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 March 31, 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 May 14, 2009 was 1,504,472.












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
                15Item
      3.
                Quantitative
      and Qualitative Disclosure about Market Risk
                23Item
      4T.
                Controls
      and Procedures
                24PART
      II. OTHER INFORMATION
                25Item
      1.
                Legal
      Proceedings
                25Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                25Item
      3.
                Defaults
      Upon Senior Securities
                25Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                25Item
      5.
                Other
      Information
                25Item
      6.
                Exhibits
                26SIGNATURES
                27EXHIBIT
      INDEX
                28







2


PART
I FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




RIVER
VALLEY BANCORP


Consolidated
Condensed Balance Sheets




March
      31, 2009
                  (Unaudited)
              
              
              December
      31, 2008(In
      Thousands, Except Share Amounts)AssetsCash
      and due from banks
              
              $
              4,745
              
              
              $
              3,645Interest-bearing
      demand deposits
              
              
              9,314
              
              
              
              6,388Cash
      and cash equivalents
              
              
              14,059
              
              
              
              10,033Investment
      securities available for sale
              
              
              65,693
              
              
              
              52,284Loans
      held for sale
              
              
              306
              
              
              
              130Loans
              
              
              282,664
              
              
              
              287,668Allowance
      for loan losses
              
              
              (2,602
              )
              
              
              (2,364
              )Net
      loans
              
              
              280,062
              
              
              
              285,304Premises
      and equipment, net
              
              
              7,603
              
              
              
              7,704Real
      estate, held for sale
              
              
              175
              
              
              
              259Federal
      Home Loan Bank stock
              
              
              4,850
              
              
              
              4,850Interest
      receivable
              
              
              1,982
              
              
              
              2,187Cash
      value of life insurance
              
              
              7,950
              
              
              
              7,871Other
      assets
              
              
              1,482
              
              
              
              1,722Total
      assets
              
              $
              384,162
              
              
              $
              372,344LiabilitiesDepositsNon-interest-bearing
              
              $
              23,780
              
              
              $
              21,393Interest-bearing
              
              
              238,947
              
              
              
              226,384Total
      deposits
              
              
              262,727
              
              
              
              247,777Borrowings
              
              
              93,217
              
              
              
              97,217Interest
      payable
              
              
              732
              
              
              
              704Other
      liabilities
              
              
              2,481
              
              
              
              2,106Total
      liabilities
              
              
              359,157
              
              
              
              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 – 1,500,322 and 1,500,322 shares
              
              
              7,410
              
              
              
              7,409Retained
      earnings
              
              
              17,612
              
              
              
              17,384Accumulated
      other comprehensive loss
              
              
              (17
              )
              
              
              (253
              )Total
      stockholders’ equity
              
              
              25,005
              
              
              
              24,540Total
      liabilities and stockholders’ equity
              
              $
              384,162
              
              
              $
              372,344




See Notes
to Unaudited Consolidated Condensed Financial Statements.


3


RIVER
VALLEY BANCORP


Consolidated
Condensed Statements of Income


(Unaudited)




Three
      Months Ended March 31,2009
              
              2008(In
      Thousands, Except Share Amounts)Interest
      IncomeLoans
      receivable
              
              $
              4,139
              
              
              $
              4,389Investment
      securities
              
              
              651
              
              
              
              638Interest-earning
      deposits and other
              
              
              52
              
              
              
              134Total
      interest income
              
              
              4,842
              
              
              
              5,161Interest
      ExpenseDeposits
              
              
              1,273
              
              
              
              1,698Borrowings
              
              
              1,110
              
              
              
              1,228Total
      interest expense
              
              
              2,383
              
              
              
              2,926Net
      Interest Income
              
              
              2,459
              
              
              
              2,235Provision
      for loan losses
              
              
              385
              
              
              
              200Net
      Interest Income After Provision for Loan Losses
              
              
              2,074
              
              
              
              2,035Other
      IncomeService
      fees and charges
              
              
              500
              
              
              
              478Net
      realized gains on sale of available-for-sale securities
              
              
              26
              
              
              
              30Net
      gains on loan sales
              
              
              373
              
              
              
              102Interchange
      fee income
              
              
              69
              
              
              
              64Increase
      in cash value of life insurance
              
              
              78
              
              
              
              78Trust
      operations income
              
              
              25
              
              
              
              55Gain/(loss)
      on sale of premises, equipment and real estate held for
    sale
              
              
              (46
              )
              
              
              6Other
      income
              
              
              13
              
              
              
              34Total
      other income
              
              
              1,038
              
              
              
              847Other
      ExpensesSalaries
      and employee benefits
              
              
              1,200
              
              
              
