**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 
 **FORM
10-Q**
 **(MARK
ONE)**
  ý
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2006ORo
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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
    
    (I.R.S.
      Employerincorporation
      or organization)
    
    Identification
      No.)**430
      Clifty Drive**
      **Madison,
      Indiana**
    
    **47250**(Address
      of principal executive offices)
    
    (Zip
      Code)
 
 **(812)
273-4949**
 (Registrant’s
telephone number, including area code)
 
 **[None]**
 (Former
name, former address and former fiscal year, if changed since last
report)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
  Yes
    ý
    
    No
    o
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
 Large
      accelerated filer
    o
    Accelerated
      filer
    o
    Non-accelerated
      filer
    ý
   Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes
    o
    No
    ý
The
number of shares of the Registrant’s common stock, without par value,
outstanding as of June 30, 2006 was 1,608,731.
  1
  **RIVER
VALLEY BANCORP**
 **FORM
10-Q**
 **INDEX**
 Page
      No.PART
      I. FINANCIAL INFORMATIONItem
      1. Financial StatementsConsolidated
      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
    11Item
      3. Quantitative and Qualitative Disclosure about Market Risk
    15Item
      4. Controls and Procedures
    16PART
      II. OTHER INFORMATION
    16Item
      1. Legal Proceedings
    17Item
      1A. Risk Factors
    17Item
      2. Unregistered Sales of Equity Securities and Use of
Proceeds
    17Item
      3. Defaults Upon Senior Securities
    17Item
      4. Submission of Matters to a Vote of Security Holders
    17Item
      5. Other Information
    17Item
      6. Exhibits
    17SIGNATURES
    18EXHIBIT
      INDEX
    19
  2
  **PART
I FINANCIAL INFORMATION**
 **Item
1. Financial Statements**
  **RIVER
VALLEY BANCORP**
 Consolidated
Condensed Balance Sheets
 
 June
      30,
      2006
    
    December
      31,
      2005**Assets**
    
    (In
      Thousands, Except Share Amounts)
      (Unaudited)Cash
      and due from banks
    
    $
    6,959
    
    $
    4,749Interest-bearing
      demand deposits
    
    
    1,437
    
    
    12,933Federal
      funds sold
    
    
    108
    
    
    48Cash
      and cash equivalents
    
    
    8,504
    
    
    17,730Investment
      securities available for sale
    
    
    64,045
    
    
    59,609Loans
      held for sale
    
    
    180
    
    
    ---Loans
    
    
    235,241
    
    
    232,044Allowance
      for loan losses
    
    
    2,402
    
    
    2,320Net
      loans
    
    
    232,839
    
    
    229,724Premises
      and equipment
    
    
    8,028
    
    
    8,189Federal
      Home Loan Bank stock
    
    
    4,050
    
    
    4,050Interest
      receivable
    
    
    2,022
    
    
    2,060Cash
      surrender value life insurance
    
    
    5,621
    
    
    5,523Other
      assets
    
    
    2,537
    
    
    1,863Total
      assets
    
    $
    327,826
    
    $
    328,748**Liabilities**DepositsNon-interest-bearing
    
    $
    18,464
    
    $
    19,270Interest-bearing
    
    
    201,013
    
    
    187,463Total
      deposits
    
    
    219,477
    
    
    206,733Borrowings
    
    
    83,217
    
    
    96,782Interest
      payable
    
    
    638
    
    
    554Other
      liabilities
    
    
    1,348
    
    
    1,661Total
      liabilities
    
    
    304,680
    
    
    305,730**Commitments
      and Contingencies****Shareholders’
      Equity**Preferred
      stock, without par valueAuthorized
      and unissued - 2,000,000 sharesCommon
      stock, without par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding - 1,608,731 and 1,586,495 shares
    
    
    9,036
    
    
    8,973Retained
      earnings
    
    
    14,947
    
    
    14,663Shares
      acquired by stock benefit plans
    
    
    ---
    
    
    (152
    )Accumulated
      other comprehensive loss
    
    
    (837
    )
    
    (466
    )Total
      shareholders’ equity
    
    
    23,146
    
    
    23,018Total
      liabilities and shareholders’ equity
    
    $
    327,826
    
    $
    328,748See
      notes to consolidated condensed financial statements.
 3
  **RIVER
VALLEY BANCORP**
 Consolidated
Condensed Statements of Income
 (Unaudited)
 
