPP, the Temporary Liquidity Guarantee Program, ARRA and other liquidity and funding initiatives, whether previously announced or that may be initiated in the future, will have on the financial markets and the other difficulties described above, including the extreme levels of volatility
and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further adverse effects could have an adverse effect on the Corporation and its business.




The level of turmoil in the financial services industry 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. 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.




22




Impact of Recent and Future Legislation. Congress and the Treasury Department have adopted legislation and taken actions to address the disruptions in the financial system and declines in the housing market. See Note 8, Economic Recovery Programs, 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 EESA, TARP, ARRA and 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. The actual impact that EESA, ARRA and related measures undertaken to alleviate the credit crisis will have on the financial markets is unknown. The failure of such measures to help stabilize the financial markets, and a continuation or worsening of current financial market conditions, could materially and adversely affect
our business, financial condition, results of operations, access to credit or the trading price of our common stock. Finally, there can be no assurance regarding the specific impact that such measures may have on us and no assurance whether or to what extent we will be able to benefit from such programs.




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.




On June 17, 2009, the Obama Administration published a comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the United States financial system. The President’s plan contains several elements that would have a direct effect on the Corporation and the Bank. Under the reform plan, the federal thrift
charter and the Office of Thrift Supervision would be eliminated and all companies that control an insured depository institution must register as a bank holding company. Draft legislation would require the Bank to become a national bank or adopt a state charter. Registration of the Corporation as a bank holding company would represent a significant change, as there currently exist significant difference between savings and loan holding company and bank holding company supervision and regulation. For example,
the Federal Reserve imposes leverage and risk-based capital requirements on bank holding companies whereas the Office of Thrift Supervision does not impose any capital requirements on savings and loan holding companies. If implemented, the foregoing regulatory reforms may have a material impact on our operations. However, at this time, we cannot determine the likelihood that the proposed regulatory reform will be adopted in the form proposed by the Obama Administration or the specific impact that any adopted
legislation will have on the Corporation or the Bank.




Additional Increases in Insurance Premiums.The FDIC insures the Bank’s deposits up to certain limits. The FDIC charges us premiums to maintain the Deposit Insurance Fund. The Bank elected to participate in the FDIC’s Temporary Liquidity Guarantee Program, which will increase its insurance premiums by
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 restoration plan that will uniformly increase insurance assessments by 7 basis points (annualized) effective January 1, 2009. Effective April 1, 2009, the plan also made changes to the deposit insurance assessment system resulting in increases in the assessment range for insured institutions. Further increases in premium assessments would increase the Corporation’s expenses. Also, in addition to the 5 basis point special assessment of $178,000 that the Corporation paid
in September 2009, the FDIC will require us to prepay all quarterly assessments for the rest of 2009, and all of 2010, 2011 and 2012, on December 30, 2009. Based on current deposit levels, management estimates that on December 30, 2009, the Corporation will pay actual and estimated third and fourth quarter 2009 assessments, totaling approximately $240,000, plus prepayment of 2010, 2011 and 2012 assessments estimated to be approximately $1.5 million.




Increased assessment rates and special assessments have had a material impact on the Corporation’s results of operations.




23




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.




Difficult Market Conditions Have Adversely Affected Our Industry. We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and
under-employment, have negatively impacted the credit performance of mortgage loans and securities and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including
to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets could adversely affect our business, financial condition and results of operations. We do not expect that the difficult conditions in the financial markets
are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the financial institutions industry. In particular, we may face the following risks in connection with these events:




•
We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.




•
Our ability to assess the creditworthiness of our customers may be impaired if the models and approach we use to select, manage and underwrite our customers become less predictive of future behaviors.




•
The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process.




•
Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.


•
Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.




•
We may be required to pay significantly higher deposit insurance premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.