              1,106Net
      occupancy and equipment expenses
              
              
              318
              
              
              
              330Data
      processing fees
              
              
              95
              
              
              
              96Advertising
              
              
              84
              
              
              
              78Legal
      and professional fees
              
              
              103
              
              
              
              97Amortization
      of mortgage servicing rights
              
              
              35
              
              
              
              53Federal
      Deposit Insurance Corporation assessment
              
              
              240
              
              
              
              13Other
      expenses
              
              
              369
              
              
              
              273Total
      other expenses
              
              
              2,444
              
              
              
              2,046Income
      Before Income Tax
              
              
              668
              
              
              
              836Income
      tax expense
              
              
              125
              
              
              
              221Net
      Income
              
              $
              543
              
              
              $
              615Basic
      earnings per share
              
              $
              .36
              
              
              $
              .38Diluted
      earnings per share
              
              
              .36
              
              
              
              .37Dividends
      per share
              
              
              .21
              
              
              
              .21







See Notes
to Unaudited Consolidated Condensed Financial Statements.





4




RIVER
VALLEY BANCORP


Consolidated
Condensed Statements of Comprehensive Income (Loss)


(Unaudited)







Three
      Months Ended
                  March
      31,2009
              
              
              2008Net
      income
              
              $
              543
              
              
              $
              615Other
      comprehensive income, net of taxUnrealized
      gains on securities available for saleUnrealized
      holding gains arising during the period, net of tax expense of $132 and
      $198
              
              
              253
              
              
              
              368Less:
      Reclassification adjustment for gains included in net income, net of tax
      expense of $9 and $11
              
              
              17
              
              
              
              19236
              
              
              
              349Comprehensive
      income
              
              $
              779
              
              
              $
              964









See Notes
to Unaudited Consolidated Condensed Financial Statements.


5


RIVER
VALLEY BANCORP


Consolidated
Condensed Statements of Cash Flows


(Unaudited)




Three
      Months Ended March 31,2009
              
              2008(In
      Thousands)Operating
      ActivitiesNet
      income
              
              $
              543
              
              
              $
              615Adjustments
      to reconcile net income to net cash provided by operating
      activitiesProvision
      for loan losses
              
              
              385
              
              
              
              200Depreciation
      and amortization
              
              
              122
              
              
              
              159Investment
      securities gains
              
              
              (26
              )
              
              
              (30
              )Loans
      originated for sale in the secondary market
              
              
              (15,483
              )
              
              
              (4,946
              )Proceeds
      from sale of loans in the secondary market
              
              
              15,507
              
              
              
              4,933Gain
      on sale of loans
              
              
              (373
              )
              
              
              (102
              )Amortization
      of net loan origination cost
              
              
              33
              
              
              
              34Net
      change in:
              Interest
      receivable
              
              
              205
              
              
              
              448Interest
      payable
              
              
              28
              
              
              
              146Other
      adjustments
              
              
              644
              
              
              
              523Net
      cash provided by operating activities
              
              
              1,585
              
              
              
              1,980Investing
      ActivitiesPurchases
      of securities available for sale
              
              
              (17,822
              )
              
              
              (12,070
              )Proceeds
      from maturities of securities available for sale
              
              
              4,775
              
              
              
              11,260Proceeds
      from sale of securities available for sale
              
              
              0
              
              
              
              4,975Net
      change in loans
              
              
              4,569
              
              
              
              (2,751
              )Purchases
      of premises and equipment
              
              
              (21
              )
              
              
              (144
              )Proceeds
      from sale of foreclosed real estate
              
              
              261
              
              
              
              0Net
      cash  provided by (used in) investing activities
              
              
              (8,238
              )
              
              
              1,270Financing
      ActivitiesNet
      change inNon-interest
      bearing, interest-bearing demand and savings deposits
              
              
              498
              
              
              
              (25,095
              )Certificates
      of deposit
              
              
              14,452
              
              
              
              25,451Short
      term borrowings
              
              
              0
              
              
              
              427Proceeds
      from borrowings
              
              
              0
              
              
              
              5,000Repayment
      of borrowings
              
              
              (4,000
              )
              
              
              (8,000
              )Cash
      dividends
              
              
              (315
              )
              
              
              (343
              )Stock
      options exercised
              
              
              0
              
              
              
              2Advances
      by borrowers for taxes and insurance
              
              
              44
              
              
              
              32Net
      cash provided by (used in) financing activities
              
              
              10,679
              
              
              
              (2,526
              )Net
      Change in Cash and Cash Equivalents
              
              
              4,026
              
              
              
              724Cash
      and Cash Equivalents, Beginning of Period
              
              
              10,033
              
              
              
              8,137Cash
      and Cash Equivalents, End of Period
              
              $
              14,059
              
              
              $
              8,861Additional
      Cash Flows and Supplementary InformationInterest
      paid
              
              $
              2,355
              
              
              $
              2,779Income
      tax paid
              
              
              0
              
              
              
              25




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 period ended March 31, 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. Unearned Employee Stock Ownership Plan shares have been excluded
from the computation of average common shares outstanding.