 Six
      Months Ended
    
    Three
      Months EndedJune
      30,
    
    June
      30,2006
    
    2005
    
    2006
    
    2005Interest
      Income
    
    (In
      Thousands, Except Share Amounts)Loans
      receivable
    
    $
    7,697
    
    $
    6,958
    
    $
    3,991
    
    $
    3,549Investment
      securities
    
    
    1,211
    
    
    668
    
    
    619
    
    
    356Interest-earning
      deposits and other
    
    
    286
    
    
    161
    
    
    140
    
    
    97Total
      interest income
    
    
    9,194
    
    
    7,787
    
    
    4,750
    
    
    4,002Interest
      ExpenseDeposits
    
    
    3,272
    
    
    1,614
    
    
    1,757
    
    
    823Borrowings
    
    
    1,950
    
    
    2,106
    
    
    967
    
    
    1,104Total
      interest expense
    
    
    5,222
    
    
    3,720
    
    
    2,724
    
    
    1,927Net
      Interest Income
    
    
    3,972
    
    
    4,067
    
    
    2,026
    
    
    2,075Provision
      for loan losses
    
    
    168
    
    
    144
    
    
    84
    
    
    72Net
      Interest Income After Provision for Loan Losses
    
    
    3,804
    
    
    3,923
    
    
    1,942
    
    
    2,003Other
      IncomeService
      fees and charges
    
    
    962
    
    
    892
    
    
    487
    
    
    464Net
      gains on loan sales
    
    
    55
    
    
    172
    
    
    33
    
    
    105Other
      income
    
    
    181
    
    
    171
    
    
    106
    
    
    91Total
      other income
    
    
    1,198
    
    
    1,235
    
    
    626
    
    
    660Other
      ExpensesSalaries
      and employee benefits
    
    
    1,987
    
    
    1,838
    
    
    1,002
    
    
    909Net
      occupancy and equipment expenses
    
    
    583
    
    
    546
    
    
    290
    
    
    268Data
      processing fees
    
    
    55
    
    
    57
    
    
    25
    
    
    31Advertising
    
    
    130
    
    
    117
    
    
    75
    
    
    56Mortgage
      servicing rights
    
    
    199
    
    
    35
    
    
    100
    
    
    68Legal
      and professional fees
    
    
    99
    
    
    153
    
    
    63
    
    
    97Other
      Expenses
    
    
    639
    
    
    644
    
    
    287
    
    
    346Total
      other expenses
    
    
    3,692
    
    
    3,390
    
    
    1,842
    
    
    1,775Income
      Before Income Tax
    
    
    1,310
    
    
    1,768
    
    
    726
    
    
    888Income
      tax expense
    
    
    404
    
    
    623
    
    
    223
    
    
    258Net
      Income
    
    $
    906
    
    $
    1,145
    
    $
    503
    
    $
    630Basic
      earnings per share
    
    $
    .57
    
    $
    .73
    
    $
    .31
    
    $
    .40Diluted
      earnings per share
    
    
    .55
    
    
    .70
    
    
    .31
    
    
    .38Dividends
      per share
    
    
    .39
    
    
    .385
    
    
    .195
    
    
    .195
 See notes
to consolidated condensed financial statements.
   4
  
 **RIVER
VALLEY BANCORP**
 Consolidated
Condensed Statements of Comprehensive Income
 (Unaudited)
 
 Six
      Months Ended
      June
      30,
    
    Three
      Months Ended
      June
      30,2006
    
    2005
    
    2006
    
    2005(In
      Thousands)Net
      income
    
    $
    906
    
    $
    1,145
    
    $
    503
    
    $
    630Other
      comprehensive income, net of taxUnrealized
      gains (losses) on securities available
      for saleUnrealized
      holding gains arising during the
      period, net of tax expense (benefit) of
      $(155), $(97), $(157) and $33
    
    
    (371
    )
    
    (147
    )
    
    (283
    )
    
    50Comprehensive
      income
    
    $
    535
    
    $
    998
    
    $
    220
    
    $
    680
 
 See notes
to consolidated condensed financial
statements.
  5
 
 **RIVER
VALLEY BANCORP**
 Consolidated
Condensed Statements of Cash Flows
 (Unaudited)
  Six
      Months EndedJune
      30,2006
    
    2005Operating
      Activities
    
    In
      ThousandsNet
      income
    
    $
    906
    
    $
    1,145Adjustments
      to reconcile net income to net cash provided by operating
      activitiesProvision
      for loan losses
    
    
    168
    
    
    144Depreciation
      and amortization
    
    
    319
    
    
    284Loans
      originated for sale in the secondary market
    
    
    (2,360
    )
    