24





Concentrations of Real Estate Loans Could Subject the Corporation to Increased Risks in the Event of a Real Estate Recession or Natural Disaster. A significant portion of the Corporation’s loan portfolio is secured by real estate. The real estate collateral in
each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in our primary market area could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing
a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Historically, Indiana and Kentucky have experienced, on occasion, significant natural disasters, including tornadoes and floods. The availability of insurance for losses for such catastrophes is limited. Our operations could also be interrupted by such natural disasters. Acts of nature, including tornadoes and floods, which may cause uninsured damage and other loss of value to real estate
that secures our loans or interruption in our business operations, may also negatively impact our operating results or financial condition.







CRITICAL ACCOUNTING POLICIES




Note 1 to the consolidated financial statements presented on pages 65 through 68 of the Annual Report to Shareholders for the year ended December 31, 2008 contains a summary of the Corporation’s significant accounting policies. Certain of these policies are important to the portrayal of the Corporation’s financial condition, since
they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation of mortgage servicing rights.







ALLOWANCE FOR LOAN LOSSES




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




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




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




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




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




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.




25


Historical loss rates for 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.  The portion of the allowance that is related to certain qualitative factors not specifically related to any one loan type is considered the unallocated portion of the reserve.




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 adjacent to that market. When evaluating the adequacy of allowance, consideration is given to this regional geographic concentration and the closely associated effect changing economic
conditions have on the Corporation’s customers.




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








VALUATION OF MORTGAGE SERVICING RIGHTS




The Corporation recognizes the rights to service mortgage loans as separate assets in the consolidated balance sheet. The total cost of loans, when sold, is allocated between loans and mortgage servicing rights based on the relative fair values of each. Mortgage servicing rights are subsequently carried at the lower of the initial carrying
value, adjusted for amortization, or fair value. Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Factors included in the calculation of fair value of the mortgage servicing rights include, estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic
factors will change over the life of the mortgage servicing rights, resulting in different valuations of the mortgage servicing rights. The differing valuations will affect the carrying value of the mortgage servicing rights on the consolidated balance sheet as well as the income recorded from loan servicing in the consolidated income statement. As of September 30, 2009, and December 31, 2008, mortgage servicing rights had carrying values of $544,000 and $240,000 respectively.







FINANCIAL CONDITION




At September 30, 2009, the Corporation’s consolidated assets totaled $385.3 million, an increase of $12.9 million, or 3.5% from December 31, 2008.  Deposits increased $20.1 million from December 31, 2008 to September 30, 2009, the majority of which came from local taxing authorities and school systems.  While a portion
of these deposits were invested in short term callable bonds, the more significant portion remained liquid in deposits held by the Corporation at the Federal Home Loan Bank of Indianapolis. As a result, as of September 30, 2009 the Corporation’s investment portfolio increased $19.0 million, or 36.4% over the total at December 31, 2008 and cash and cash equivalents increased $2.4 million, or 24.3%, over the December 31, 2008 level.




The Corporation experienced a decrease in the loan portfolio of $6.5 million year-to-date due primarily to the refinancing of conventional Bank owned 1-4 family mortgages which were then sold into the secondary market.  Sales to the Federal Home Loan Mortgage Corporation (Freddie Mac) during the first nine months were approximately
$41.0 million, more than 4 times the sales generated during the comparable period in 2008.  Profit, and related income, from these sales contributed significantly to the overall profit of the Corporation. Other lending remained stable or dropped slightly during the period, with the only categorical increases in commercial real estate and non-real estate lending primarily in the form of agricultural lending.




The Corporation’s consolidated allowance for loan losses totaled $4.8 million at September 30, 2009 as compared to $2.4 million at December 31, 2008.  The increase primarily reflects the second quarter increase in specific reserves on delinquent loans, discussed below.  Funding for the allowance represented 1.70%,
and .82% of total loans, respectively.  Overall delinquencies 30 or more days past due as of September 30, 2009 were at 4.22%, compared to 1.17% at the same date in 2008 and 1.07% at December 31, 2008. This increase is primarily due to two large relationships which represent 64% of the Corporation’s total delinquent loans.  Excluding those two relationships, the Corporation’s delinquency rate would have been 1.90% at September 30, 2009.