Three
      Months Ended
                  March
      31, 2009
              
              Three
      Months Ended
                  March
      31, 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 stockholders
              
              $
              543
              
              1,500,322
              
              $
              .36
              
              $
              615
              
              1,634,989
              
              $
              .38Effect
      of dilutive RRP awards and stock options
              
              
              
              
              9,105
              
              
              
              
              
              
              
              18,726Diluted
      earnings per shareIncome
      available to common stockholders and assumed conversions
              
              $
              543
              
              1,509,427
              
              $
              .36
              
              $
              615
              
              1,653,715
              
              $
              .37




Options
to purchase 5,000 shares of common stock at an exercise price of $22.25 per
share were outstanding for the three month periods ending March 31, 2009 and
March 31, 2008.  Options to purchase 19,000 shares of common stock at
$14.56 per share and 8,400 shares of common stock at $13.25 were outstanding for
the three month period ending March 31, 2009.  Neither group of
options was 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: DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS




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




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




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




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




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




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






8




Available-for-Sale
Securities




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




The
following table presents 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 FAS 157 fair value hierarchy in which
the fair value measurements fall at March 31, 2009 and December 31, 2008,
respectively (in thousands).




March
      31, 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)Available-for-sale
      securities
                                $65,693
                                
                                $0
                                
                                $64,872
                                
                                $821







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)Available-for-sale
      securities
                              $52,284
                              
                              $0
                              
                              $51,201
                              
                              $1,083







9




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




Available-For-Sale
      Securities
                                            (In
      Thousands)March
      31, 2009Beginning
      balance
                                          
                                          $
                                          1,083Total
      realized and unrealized gains and lossesAmortization
      included in net income
                                          
                                          
                                          1Unrealized
      gains (losses) included in other comprehensive income
                                          
                                          
                                          (260
                                          )Purchases,
      issuances and settlements including paydowns
                                          
                                          
                                          (3
                                          )Transfers
      in and/or out of Level 3
                                          
                                          
                                          0Ending
      balance
                                          
                                          $
                                          821Total
      gains or losses for the period included in net income attributable to the
      change in unrealized gains or losses related to assets and liabilities
      still held at the reporting dates
                                          
                                          $
                                          0




There are
no realized and or unrealized gains and losses included in net income for the
period from January 1, 2009, through March 31, 2009.




At and
during the year ended December 31, 2008, Level 3 securities included a pooled
trust preferred security. The fair value on this security is calculated using a
combination of observable and unobservable assumptions as a quoted market price
is not readily available. This security remains in Level 3 at March 31, 2009.
Also, during 2008, a second pooled trust preferred security was purchased and
originally priced using Level 2 inputs. At December 31, 2008, trading of these
types of securities was only conducted on a distress sale or forced liquidation
basis. As a result, the Corporation measured the fair value using discounted
cash flow projections and included the security in Level 3 at December 31, 2008
and March 31, 2009. During the second quarter of 2008, a collateralized mortgage
obligation (CMO) was purchased and included in Level 3. At December 31, 2008 and
March 31, 2009, the Corporation was able to price this CMO using observable
inputs and the security was transferred to Level 2 during 2008.




Certain
investment securities are reported in the financial statements at an amount less
than their historical cost.  Unrealized losses on these investments at
March 31, 2009 and December 31, 2008 totaled $1.4 million and $1.5
million.  Included in corporate securities at March 31, 2009 and
December 31, 2008 are two pooled trust preferred issues with individual
unrealized losses of $680,000 and $288,000, respectively.  These two
securities are rated Aaa by Moodys indicating these securities are considered
high quality and of very low credit risk.  The Company 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 Company,
the collateral position of the tranches, projected cash flows and the credit
ratings.  The Company has the ability and intent to hold these
securities to recovery, which may be maturity and expects to receive all
contractual cash flows related to these investments.  Based upon these
factors, the Company has determined these securities are not other than
temporarily impaired.






10




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




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
non-recurring basis and the level within the FAS 157 fair value hierarchy in
which the fair value measurements fall at March 31, 2009 and December 31, 2008,
respectively (in thousands).