    (7,725
    )Proceeds
      from sale of loans in the secondary market
    
    
    2,197
    
    
    7,958Gain
      on sale of loans
    
    
    (55
    )
    
    (172
    )Amortization
      of deferred loan origination cost
    
    
    72
    
    
    58Amortization
      of expense related to stock benefit plans
    
    
    10
    
    
    170Net
      change in:Interest
      receivable
    
    
    38
    
    
    (191
    )Interest
      payable
    
    
    84
    
    
    63Other
      adjustments
    
    
    (1,084
    )
    
    212Net
      cash provided by operating activities
    
    
    295
    
    
    1,946Investing
      ActivitiesPurchases
      of securities available for sale
    
    
    (8,908
    )
    
    (26,818
    )Proceeds
      from maturities of securities available for sale
    
    
    4,009
    
    
    8,008Purchase
      of Federal Home Loan Bank stock
    
    
    0
    
    
    (645
    )Net
      change in loans
    
    
    (3,748
    )
    
    (1,934
    )Proceeds
      from sale of foreclosed real estate
    
    
    506
    
    
    15Purchases
      of premises and equipment
    
    
    (158
    )
    
    (1,204
    )Net
      cash used in investing activities
    
    
    (8,299
    )
    
    (22,578
    )Financing
      ActivitiesNet
      change inNoninterest-bearing,
      interest-bearing demand and savings deposits
    
    
    11,970
    
    
    2,257Certificates
      of deposit
    
    
    774
    
    
    (3,214
    )Short
      term borrowings
    
    
    (14,565
    )
    
    2,955Proceeds
      from borrowings
    
    
    9,000
    
    
    25,000Repayment
      of borrowings
    
    
    (8,000
    )
    
    (11,000
    )Cash
      dividends
    
    
    (620
    )
    
    (597
    )Excess
      tax benefit on stock options exercised
    
    
    43
    
    
    0Stock
      options exercised
    
    
    162
    
    
    17Advances
      by borrowers for taxes and insurance
    
    
    14
    
    
    11Net
      cash provided by (used in) financing activities
    
    
    (1,222
    )
    
    15,429Net
      Change in Cash and Cash Equivalents
    
    
    (9,226
    )
    
    (5,203
    )Cash
      and Cash Equivalents, Beginning of Period
    
    
    17,730
    
    
    12,437Cash
      and Cash Equivalents, End of Period
    
    $
    8,504
    
    $
    7,234Additional
      Cash Flows and Supplementary InformationInterest
      paid
    
    $
    5,138
    
    $
    3,657Income
      tax paid
    
    
    574
    
    
    502
 
 See notes
to consolidated condensed financial statements.
 6
   **RIVER
VALLEY BANCORP**
 Notes to
Unaudited Consolidated Condensed Financial Statements
 
 River
Valley Bancorp (the “Corporation”) 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 portions of northwestern 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, 2005. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) which are necessary
for a fair presentation of the financial statements have been included. The
results of operations for the six and three month periods ended June 30, 2006,
are not necessarily indicative of the results which may be expected for the
entire year. The consolidated condensed balance sheet of the Corporation as of
December 31, 2006 has been derived from the audited consolidated balance sheet
of the Corporation as of that date.
  Note
2: Principles of Consolidation
  The
consolidated condensed financial statements include the accounts of the
Corporation and its subsidiary, the Bank. The Bank currently owns four
subsidiaries. Madison First Service Corporation, which was incorporated under
the laws of the State of Indiana on July 3, 1973, currently holds land but does
not otherwise engage in significant business activities. RVFB Investments, Inc.,
RVFB Holdings, Inc., and RVFB Portfolio, LLC were established in Nevada the
latter part of 2005. They hold and manage a significant portion of the Bank’s
investment portfolio. All significant inter-company balances and transactions
have been eliminated in the accompanying consolidated financial statements.
  Note
3: Earnings Per Share
  Earnings
per share have been computed based upon the weighted average common shares
outstanding. Unearned Employee Stock Ownership Plan shares have been excluded
from the computation of average common shares outstanding.
   7
 
 Six
      Months Ended
      June
      30, 2006
    
    Six
      Months Ended
      June
      30, 2005Income
    
    Weighted
      Average
      Shares
    
    Per
      Share
      Amount
    
    Income
    
    Weighted
      Average
      Shares
    
    Per
      Share
      Amount(Dollar
      Amounts In Thousands, Except Share Amounts)**Basic
      earnings per share**Income
      available to common shareholders
    