26




Non-performing loans (defined as loans delinquent greater than 90 days and loans on non-accrual status) as of September 30, 2009 were $10.0 million, compared to $1.0 million at the same date in 2008 and at December 31, 2008.  Non-performing loans as a percent of total loans were 3.59%, .36% and .70%, respectively for those periods.
While the Corporation experienced increased delinquencies in commercial and mortgage lending during the first nine months of 2009, the increases in non-performing loans were primarily due to the addition of the two troubled relationships of approximately $4.9 million and $1.6 million, mentioned above.   The larger relationship was previously discussed in the Corporation’s 2008 Annual Report on Form 10-K.  Management is working with the borrower and legal representatives to attempt
a workout of this situation, but based on an estimate of potential losses, the Corporation placed a $2.0 million specific reserve on the relationship as of June 30, 2009.  For the period ended September 30, 2009 the allowance for loan losses was funded at a level in line with current and estimated losses.  Appropriate and documented specific loss reserves have been established as necessary. The provision for loan losses increased to $2.6 million for the nine months ended September 30, 2009,
as compared to $645,000 for the same period in 2008.  Net charge offs for the nine month period ended September 30, 2009 were $120,000 as compared to $581,000 for the same period in 2008.




Although management believes that its allowance for loan losses at September 30, 2009, 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.




Other changes in the asset mix of the Corporation occurred but had little impact on the financial statements.  Increases due to items such as the capitalization of mortgage servicing rights (a direct result of the increased sales to Freddie Mac) and a large tax benefit realized in the second quarter (the result of the large expense
to the provision for loan loss taken in that quarter), were offset by decreases in prepaid assets, and reductions in the deferred tax assets carried for unrealized earnings on available-for-sale investments, as those investments moved from a net loss position at December 31, 2008 to a net gain position at September 30, 2009.




Deposits totaled $267.9 million at September 30, 2009, an increase of $20.1 million, or 8.1%, compared to total deposits at December 31, 2008. During the nine-month period, transactional deposit accounts increased by 9.8%, or $2.1 million, while interest bearing accounts increased 7.9%, or $18.0 million.  Deposit increases for the
period came primarily from the deposits of public sector depositors and by local taxing authorities.




Borrowings totaled $87.2 million at September 30, 2009 versus $97.2 million at December 31, 2008, a drop of $10.0 million, or 10.3% period to period, as the Corporation used portions of excess liquidity to pay down advances.  Of total borrowings, $80.0 million and $90.0 million, respectively, represented Federal Home Loan Bank (FHLB)
advances with average rates of 4.55% and 4.61% at the respective dates. The decrease in the average balance of advances held, coupled with the drop in the average rate paid on those advances, contributed to the overall profitability of the Corporation in reduced borrowing costs, $3.2 million for the nine months ended September 30, 2009 as compared to $3.7 million for the same period in 2008.




Stockholders’ equity totaled $25.5 million at September 30, 2009, an increase of $945,000, or 3.9% from the $24.5 million at December 31, 2008.  The increase was primarily due to the change in the unrealized earnings on available-for-sale investments, at a gain position of $649,000 at September 30, 2009 as compared to a loss
position of $253,000 at December 31, 2008.




The Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2009, the Bank’s regulatory capital exceeded all applicable regulatory capital requirements.




27





COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008




GENERAL




The Corporation’s net income for the nine months ended September 30, 2009, totaled $930,000, a decrease of $919,000 or 49.7% from the $1.8 million reported for the period ended September 30, 2008.  The decrease in income in the 2009 period was primarily attributable to increased expense to the provision for loan losses and
increased expense for FDIC insurance. Contributing in a lesser fashion were decreases due to the write down of uncollected interest on non-performing loans and reduced income on the interest earning deposits held by the Corporation, as rates paid for these deposits fell to less than .05%. Expense for FDIC insurance for the nine month period ended September 30, 2009 was $665,000 as compared to $50,000 for the same period in 2008, an increase of $615,000 period to period.  Uncollected interest on non-performing
loans written off during the first nine months of 2009 was $430,000.  Comparatively, the Corporation recouped $58,500 in uncollected interest during the same period in 2008.