March
      31, 2009
                        
                        Fair
      Value Measurements UsingFair
      Value
                      
                      Quoted
      Prices in Active Markets for Identical Assets
                        (Level
      1)
                      
                      Significant
      Other Observable Inputs
                        (Level
      2)
                      
                      Significant
      Unobservable Inputs
                        (Level
      3)Impaired
      loans
                      
                      $
                      269
                      
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      269Real
      estate held for sale
                      
                      
                      175
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      175Mortgage
      Servicing Rights
                      
                      
                      173
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      173







December
      31, 2008
                      
                      Fair
      Value Measurements UsingFair
      Value
                    
                    Quoted
      Prices in Active Markets for Identical Assets
                      (Level
      1)
                    
                    Significant
      Other Observable Inputs
                      (Level
      2)
                    
                    Significant
      Unobservable Inputs
                      (Level
      3)Impaired
      loans
                    
                    $
                    2,512
                    
                    
                    $
                    –
                    
                    
                    $
                    –
                    
                    
                    $
                    2,512Mortgage
      servicing rights
                    
                    
                    119
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    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 quarter ended March 31, 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 $269,000 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.






Real
Estate Held For Sale




Real
estate held for sale is carried at the fair value less cost to sell and is
periodically evaluated for impairment as described in SFAS No. 156, Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140.  Real estate
held for sale recorded during the current accounting period is recorded at fair
value, less cost to sell, and is disclosed as a nonrecurring
measurement.


11




During
the three months ended March 31, 2009, transfers to real estate held for sale
were made, and remained outstanding at period end, totaling
$175,000.  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 as
described in SFAS No. 156, Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140.New mortgage
servicing rights recorded during the current accounting period are recorded at
fair value and are disclosed as a nonrecurring measurement.




Mortgage
servicing rights recorded as an asset and into income during the three months
ended March 31, 2009 and the year ended December 31, 2008 totaled $173,000 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.






NOTE 5: RECENT ACCOUNTING
PRONOUNCEMENTS




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




In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements - an Amendment to ARB No.
51.  This Statement establishes new accounting and reporting
standards that require the ownership interests in subsidiaries held by parties
other than the parent to be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent’s equity.  The Statement also requires the amount of
consolidated net income attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income.  This Statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008.  Management has evaluated the provisions of this
Statement.  There is no ownership interest other than the parent
company and therefore, the provisions of this Statement did not have any impact
on the financial position or results of operation of the
Corporation.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133.  This Statement changes the disclosure requirements for
derivative instruments and hedging activities.  Entities are required
to provide enhanced disclosures about a) how and why an entity uses derivative
instruments, b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  The adoption of the provisions of
this Statement did not have any impact on the financial position or results of
operation of the Corporation.


12




FSP FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, was issued on April 9, 2009.  This FSP provides
additional guidance for estimating fair value in accordance with FASB Statement
No. 157, Fair Value
Measurements,when the volume and level of activity for the asset or
liability have significantly decreased.  This FSP also includes
guidance on identifying circumstances that indicate a transaction is not
orderly.   Even if there has been a significant decrease in the
volume and level of activity regardless of valuation technique, 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 FSP is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1 and
APB 28-1 are adopted concurrently.  This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.




FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairment, was issued on April 9, 2009. This FSP
amends the other-than-temporary guidance in U.S. generally accepted accounting
principles 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 FSP does
not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities and does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.  This FSP is effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1 and APB 28-1 are adopted
concurrently.




FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, was issued on
April 9, 2009.  This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments,and APB Opinion No. 28,
Interim Financial
Reporting, to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements.  This FSP is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 115-2 and
FAS 124-2 are adopted concurrently.  This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.






NOTE 6:  
RECLASSIFICATIONS




Certain
reclassifications have been made to the 2008 consolidated condensed financial
statements to conform to the March 31, 2009 presentation.






NOTE 7:  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, like the
Corporation, to issue non-voting preferred stock to the Treasury in an amount
ranging between 1% and 3% of its total risk-weighted assets.




On
November 13, 2008, the Corporation filed an initial application pursuant to the
TARP’s CPP with its regulator, the OTS, seeking approval to sell $8,100,000 in
preferred stock to the Treasury (which equalled approximately 3% of its total
risk weighted assets as of September 30, 2008).


13




The
Corporation received preliminary approval of its application, and the
Corporation called a Special Meeting of Shareholders on March 10, 2009, to
consider whether to amend the Corporation’s Articles of Incorporation to permit
the sale of preferred stock to the Treasury or similar investors. Although the
shareholders approved the amendment, which became effective on March 13, 2009,
the Board of Directors determined that the Corporation will not participate in
the TARP’s CPP, as more fully discussed in Item 2 - Management’s Discussion and
Analysis of Financial Condition and Results of Operation.