    $
    906
    
    
    1,598,487
    
    $
    .57
    
    $
    1,145
    
    
    1,576,385
    
    $
    .73**Effect
      of dilutive RRP awards and stock options**
    
    
    
    
    
    44,201
    
    
    
    
    
    
    
    
    62,038**Diluted
      earnings per share**Income
      available to common shareholders and assumed conversions
    
    $
    906
    
    
    1,642,688
    
    $
    .55
    
    $
    1,145
    
    
    1,638,423
    
    $
    .70Three
      Months Ended
      June
      30, 2006
    
    Three
      Months Ended
      June
      30, 2005Income
    
    
    Weighted
      Average
      Shares
    
    
    Per
      Share Amount
    
    
    Income
    
    
    Weighted
      Average
      Shares
    
    
    Per
      Share Amount(Dollar
      Amounts In Thousands, Except Share Amounts)**Basic
      earnings per share**Income
      available to common shareholders
    
    $
    503
    
    
    1,606,336
    
    $
    .31
    
    $
    630
    
    
    1,579,634
    
    $
    .40**Effect
      of dilutive RRP awards and stock options**
    
    
    
    
    
    40,867
    
    
    
    
    
    
    
    
    60,330**Diluted
      earnings per share**Income
      available to common shareholders and assumed conversions
    
    $
    503
    
    
    1,647,203
    
    $
    .31
    
    $
    630
    
    
    1,639,964
    
    $
    .38
 
 Options
to purchase 5,000 shares of common stock at $22.67 per share were outstanding at
June 30, 2006, but were not included in the computation of diluted earnings per
share because the option price was greater than the average market price of the
common shares.


Note
4: Change in Accounting Principle
  The
Corporation has a stock-based employee compensation plan, which is described in
Notes of Financial Statements included in the December 31, 2005 Annual Report to
shareholders.
  Effective
January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123(R), Share−Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses
all forms of share−based payment awards, including shares under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS 123(R) requires all share-based payments to be recognized as expense, based
upon their fair values, in the financial statements over the vesting period of
the awards. The Company has elected the modified prospective application and, as
a result, has
   8
  recorded
approximately $1,700 in compensation expense related to vested stock options
less estimated forfeitures for the six month period ended June 30,
2006.
  Prior to
the adoptions of SFAS 123(R), the Corporation accounted for this plan under the
recognition and measurement principles of APB Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related interpretations. No stock-based employee compensation cost was reflected
in net income, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the grant date. The
following table illustrates the effect on net income and earnings per share if
the Corporation had applied the fair value provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, *Accounting
for Stock-Based Compensation* , to
stock-based employee compensation.
  Six
      Months Ended
      June
      30, 2005
    
    Three
      Months Ended
      June
      30, 2005Net
      income, as reported
    
    $
    1,145
    
    $
    630Less:
      Total stock-based employee compensation cost determined under the fair
      value based
      method, net of income taxes
    