Offsetting those losses were improvements in both the interest rate spread, 3.50% at September 30, 2009 compared to 3.25% at September 30, 2008, and in non-interest income, most specifically income from the gain on loan sales to the secondary market, which were three and one half times the 2008 levels.   Gain on loan sales to
the secondary market for the nine month period ended September 30, 2009 were $927,000 as compared to $215,000 for the same period in 2008.







NET INTEREST INCOME




Total interest income for the nine months ended September 30, 2009 decreased by $941,000, or 6.2%, to $14.3 million from the $15.3 million recorded for the same period in 2008.  Despite prior year growth in the underlying assets, the Prime rate changes by the Federal Reserve during 2008 spurred refinancing activity during the first
nine months of 2009, resulting in a decrease in the balances of conventional mortgages held at the Bank level, and increased sales of loans to Freddie Mac.  The changes in the Prime rate were also felt through reduced income on the loan portfolio and for interest earning deposits held at the Federal Home Loan Bank (FHLB). The average yield on loans at September 30, 2009 was 5.97%, a decrease from the rate of 6.35% at September 30, 2008. Rates paid on deposits at the FHLB fell from 1.75% at September
30, 2008 to .01% as of September 30, 2009.




Total interest expense for the same period exhibited significant declines with a decrease of $1.3 million, or 15.1%, from the $8.3 million reported at September 30, 2008 to $7.0 million at September 30, 2009.  For the nine months ended September 30, 2009 interest expense from deposits totaled $3.8 million while interest expense from
borrowings totaled $3.2 million, as compared to $4.6 million and $3.7 million for the same period in 2008.  Of the overall decrease in interest expense, $819,000 was attributable to interest expense on deposits as the effect of the Fed rate cuts continued to affect depositors and widen the spread on interest bearing balances.  Over the same period, the Corporation experienced a decrease of $432,000 on interest expense for borrowings as the average balance of funds borrowed from the FHLB, and
the average rate paid on those funds dropped as advances were repaid.




The result of these circumstances was that net interest income increased to $7.3 million for the nine months ended September 30, 2009 from $7.0 million for the same period in 2008, an increase of $310,000, or 4.4%.




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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 Corporation, the status of past due principal and interest payment, general economic conditions, particularly as
such conditions relate to the Corporation’s market area, and other factors related to the collectibility of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $2.6 million provision for losses on loans for the nine months ended September 30, 2009, as compared to $645,000 for the same period in 2008.  Reserves established specifically for potential losses, including two large relationships of $4.9 and $1.6 million each, increased from $900,000 at September
30, 2008 to $3.0 million at September 30, 2009.  Non-performing loans, defined as loans past due 90 or more days as of September 30, 2009 were $10.0 million, an increase of $9.0 million from the $1.0 million at the same point in 2008, primarily due to the addition of the two aforementioned large relationships.  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, 2009, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future.







OTHER INCOME




Other income increased by $746,000, during the nine months ended September 30, 2009 to $3.2 million, as compared to the $2.5million reported for the same period in 2008.  This increase was fueled primarily by sales of 1-4 family residential loans to the secondary market, with gains on the sale of securities, income from loan related
fees, and increased debit card interchange fees.  The increases noted were partially offset by losses on sales of foreclosed property, reduced income from overdraft fees, and decreased income from the Corporation’s trust operation.  Unlike interest income, “Other Income” is not always readily predictable and is subject to variations depending on outside influences.







OTHER EXPENSE




Total other expense increased by $744,000 or 11.7%, to $7.1 million during the nine months ended September 30, 2009, as compared to the $6.4 million reported for the same period in 2008.  Increased FDIC assessment expense ($665,000 in 2009 as compared to $50,000 in 2008), increased donations expense (including the $32,000 donation
of a piece of repossessed real estate to Habitat for Humanity), increased expense relating to building rents ($8,000 per month for the new branch in Floyd Knobs, Indiana) and increased expense relating to the sale of loans into the secondary market ($148,000 in 2009 as compared to $12,000 in 2008) contributed largely to the increase. These increases were offset by reduced costs of loan administration in general and reduced administrative expenses, such as communications cost and travel expense, all a result of
the Corporation’s aggressive cost cutting measures.  The Corporation managed personnel costs through staff reductions resulting from attrition, rather than forced reductions, minimizing the effect on the Corporation’s employees, while maintaining an experienced personnel base.