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.




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
December 31, 2009. Both of these programs are part of the FDIC’s Temporary
Liquidity Guarantee Program.




In
February 2009, the Board of Directors of the FDIC voted to amend the restoration
plan for the Deposit Insurance Fund (“DIF”). The amended restoration plan
extended the period of time to raise the DIF reserve ratio to 1.15 percent from
five to seven years. The amended restoration plan also includes a final rule
that sets assessment rates. Under this final rule, beginning on April 1, 2009
the Corporation expects the FDIC premium assessed to the Corporation to
increase.




The Board
of the FDIC also adopted an interim rule imposing a 20 basis point special
assessment on insured institutions as of June 30, 2009 which will be payable on
September 30, 2009. The interim rule would also allow the assessment of
additional special assessments of up to 10 basis points after June 30, 2009 as
deemed necessary. On March 5, 2009, FDIC Chairman Sheila Bair announced that if
Congress adopts legislation expanding the FDIC’s line of credit with Treasury
from $30 billion to $100 billion, the FDIC might have the flexibility to reduce
the special emergency assessment, possibly from 20 to 10 point basis points.
Assuming the legislation passes and the FDIC reduces the special assessment to
10 basis points, we anticipate that the special assessment for the Bank would
total approximately $236,000, based on current deposit levels.




While the
Corporation has not fully evaluated the impact the increased assessment rates
and the pending special assessment will have on the 2009 financial results, it
is anticipated the impact will be material to the 2009 results of
operations.


14




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




FORWARD LOOKING
STATEMENTS




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






EFFECT OF CURRENT
EVENTS




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.




Although
the Corporation’s fundamental banking practices and policies have protected it
from the significant write-downs and disruption being experienced in the
industry, the Corporation will continue to monitor and enhance its stability in
this uncertain environment. In November 2008, although the Bank met all
applicable regulatory capital requirements and remained well capitalized, the
Corporation made a preliminary determination that obtaining additional capital
pursuant to the CPP for contribution in whole or in part to the Bank might
become advisable. As a result, the Corporation filed an initial application
pursuant to the CPP with its regulator, the OTS, seeking approval to sell
$8,100,000 in preferred stock to the Treasury (which equalled approximately 3%
of its total risk weighted assets as of September 30, 2008). The Corporation
received preliminary approval of its application, and the Corporation called a
Special Meeting of Shareholders on March 10, 2009, to consider whether to amend
the Corporation’s Articles of Incorporation in a manner that would permit the
Corporation to issue preferred stock to the Treasury or similar
investors.




Although
the shareholders approved the amendment of the Articles of Incorporation, which
became effective on March 13, 2009, the Board of Directors, after careful
consideration, has determined the Corporation will decline to participate in the
TARP’s CPP.


15




Institutions
like the Corporation were expected and encouraged by their regulators to apply
for capital infusions through the CPP, even though the Bank is “well
capitalized” by regulatory standards. After the Treasury announced the CPP as
part of its emergency legislation, the applications were due less than a month
after release of the application guidelines. Many companies, like us, applied
for the funds as a way to preserve the option while engaging in a more thorough
review of the advantages and consequences. This review has been complicated by
ongoing adoption of new legislation and new regulations that will apply to
recipients of the TARP money, many of which stipulations conflict with each
other or are unclear. In fact, after the changes implemented as recently as
February 17, 2009, with the adoption of the American Recovery and Reinvestment
Act of 2009, companies that have already closed and accepted TARP money have
been given the option of returning the money and leaving the
program.




The Board
of Directors, after evaluating many factors affecting the Corporation’s
capitalization, including the state of the national and local economy, our loan
quality, and our general conservative banking practices, among other things, has
determined that the Corporation will not participate in the TARP’s
CPP.




EESA
followed, and has been followed by, numerous actions by the Federal Reserve,
Congress, Treasury, the SEC and others to address the current liquidity and
credit crisis that has followed the sub-prime meltdown that commenced in 2007.
These measures include homeowner relief that encourage loan restructuring and
modification; the establishment of significant liquidity and credit facilities
for financial institutions and investment banks; the lowering of the federal
funds rate, including two 50 basis point decreases in October of 2008; emergency
action against short selling practices; a temporary guaranty program for money
market funds; the establishment of a commercial paper funding facility to
provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.




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.


16




Impact of Recent
and Future Legislation. Congress and the Treasury Department have
recently adopted legislation and taken actions to address the disruptions in the
financial system and declines in the housing market. See Note 7, 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.




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 has 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, the FDIC
has announced a 20 basis point special assessment payable in September 2009
(possibly to be reduced to a 10 basis point assessment), as well as the
possibility of additional special assessments of up to 10 basis points after
June 2009, as necessary.