    
    34
    
    
    29Pro
      forma net income
    
    $
    1,111
    
    $
    601Earnings
      per share:Basic
      - as reported
    
    $
    .73
    
    $
    .40Basic
      - pro forma
    
    
    .72
    
    
    .39Diluted
      - as reported
    
    
    .70
    
    
    .39Diluted
      - pro forma
    
    
    .69
    
    
    .38
  Prior to
the adoption of SFAS 123 (R), unearned compensation related to restricted stock
awards was classified as a separate component of shareholders’ equity. In
accordance with the provisions of SFAS 123(R), on January 1, 2006, the balance
in unearned compensation was reclassified to common stock on the balance
sheet.
  Note
5: Recent Accounting Pronouncements
  In March
2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS 140, *Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,* with
respect to the accounting for separately recognized servicing assets and
servicing liabilities.
  SFAS No.
156 requires an entity to initially recognize a servicing asset or servicing
liability at fair value each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in other specific
situations.
  In
addition, SFAS No. 156 permits an entity to choose either of the following
subsequent measurement methods for each class of separately recognized servicing
assets and servicing liabilities:
  ·
    Amortization
      method—Amortize servicing assets or servicing liabilities in proportion to
      and over the period of estimated net servicing income or net servicing
      loss and assess servicing assets or servicing liabilities for impairment
      or increased obligation based on fair value at each reporting date.
  ·
    Fair
      value measurement method—Measure servicing assets or servicing liabilities
      at fair value at each reporting date and report changes in fair value in
      earnings in the period in which the changes occur.
  SFAS No.
156 is effective at the beginning of an entity’s first fiscal year that begins
after September 15, 2006 and should be applied prospectively for recognition and
initial measurement of servicing assets and servicing liabilities. Earlier
adoption is permitted as of the beginning of an entity’s fiscal year, provided
the entity has not yet issued financial statements, including interim financial
statements, for any period of that fiscal year.
  The
Corporation did not early adopt SFAS No. 156 on January 1, 2006. The Corporation
is currently evaluating the effect of adoption of this statement on the
Corporation’s financial condition or results of operations.
   9
   Note
5: Reclassifications
  Certain
reclassifications have been made to the 2005 consolidated condensed financial
statements to conform to the June 30, 2006 presentation.
  10
  **Item
2: Management’s Discussion and Analysis of Financial Condition and Results of
Operations**
  **Forward
Looking Statement**
  This
Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements which constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this Form 10-Q and include statements regarding the intent, belief, outlook,
estimate or expectations of the Corporation (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Corporation. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
  **Critical
Accounting Policies**
  The notes
to the consolidated financial statements contain a summary of the Corporation’s
significant accounting policies presented on pages 24 through 26 of the Annual
Report to Shareholders for the year ended December 31, 2005. Certain of these
policies are important to the portrayal of the 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
   11
  based on
the expected net charge-offs for one year. Loss rates are based on the average
net charge-off history by loan category.
  Historical
loss rates for commercial and consumer loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition. Factors which management considers in the
analysis include the effects of the national and local economies, trends in the
nature and volume of loans (delinquencies, charge-offs and non-accrual loans),
changes in mix, credit score migration comparisons, asset quality trends, risk
management and loan administration, changes in the internal lending policies and
credit standards, collection practices and examination results from bank
regulatory agencies and the Corporation’s internal loan review.
  An
unallocated reserve is maintained to recognize the imprecision in estimating and
measuring loss when evaluating reserves for individual loans or pools of loans.
Allowances on individual loans and historical loss rates are reviewed quarterly
and adjusted as necessary based on changing borrower and/or collateral
conditions and actual collection and charge-off experience.
  The
Corporation’s primary market area for lending is southeastern Indiana and
portions of northwestern Kentucky. When evaluating the adequacy of allowance,
consideration is given to this regional geographic concentration and the closely
associated effect changing economic conditions have on the Corporation’s
customers.
  The
Corporation has not substantively changed any aspect to its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
  Valuation
of Mortgage Servicing Rights
  The
Company recognizes the rights to service mortgage loans as separate assets in
the consolidated balance sheet. The total cost of loans when sold is allocated
between loans and mortgage servicing rights based on the relative fair values of
each. Mortgage servicing rights are subsequently carried at the lower of the
initial carrying value, adjusted for amortization, or fair value. Mortgage
servicing rights are evaluated for impairment based on the fair value of those
rights. Factors included in the calculation of fair value of the mortgage