INCOME TAXES




A tax benefit of $79,000 was recorded for the nine-month period ended September 30, 2009 as compared to tax expense of $618,000 for the comparable period in 2008.  For the 2009 period, the Corporation had pre-tax income of $851,000 as compared to $2.5 million for the 2008 period, reflecting the second quarter loss resulting from
a significant increase to the provision for loan losses.  The change in tax from period to period was due to the levels of taxable income and loss for the periods.  The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance partially offset by the effect of nondeductible expenses.




29





COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008




GENERAL




The Corporation’s net income for the three months ended September 30, 2009, totaled $749,000, an increase of $104,000 or 16.1% from the net income of $645,000reported for the period ended September 30, 2008.  The increase in income for the 2009 period was primarily attributable to increased income from the sale of loans into
the secondary market (to Freddie Mac), a slight decrease in the expense for the loan loss provision, and increased fees for loan document preparation. Gain on loan sales to the secondary market for the three month period ended September 30, 2009 were $156,000 as compared to $42,000 for the same period in 2008, an increase of $114,000, or 271.4%.




Offsetting the increased income were decreases in service charges for overdrawn accounts, increased FDIC assessment charges, and slight increases in professional fees and technology costs.  Expense for FDIC insurance for the three month period ended September 30, 2009 was $240,000, over twelve times the expense for the same period
in 2008 of $19,000.  Meanwhile, the interest rate spread reflected multiple interest rate reductions by the Federal Reserve Bank during 2008, with the spread at 3.50% as of September 30, 2009 as compared to 3.25% at September 30, 2008.







NET INTEREST INCOME




Total interest income for the three months ended September 30, 2009 decreased by $364,000, or 7.1%, to $4.8 million from the $5.1 million recorded for the same period in 2008.  The effect of the Prime rate changes by the Federal Reserve during 2008 were felt through reduced income on the loan portfolio and on interest earning deposits
held at the Federal Home Loan Bank (FHLB).  Rates paid on deposits at the FHLB fell from 1.75% at September 30, 2008 to .01% as of September 30, 2009.  Decreased average balances in the loan portfolio also contributed to the decreased interest income, with total loans outstanding at September 30, 2009 of $281.2 million compared to $287.7 million at the same point in 2008, a decrease of $6.5 million or 2.3%. Higher average balances in the investment portfolio resulted in increased income from
investment securities at $693,000 as of September 30, 2009, a 12.1% increase over the $618,000 for the same period in 2008.




Total interest expense for the same period decreased by $385,000, or 14.3%, from the $2.7 million reported at September 30, 2008 to $2.3 million at September 30, 2009.  For the three months ended September 30, 2009 interest expense from deposits totaled $1.3 million while interest expense from borrowings totaled $1.0 million, as
compared to $1.5 million and $1.2 million for the same period in 2008.  Of the overall decrease in interest expense, $196,000 was attributable to interest expense on deposits as the effect of the Fed rate cuts in 2008 continued to affect depositors and widen the spread on interest bearing balances.  Over the same period, the Corporation experienced a decrease of $189,000 on interest expense for borrowings as the average balance of funds borrowed from the FHLB dropped, as advances were repaid,
and the average rate paid on those borrowings dropped from 4.61% at September 30, 2008 to 4.55% at September 30, 2009.




Net interest income was $2.5 million for the three months ended September 30, 2009 and for the same period in 2008, with only a slight increase period to period of $21,000, or 0.9%.  This reflects the effects of increasing spread between interest earning assets and interest bearing liabilities, combined with changes in the mix of
the underlying assets and liabilities.