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




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.


17




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.




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.


18




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.




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.


19




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 March 31, 2009, mortgage servicing
rights had a carrying value of $378,000.






FINANCIAL
CONDITION




At March
31, 2009, the Corporation’s consolidated assets totaled $384.2 million, an
increase of $11.8 million, or 3.2% from December 31, 2008.  New
deposits during the quarter totaling $14.9 million, the majority of which came
from a single depositor in the public sector, were invested in short term
callable agency bonds. The Bank experienced a slight decrease in the loan
portfolio of $5.0 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 quarter topped $15.5 million, more than three
times the March 2008 level of $4.9 million.  Profit from these sales
contributed significantly to the overall profit of the Bank. Other lending
remained stable or dropped slightly during the period.  Over the same
period, interest receivable on interest earning assets decreased by $205,000, or
9.4%, reflecting the drop in interest rates resulting from the 2008 reductions
of the Prime rate by the Federal Reserve (Fed).  Most radically
affected by the drops in the Prime interest rate were commercial loans and home
equity lines of credit which change directly with the rate.  The
average yield on loans at March 31, 2009 was 6.01%, a decrease from the rate of
6.62% at the same period in 2008. Other changes for the period included: a 13.9%
decrease in non-earning “Other Assets,” primarily due to a decline in prepaid
expenses and deferred tax assets; a 32.4% decrease in the volume of repossessed
real estate held from $259,000 at December 31, 2008 to a single piece of
property valued at $175,000 at March 31, 2009; and a slight increase in the
volume of loans held for sale from $130,000 at December 31, 2008 to $306,000 as
of March 31, 2009, reflecting Freddie Mac sales in process.


20




The
Corporation’s consolidated allowance for loan losses totaled $2.6 million at
March 31, 2009 as compared to the total at December 31, 2008 of $2.4
million.  These levels represented .92%, and .82% of total loans,
respectively.  As the national and local economy worsened, the Bank
aggressively managed delinquencies, with overall delinquencies 30 or more days
past due as of March 31, 2009 at 3.21%, compared to 1.53% at the same date in
2008 and 1.07% at December 31, 2008. Non-performing loans (defined as loans
delinquent greater than 90 days and loans on non-accrual status) as of March 31,
2009 were $4.3 million, compared to $2.5 million at the same date in 2008 and
$1.0 million at December 31, 2008.  Non-performing loans as a percent
of total loans were 1.51%, .95% and .37%, respectively for those periods. The
increases in non-performing loans were primarily due to the addition of one
troubled relationship of approximately $3.0 million, added during the first
quarter of 2009 and 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 while working to quantify
the negative impact this relationship could have on the Bank’s
allowance.  Due to the classification of this relationship, the Bank’s
allowance for loan losses was increased based on the allowance methodology
employed by the Bank related to classified credits.  At March 31,
2009, the Bank has not assigned additional specific reserves to this
relationship due to the current loan-to-value percentages which range from 71%
to 80%.  Based on recent declines in the current real estate market,
the Bank is in the process of having the properties reappraised.  As
additional information becomes available, adjustments to the allowance may be
necessary.  For the period ended March 31, 2009 the allowance for loan
losses was funded at a level in line with current and estimated
losses.  With the exception of a few loans delinquent due to
administrative delays in refinancing, and the aforementioned single
relationship, the Bank’s non-performing loans represent loans in the lengthy
process of foreclosure.  Appropriate and documented specific loss
reserves have been established as necessary.  In connection with the
decline in the local economy during the first quarter of 2009 and the increase
in non-performing loans, the Bank established higher levels of provision
expense.  The provision for loan losses increased to $385,000 for the
quarter ended March 31, 2009, as compared to $200,000 for the same period in
2008.  Net charge offs for the three month period ended March 31, 2009
were $130,000 as compared to $30,000 for the same period in 2008.




Although
management believes that its allowance for loan losses at March 31, 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.




Deposits
totaled $262.7 million at March 31, 2009, an increase of $15.0 million, or 6.0%,
compared to total deposits at December 31, 2008. During the three-month period,
transactional deposit accounts increased by 11.2%, or $2.4 million, while
interest bearing accounts increased 5.5%, or $12.6 million.  Deposit
increases for the period came primarily from the deposits of a single, public
sector depositor.




Borrowings
totaled $93.2 million at March 31, 2009 versus $97.2 million at December 31,
2008, a drop of $4.0 million, or 4.1% period to period.  Of total
borrowings, $86.0 million and $90.0 million, respectively, represented Federal
Home Loan Bank (FHLB) advances with average rates of 4.67% and 4.61% at the
respective dates. The Bank has experienced a slower drop in the overall cost of
funds as a result of these longer term borrowing rates, which average nearly
1.5% over the highest paying certificate of deposit rate for the
Bank.