servicing rights include, estimating the present value of future net cash flows,
market loan prepayment speeds for similar loans, discount rates, servicing
costs, and other economic factors. Servicing rights are amortized over the
estimated period of net servicing revenue. It is likely that these economic
factors will change over the life of the mortgage servicing rights, resulting in
different valuations of the mortgage servicing rights. The differing valuations
will affect the carrying value of the mortgage servicing rights on the
consolidated balance sheet as well as the income recorded from loan servicing in
the income statement. As of June 30, 2006 and December 31, 2005, mortgage
servicing rights had carrying values of $677,000 and $839,000,
respectively.
  **Financial
Condition**
  At June
30, 2006, the Corporation’s consolidated assets totaled $327.8 million, a
decrease of $.9 million, or .28%, from December 31, 2005. The decrease in assets
resulted from a decrease in cash and cash equivalents of $9.2 million and a near
offsetting increase of approximately $7.8 million in securities and loans. Net
loans receivable, including loans held for sale, were $233.0 million at June 30,
2006, an increase of $3.3 million, or 1.4%, from $229.7 million at December 31,
2005.
  The
Corporation’s allowance for loan losses totaled $2.3 million at December 31,
2005 and $2.4 million at June 30, 2006, which represented approximately 1.00%
and 1.02 % of loans, respectively. Non-performing loans (defined as loans
delinquent greater than 90 days and loans on non-accrual status) totaled
$1,747,000 and $1,764,000 million at December 31, 2005 and June 30, 2006,
respectively. Although management believes that its allowance for loan losses at
June 30, 2006, was adequate based upon the available facts and circumstances,
there can be no assurance that additions to such allowance will not be necessary
in future periods, which could negatively affect the Corporation’s results of
operations.
  Deposits
totaled $219.5 million at June 30, 2006, an increase of $12.8 million, or 6.2%,
compared to total deposits at December 31, 2005. The increase for the six-month
period resulted from the transfer of local public funds from repurchase
agreements to deposit accounts.
  Total
borrowings declined from $96.8 million at December 31, 2005 to $83.2 million at
June 30, 2006 primarily due to the change in repurchase agreements outstanding
period to period. Advances from the Federal Home Loan Bank totaled
   12
  $75.0
million at December 31, 2005 and $76.0 million at June 30, 2006. Advances from
the Federal Home Loan Bank are a readily available source of funding and
additional advances are available for future liquidity needs.
  Shareholders’
equity totaled $23.1 at June 30, 2006, an increase of $.1 million from $23.0
million at December 31, 2005.
  The Bank
is required to maintain minimum regulatory capital pursuant to federal
regulations. At June 30, 2006, the Bank’s regulatory capital exceeded all
applicable regulatory capital requirements.
  **Comparison
of Operating Results for the Six Months Ended June 30, 2006 and
2005**
  **General**
  The
Corporation’s net income for the six months ended June 30, 2006, totaled
$906,000, a decrease of $239,000 or 20.9% from the $1,145,000 reported for the
period ended June 30, 2005.
  **Net
Interest Income**
  Total
interest income for the six months ended June 30, 2006 amounted to $9.2 million,
an increase of $1.4 million, or 18.1%, above the comparable period in 2005,
reflecting the effects of a small decrease in our loan portfolio and an increase
in the loan yield from 6.5% for the 2005 period to 6.8% for the 2006 period.
  Interest
expense on deposits increased by $1.7 million, or 102.7%, to a total of $3.3
million for the six months ended June 30, 2006 as compared to the six months
ended June 30, 2005, due primarily to a .71% increase in the average cost of
funds and a $48.4 million increase in the average deposits period to period.
Interest expense on borrowings totaled $1,950,000 for the six months ended June
30, 2006, a decrease of $156,000, from the comparable period in 2005. The
decrease resulted primarily from a decrease in average borrowings
year-to-year.
  As a
result of the foregoing changes in interest income and interest expense, net
interest income decreased by $95,000 or 2.4 %, for the six months ended June 30,
2006, as compared to the same period in 2005.
  **Provision
for Losses on Loans**
  A
provision for losses on loans is charged to income to bring the total allowance
for loan losses to a level considered appropriate by management based upon
historical experience, the volume and type of lending conducted by the Bank, the
status of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to the Bank’s market area, and other
factors related to the collectibility of the Bank’s loan portfolio. As a result
of such analysis, management recorded a $168,000 provision for losses on loans
for the six months ended June 30, 2006, compared to the $144,000 amount recorded
in the 2005 period. The 2006 provision amount was predicated on the constant
level in the balance of the loan portfolio, the addition of an overdraft
protection account, coupled with the decrease in the level of delinquent loans
year-to-year. While management believes that the allowance for losses on loans
is adequate at June 30, 2006, based upon the available facts and circumstances,
there can be no assurance that the loan loss allowance will be adequate to cover
losses on non-performing assets in the future.
  **Other
Income**
  Other
income decreased by $37,000, or 3.0%, for the six months ended June 30, 2006, as
compared to the same period in 2005, due primarily to the $117,000 decrease in