30





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 Corporation, the status of past due principal and interest payment, general economic conditions, particularly as
such conditions relate to the Corporation’s market area, and other factors related to the collectibility of the Corporation’s loan portfolio. As a result of such analysis, management recorded a $135,000 provision for losses on loans for the three months ended September 30, 2009, as compared to $245,000 for the same period in 2008. Non-performing loans as of September 30, 2009 were $10.0 million, an increase of $9.0 million, from the $1.0 million at the same point in 2008, primarily reflecting the
addition of two large relationships representing $4.9 million and $1.6 million of loans past due more than 90 days at September 30, 2009.  The decrease in the provision year-to-year has been predicated primarily on estimated losses, of which the majority are represented by specific reserves established during the second quarter; declining levels of loan activity and shrinkage in the loan portfolio; and some impact for the current economic environment.  Net charge offs for the nine month period
ended September 30, 2009 were $120,000 as compared to $581,000 for the same period in 2008. While management believes that the allowance for losses on loans is adequate at September 30, 2009, based upon the available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on non-performing assets in the future.







OTHER INCOME




Other income increased by $105,000, during the three months ended September 30, 2009 to $939,000, as compared to the $834,000 reported for the same period in 2008.  This increase was fueled primarily by sales of 1-4 family residential loans to the secondary market, the associated fees for document preparation, increased cash surrender
value of bank owned life insurance, and a slight gain on the sale of repossessed real estate.  These increases were offset by decreased income from charges for overdraft privileges and reduced facilities rental income. Unlike interest income, “Other Income” is not always readily predictable and is subject to variations depending on outside influences.







OTHER EXPENSE




Total other expense increased by $114,000 or 5.2%, to $2.3 million during the three months ended September 30, 2009, as compared to the $2.2 million reported for the same period in 2008.  Increased FDIC assessment expense ($240,000 in 2009 as compared to $19,000 in 2008), increased professional fees (relating primarily to legal costs
and external loan review activity), and increased expense relating to the sale of loans into the secondary market (expense of $20,700 in 2009 as compared to income of $4,300 in 2008, primarily due the large increase in fees paid in conjunction with the refinance of Freddie Mac loans) contributed largely to the increase.







INCOME TAXES




A tax expense of $231,000 was recorded for the three-month period ended September 30, 2009 as compared to $213,000 for the comparable period in 2008.  For the 2009 period, the Corporation had pre-tax income of $980,000 as compared to $858,000 for the 2008 period.  The effective tax rate was 23.6% for
the three month period ended September 30, 2009 compared to 24.8% for the same period in 2008.  The tax calculations for both periods include the benefit of tax-exempt income from municipal investments and cash surrender life insurance partially offset by the effect of nondeductible expenses.







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.


31





LIQUIDITY RESOURCES




Historically, the Corporation 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, 2009, the Bank had $80.0million in such borrowings, with an additional $22.0 million available, previously approved by the Bank’s board of directors.  Based on collateral, an additional $12.0 million could be available, if the board of directors determines the need. In addition, at September 30, 2009
the Bank had commitments to fund loan originations of $2.8 million, unused home equity lines of credit of $15.3 million and unused commercial lines of credit of $9.2 million.  Commitments to sell loans as of that date were $2.1 million.  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.







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.






32






PART II.  OTHER INFORMATION




ITEM 1.  LEGAL PROCEEDINGS




Neither the Corporation nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the business.







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




3(2)
Amended Code of By-Laws of River Valley Bancorp, As Amended July 21, 2009, is incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on July 23, 200931(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







33




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 16, 2009
By:
/s/ Matthew P. ForresterMatthew P. ForresterPresident and Chief Executive OfficerDate: November 16, 2009
By:
/s/ Vickie L. GrimesVickie L. GrimesVice President of Finance







34




EXHIBIT INDEX





No.

Description

Location3(2)

Amended Code of By-Laws of River Valley Bancorp, As Amended July 21, 2009

Incorporated by reference to Exhibit 3.1 to Form 8-K filed July 23, 200931(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











35