Shareholders’
equity totaled $25.0 million at March 31, 2009, a slight increase of $465,000,
or 1.9% from the $24.5 million at December 31, 2008.  Of this change,
$543,000 was income from operations, $315,000 was paid out in dividends to
shareholders, and the remainder of the increase came from unrealized gain/losses
on available for sale securities as the portfolio moved in a gain direction from
the net loss of $253,000 at December 31, 2008 to a net loss position of $17,000
at March 31, 2009.




The Bank
is required to maintain minimum regulatory capital pursuant to federal
regulations. At March 31, 2009, the Bank’s regulatory capital exceeded all
applicable regulatory capital requirements.


21




COMPARISON
OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND
2008




GENERAL




The
Corporation’s net income for the three months ended March 31, 2009, totaled
$543,000, a decrease of $72,000 or 11.7% from the $615,000 reported for the
period ended March 31, 2008.  The decrease in income in the 2009
period was primarily attributable to losses and provision expense relative to
the rise in loan delinquencies.  Increased expense to the provision
for loan losses, realized losses on repossessed real estate disposed of during
the quarter, and write-down of interest income on non-accruing loans were the
primary reasons for the decrease. Offsetting those losses were improvements in
both the interest rate spread, 3.39% at March 31, 2009 compared to 3.26% at
March 31, 2009, and in non-interest income, most specifically income from the
gain on loan sales to the secondary market, which were up by 265.7% over 2008
levels.   Gain on loan sales to the secondary market for the
three month period ended March 31, 2009 were $373,000 as compared to $102,000
for the same period in 2008.






NET INTEREST
INCOME




Total
interest income for the three months ended March 31, 2009 decreased by $319,000,
or 6.2%, to $4.8 million from the $5.2 million recorded for the same period in
2008.  Despite prior year growth in the underlying assets, 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
2.15% at March 31, 2008 to .05% as of March 31, 2009.




Total
interest expense for the same period exhibited significant declines with a
decrease of $543,000, or 18.6%, from the $2.9 million reported at March 31, 2008
to $2.4 million at March 31, 2009.  For the three months ended March
31, 2009 interest expense from deposits totaled $1.3 million while interest
expense from borrowings totaled $1.1million, as compared to $1.7 million and
$1.2 million for the same period in 2008.  Of the overall decrease in
interest expense, $425,000, or 25.0%, 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 Bank experienced a decrease of $118,000, or 9.6%, on interest expense for
borrowings as the average balance of funds borrowed from the FHLB dropped as
advances were repaid.




Net
interest income increased to $2.5 million for the three months ended March 31,
2009 from $2.2 million for the same period in 2008, an increase of $224,000, or
10.0%.  This increase reflects the impact of the strong loan activity
in the last two quarters of 2008 and the effects of the interest rate
environment on the spread between interest earning assets and interest bearing
liabilities.






PROVISION FOR LOSSES ON
LOANS




A
provision for losses on loans is charged to income to bring the total allowance
for loan losses to a level considered appropriate by management based upon
historical experience, the volume and type of lending conducted by the Bank, the
status of past due principal and interest payment, general economic conditions,
particularly as such conditions relate to the Bank’s market area, and other
factors related to the collectibility of the Bank’s loan portfolio. As a result
of such analysis, management recorded a $385,000 provision for losses on loans
for the three months ended March 31, 2009, as compared to $200,000 for the same
period in 2008. Non-performing loans as of March 31, 2009 were $4.3 million, an
increase of $1.8 million, or 70.5%, from the $2.5 million at the same point in
2008, primarily reflecting the addition of one large relationship representing
$3.0 million of loans past due more than 90 days at March 31,
2009.  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 March 31, 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.


22




OTHER
INCOME




Other
income increased by $191,000, during the three months ended March 31, 2009 to
$1.0 million, as compared to the $847,000 reported for the same period in
2008.  This increase was fueled primarily by sales of 1-4 family
residential loans to the secondary market and slight increases in income from
overdraft fees.  The increase in income was offset by losses on sales
of foreclosed property, decreased income from the Bank’s trust operation, and
decreased income from the sale of investment securities. 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 $398,000 or 19.5%, to $2.4 million during the three
months ended March 31, 2009, as compared to the $2.0 million reported for the
same period in 2008.  Increased FDIC assessment expense ($240,000 in
2009 as compared to $13,000 in 2008), increased donations expense (including the
$20,000 donation of a piece of repossessed real estate to Habitat for Humanity),
and increased expense relating to the sale of loans into the secondary market
($52,000 in 2009 as compared to $3,600 in 2009) contributed largely to the
increase. Increases in personnel, occupancy, advertising and office supply costs
relative to the 2008 opening of the Floyds Knobs, Indiana branch also
contributed to the increase in total other expense.