gain on sale of loans. This decrease was partially offset by an increase in
service fees and charges of $70,000 and an increase in other of
$10,000.
  **Other
Expense**
  Other
expense increased by $302,000, or 8.9%, during the six months ended June 30,
2006, as compared to the same period in 2005. The increase was due primarily to
an increase in mortgage servicing rights and salary/ benefit expense. In years
prior to 2005, the Company recorded impairment on its mortgage servicing rights.
As the market value of the mortgage servicing rights increased during 2005, the
previously recorded impairment was recovered thus significantly lowering
amortization expense during 2005. During the first half of 2005, the impairment
recovery totaled $155,000. Salaries and employee benefits also increased in 2006
as compared to 2005 as a result of an increase in employees to service an
increased asset base and expanded branch network.
   13
  **Income
Taxes**
  The
provision for income taxes totaled $404,000 for the six months ended June 30,
2006, a decrease of $219,000, or 35.2%, as compared to the same period in 2005.
The effective tax rates were 30.8% and 35.2% for the six months ended June 30,
2006 and 2005, respectively. The effective tax rate declined in 2006 as compared
to 2005 primarily due to the creation of the investment
subsidiaries.
  **Comparison
of Operating Results for the Three Months Ended June 30, 2006 and
2005**
  **General**
  The
Corporation’s net income for the three months ended June 30, 2006, totaled
$503,000, a decrease of $127,000, or 20.2 %, from the $630,000 of net income
reported in the comparable 2005 period. The decrease in earnings in the 2006
period was primarily attributable to a decrease in net interest income of
$49,000, a decrease in gain on loan sales of $72,000 and an increase in salaries
and employee benefits of $93,000.
  **Net
Interest Income**
  Total
interest income for the three months ended June 30, 2006 amounted to $4.8
million, an increase of $748,000, or 18.7%, from the comparable quarter in 2005,
reflecting the effects of an increase in the average balance of securities year
to year and an increase in the yield on the loan portfolio. Interest income on
loans totaled $4.0 million for the three months ended June 30, 2006, an increase
of approximately $442,000, or 12.4%, from the comparable 2005
quarter.
  Interest
expense on deposits increased by $934,000, or 113.5%, to a total of $1.8 million
for the quarter ended June 30, 2006, due primarily to an increase in the average
cost of deposits and a significant increase in the average deposits period to
period. Interest expense on borrowings totaled $967,000 for the three months
ended June 30, 2006, a decrease of $137,000 over the comparable quarter in 2005.
The decrease resulted primarily from a decrease in average borrowings
outstanding from year-to-year.
  As a
result of the foregoing changes in interest income and interest expense, net
interest income decreased by $49,000, or 2.4%, for the three months ended June
30, 2006, as compared to the same quarter in 2005.
   14
  **Provision
for Losses on Loans**
  A
provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
upon historical experience, the volume and type of lending conducted by the
Bank, the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank’s market area,
and other factors related to the collectibility of the Bank’s loan portfolio. As
a result of such analysis, management recorded a $84,000 provision for losses on
loans for the three months ended June 30, 2006, compared to the $72,000 recorded
in the 2005 period. While management believes that the allowance for losses on
loans is adequate at June 30, 2006, based upon the available facts and
circumstances, there can be no assurance that the loan loss allowance will be
adequate to cover losses on non-performing assets in the future.
  **Other
Income**
  Other
income decreased by $34,000 for the three months ended June 30, 2006, as
compared to the same period in 2005, due primarily to a $72,000 decrease in gain
on loan sales offset by a $23,000 increase in service fees and charges for the
three months ended June 30, 2006, as compared to the same period in 2005.
  **Other
Expense**
  Other
expense increased by $67,000, or 3.8%, for the three months ended June 30, 2006,
compared to the same period in 2005. This increase resulted primarily from the
increase in salaries/benefits and occupancy/equipment expenses, which is the
result of several new employees for the new branches. The Company had 78
full-time-equivalent employees as of June 30, 2006 as compared to 68 at June 30,
2005.
  **Income
Taxes**
  The
provision for income taxes totaled $223,000 for the three months ended June 30,
2006, a decrease of $35,000, or 13.6%, as compared to the same period in 2005.
The effective tax rates were 30.7% and 29.0% for the three months ended June 30,
2006 and 2005, respectively.
  **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.
  **Item
3.** **Quantitative
and Qualitative Disclosures About Market Risk**
  An
important part of River Valley Financial Bank’s asset/liability management
policy includes examining the interest rate sensitivity of the assets and
liabilities and monitoring the expected effects of interest rate changes on its
net portfolio value.
  Presented
below, as of March 31, 2006 and 2005, is an analysis performed by the OTS of
River Valley’s interest rate risk as measured by changes in River Valley’s net
portfolio value (“NPV”) for instantaneous and sustained parallel shifts in the
yield curve, in 100 basis point increments, up 300 basis points and down 200
basis points. Down -200 basis points was added back as of the March 31, 2005
calculations.
   15
  March 31,
2006
  Net
      Portfolio Value
    