INCOME
TAXES




The
provision for income taxes totaled $125,000 for the three months ended March 31,
2009, a decrease of $96,000, or 43.4%, over the $221,000 for the same period in
2008.  The effective tax rate for the three months ended March 31,
2009 was 18.7% as compared to 26.4% for the same period in 2008.  The
decrease continues to reflect the effect of tax-exempt income from cash
surrender value life insurance and municipal investments and most specifically,
a drop in taxable income at the Bank level as Bank income dropped while tax
exempt income at the subsidiary level rose.






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.






LIQUIDITY
RESOURCES




Historically,
the Bank has maintained its liquid assets at a level believed adequate to meet
requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows.  Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is
maintained.  Cash for these purposes is generated through loan sales
and repayments, increases in deposits, and through the sale or maturity of
investment securities.  Loan payments are a relatively stable source
of funds, while deposit flows are influenced significantly by the level of
interest rates and general money market conditions.  Borrowings may be
used to compensate for reductions in other sources of funds such as
deposits.  As a member of the Federal Home Loan Bank (FHLB) system,
the Bank may borrow from the FHLB of Indianapolis.  At March 31, 2009,
the Bank had $86.0million in
such borrowings, with an additional $16.0 million available, previously approved
by the Bank’s board of directors.  Based on collateral, an additional
$9.0 million could be available, if the board of directors determines the need.
In addition, at March 31, 2009 the Bank had commitments to fund loan
originations of $12.9
million, unused home equity lines of credit of $15.5 million and unused
commercial lines of credit of $11.7 million.  Commitments to sell
loans as of that date were $8.6 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.


23




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.


24




PART
II. OTHER INFORMATION




ITEM 1.  LEGAL PROCEEDINGS




As
previously reported in the Corporation’s Form 10-K for the year ended December
31, 2008, Cecilia Means filed a putative class action complaint in the Marion
County Superior Court, Marion County, Indiana, on behalf of herself and others
who paid funds into a pre-need trust (the “Pre-Need Trust”) for burial services
and merchandise from Grandview Memorial Gardens, against the Bank, a former
trustee of the Pre-Need Trust; three other banks that serve or have served as
trustees of the Pre-Need Trust; and the current and former owners of Grandview
Memorial Gardens.  The complaint alleges that the Bank and other
trustees did not properly account for funds placed in the Pre-Need Trust and did
not properly verify the legitimacy of disbursements from the Pre-Need Trust in
violation of certain state statutes and in breach of the trustees’ alleged
fiduciary duties.  The complaint was not specific as to the amount of
damages sought but stated that the plaintiff believed that the Pre-Need Trust
had an estimated $4 million in unfunded liabilities.




The Bank denied the plaintiffs’ allegations but,
as previously reported, the Bank, along with the other trustee defendants,
agreed to terms for a settlement of the plaintiffs’ claims.  Pursuant
to the settlement agreement, the Bank contributed $110,000 into an escrow
account established for the settlement fund.  The settlement was
submitted to the court for approval, and the court signed a preliminary approval
order.  At a final hearing on the approval on January 23, 2009, the
court entered a final judgment approving the class action
settlement.  The judgment was not appealed.  The Bank has no
further obligations under the settlement agreement and has been released by the
class members from all claims relating to the Pre-Need Trust.




Except as
disclosed above, 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




On March
10, 2009, the Corporation held a Special Meeting of Shareholders pursuant to due
notice.




At the
Special Meeting, the Shareholders voted on a proposal to amend Section 11.01 of
the Corporation’s Articles of Incorporation to limit its applicability to shares
of common stock to enable the Corporation to issue preferred stock to the
Treasury or similar investors.




The
proposal was approved, having received a vote, in person or by proxy, of more
favorable votes than votes cast against the proposal, as follows:




Votes
      For:  723,537
            Votes
      Against:  49,431
            Abstain:  0






ITEM 5.  OTHER INFORMATION




None.


25




ITEM 6.  EXHIBITS


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







26




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:
      May 15, 2009
            By:
            /s/
      Matthew
      P. ForresterMatthew
      P. ForresterPresident
      and Chief Executive OfficerDate:
      May 15, 2009
            By:
            /s/
      Vickie
      L. GrimesVickie
      L. GrimesVice
      President of Finance







27




EXHIBIT
INDEX





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











28