    NPV
      as % of PV of AssetsChangesIn
      Rates
    
    $
      Amount
    
    $
      Change
    
    %Change
    
    NPV
      Ratio
    
    Change(Dollars
      in thousands)+300
      bp
    
    
    42,566
    
    
    -277
    
    
    -1
    %
    
    13.12
    %
    
    +28bp+200
      bp
    
    
    42,792
    
    
    -51
    
    
    0
    %
    
    13.07
    %
    
    +22bp+100
      bp
    
    
    42,953
    
    
    110
    
    
    0
    %
    
    13.00
    %
    
    +15bp0
      bp
    
    
    42,843
    
    
    
    
    
    
    
    
    12.85
    %-100
      bp
    
    
    41,640
    
    
    -1,203
    
    
    -3
    %
    
    12.41
    %
    
    -44bp-200
      bp
    
    
    39,474
    
    
    -3,369
    
    
    -8
    %
    
    11.72
    %
    
    -113bp
 
 March 31,
2005
 
 Net
      Portfolio Value
    
    NPV
      as % of PV of AssetsChangesIn
      Rates
    
    $
      Amount
    
    $
      Change
    
    %Change
    
    NPV
      Ratio
    
    Change(Dollars
      in thousands)+300
      bp
    
    
    39,448
    
    
    763
    
    
    +2
    %
    
    13.10
    %
    
    +80bp+200
      bp
    
    
    39,747
    
    
    1,063
    
    
    +3
    %
    
    13.06
    %
    
    +56bp+100
      bp
    
    
    39,566
    
    
    881
    
    
    +2
    %
    
    12.88
    %
    
    +38bp0
      bp
    
    
    38,684
    
    
    
    
    
    
    
    
    12.50
    %-100
      bp
    
    
    36,909
    
    
    -1,775
    
    
    -5
    %
    
    11.86
    %
    
    -64bp-200
      bp
    
    
    34,220
    
    
    -4,464
    
    
    -12
    %
    
    10.96
    %
    
    -154bp
 
 Management
believes at June 30, 2006 there have been no material changes in River Valley’s
interest rate sensitive instruments which would cause a material change in the
market risk exposures which affect the quantitative and qualitative risk
disclosures as presented in Item 7, Management’s Discussion and Analysis or Plan
of Operation and Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, of the Company’s Annual Report on Form 10-K for the period ended December
31, 2005.
  **Item
4. Controls and Procedures**
  A. Evaluation
of disclosure controls and procedures . The
Corporation’s chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation’s disclosure controls and
procedures (as defined in Sections 13a-15(e) and 15d-15(e) of regulations
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of the end of the most recent fiscal quarter covered by this
quarterly report (the “Evaluation Date”), have concluded that as of the
Evaluation Date, the Corporation’s disclosure controls and procedures were
effective in ensuring that information required to be disclosed by the
Corporation in reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and are designed to ensure
that information required to be disclosed in those reports is accumulated and
communicated to management as appropriate to allow timely decisions regarding
required disclosure .
  B. Changes
in internal control over financial reporting . There
were no changes in the Corporation’s internal control over financial reporting
identified in connection with the Corporation’s evaluation of controls that
occurred during the Corporation’s last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
   16
  **PART
II. OTHER INFORMATION**
 **Item
1.** **Legal Proceedings**
  None.
  **Item
1A. Risk Factors**
  There
have been no material changes with respect to the risk factors disclosed in the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2005.
  **Item
2.** **Changes in Securities and Use of Proceeds and Issuers Purchases of Equity
Securities.**
  None.
  **Item
3.** **Defaults Upon Senior Securities.**
  None.
  **Item
4. Submission of Matters to Vote of Security Holders.**
  On April
19, 2006, the Annual Meeting of the Corporation’s shareholders was held. Two
directors were elected to the following terms and by the following
votes:
  For
    Votes
      WithheldRobert
      W. Anger (three-year term)
    1,363,358
    6,561Matthew
      P. Forrester (three-year term)
    1,365,199
    4,720
 Directors
continuing in office are Michael J. Hensley, Fred W. Koehler, Charles J. McKay
and L. Sue Livers.
  **Item
5. Other Information.**
  None.
  **Item
6. Exhibits.**
  Exhibits
  31(1)
    CEO
      Certification required by 17 C.F.R. Section
  240.13a-14(a)31(2)
    CFO
      Certification required by 17 C.F.R. Section
  240.13a-14(a)32
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
  17
  **SIGNATURES**
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
  **RIVER
      VALLEY BANCORP**Date:
      August 11, 2006
    By:
    /s/
      Matthew P. ForresterMatthew
      P. ForresterPresident
      and Chief Executive OfficerDate:
      August 11, 2006
    By:
    /s/
      Larry C. FouseLarry
      C. FouseVice
      President of Finance
  
  18
  **EXHIBIT
INDEX**
  
 **No.**
    **Description**
    **Location**31(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