UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K







[X]
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
Fiscal Year Ended March 31,
2009                                               
OR





[  
      ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




Commission
File Number: 0-22957





RIVERVIEW
BANCORP, INC.





(Exact
name of registrant as specified in its charter)






Washington
            
            91-1838969(State or
      other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer I.D. Number)900 Washington
      St., Ste. 900,Vancouver, Washington
            
            98660(Address of
      principal executive offices)
            
            (Zip
      Code)Registrant's
      telephone number, including area code:
            
            (360)
      693-6650Securities
      registered pursuant to Section 12(b) of the Act:Title of Each
      Class
            
            Name of Each
      Exchange on Which RegisteredCommon Stock,
      Par Value $.01 per share
            
            Nasdaq Stock
      Market LLCSecurities
      registered pursuant to Section 12(g) of the Act:
            
            None






Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes ___   
No   X





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes ___   
No  X





Indicate
by check mark whether the registrant (1) 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 (§232.405 of this
chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and disclosure will not be contained, to
the best of the registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K   X





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 definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
accelerated filer  
____               Accelerated
filer    X              
Non-accelerated filer   
____                Smaller
Reporting Company ____





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).      Yes     No  X





The
aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sales price of the registrant's Common Stock as
quoted on the Nasdaq Global Select Market System under the symbol "RVSB" on
September 30, 2008 was $65,105,687 (10,923,773 shares at $5.96 per
share).  As of June 9, 2009, there were issued and outstanding
10,923,773 shares of the registrant’s common stock.




DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of registrant's Definitive Proxy Statement for the 2009 Annual Meeting of
Shareholders (Part III).







1








Table of
      ContentsPART I
            
            
            PAGEItem
      1.
            
            Business
            1Item
      1A.
            
            Risk
      Factors
            32Item
      1B.
            
            Unresolved
      Staff Comments
            40Item
      2.
            
            Properties
            40Item
      3.
            
            Legal
      Proceedings
            40Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            41PART IIItem
      5.
            
            Market
      of Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            41Item
      6.
            
            Selected
      Financial Data
            43Item
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            45Item
      7A.
            
            Quantitative
      and Qualitative Disclosures about Market Risk
            58Item
      8.
            
            Financial
      Statements and Supplementary Data
            61Item
      9.
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            92Item
      9A.
            
            Controls
      and Procedures
            92Item
      9B.
            
            Other
      Information
            95PART IIIItem
      10.
            
            Directors,
      Executive Officers and Corporate Governance
            95Item
      11.
            
            Executive
      Compensation
            95Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholders
            95Item
      13.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            96Item
      14.
            
            Principal
      Accountant Fees and Services
            96PART IVItem
      15.
            
            Exhibits
      and Financial Statement Schedules
            97Signatures
            98Index
      to exhibits
            99

















2





PART
I








Item
1.  Business





General





Riverview
Bancorp, Inc. (the “Company"), a Washington corporation, is the savings and loan
holding company of Riverview Community Bank (the “Bank”).  At March
31, 2009, the Company had total assets of $914.3 million, total deposit accounts
of $670.1 million and shareholders' equity of $88.7 million. The Company’s
executive offices are located at 900 Washington Street, Vancouver Washington.
All references to the Company herein include the Bank where
applicable.





Substantially
all of the Company’s business is conducted through the Bank which is regulated
by the Office of Thrift Supervision ("OTS"), its primary regulator, and by the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its
deposits.  The Bank's deposits are insured by the FDIC up to
applicable legal limits under the Deposit Insurance Fund ("DIF").  The
Bank has been a member of the Federal Home Loan Bank ("FHLB") of Seattle since
1937.





The
Company is a progressive, community-oriented financial services company, which
emphasizes local, personal service to residents of its primary market
area.  The Company considers Clark, Cowlitz, Klickitat and Skamania
counties of Washington and Multnomah, Clackamas and Marion counties of Oregon as
its primary market area. The Company is engaged predominantly in the business of
attracting deposits from the general public and using such funds in its primary
market area to originate commercial, commercial real estate, multi-family real
estate, real estate construction, residential real estate and other consumer
loans. Commercial and construction loans have grown from 82.47% of the loan
portfolio at March 31, 2005 to 89.16% of the loan portfolio at March 31, 2009,
increasing the risk profile of our total loan portfolio.





The
Company’s strategic plan includes targeting the commercial banking customer base
in its primary market area, specifically small and medium size businesses,
professionals and wealth building individuals.  In pursuit of these
goals, the Company manages growth diversification while including a significant
amount of commercial and commercial real estate loans in its
portfolio.  Significant portions of these new loan products carry
adjustable rates, higher yields or shorter terms and higher credit risk than
traditional fixed-rate mortgages.  A related goal is to increase the
proportion of personal and business checking account deposits used to fund these
new loans.  The strategic plan also stresses increased emphasis on
non-interest income, including increased fees for asset management and deposit
service charges.  The strategic plan is designed to enhance earnings,
reduce interest rate risk and provide a more complete range of financial
services to customers and the local communities the Company serves. The Company
is well positioned to attract new customers and to increase its market share
with eighteen branches including ten in Clark county, three in the Portland
metropolitan area and four lending centers.





In order
to support its strategy of growth without compromising its local, personal
service to its customers and a commitment to asset quality, the Company has made
significant investments in experienced branch, lending, asset management and
support personnel and has incurred significant costs in facility expansion and
in infrastructure development. The Company’s efficiency ratios reflect this
investment and will likely remain relatively high by industry standards for the
foreseeable future as a result of the emphasis on growth and local, personal
service.  Working to control non-interest expenses remains a high
priority for the Company’s management.





The
Company continuously reviews new products and services to provide its customers
more financial options. All new technology and services are generally reviewed
for business development and cost saving purposes.  In-house
processing of checks and check imaging has supported the Bank’s increased
service to customers and at the same time has increased
efficiency.  The Bank has implemented remote check capture at selected
branches and is in the process of implementing remote capture of checks on site
for selected customers of the Bank.  The Bank has increased its
emphasis on enhancing its cash management product line with the hiring of an
experienced cash management officer.  The formation of a team
consisting of this cash management officer and existing Bank employees is
expected to lead to an improved cash management product line for the Bank’s
commercial customers.  The Company continues to experience growth in
customer use of its online banking services, which allows customers to conduct a
full range of services on a real-time basis, including balance inquiries,
transfers and electronic bill paying.  The Company’s online service
has also enhanced the delivery of cash management services to commercial
customers.   During the second quarter of fiscal 2009, the
Company began offering Certificate of Deposit Registry Service (CDARSTM)
deposits.  Through the CDARS program, customers can access FDIC
insurance up to $50 million.  The Company also implemented Check 21
during the second








3






quarter
of fiscal 2009, which allows the Company to process checks faster and more
efficiently.  In December 2008, the Company began operating as a
merchant bankcard “agent bank” facilitating credit and debit card transactions
for business customers through an outside merchant bankcard
processor.  This allows the Company to underwrite and approve merchant
bankcard applications and retain interchange income that, under its previous
status as a “referral bank”, was earned by a third party.  A branch
manager of the Bank, who previously had experience in leading similar merchant
bankcard programs with other community financial institutions, currently manages
the merchant bankcard service.





Special
Note Regarding Forward-Looking Statements





This
Annual Report on Form 10-K, and in particular the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section under Item 7
of this report, contains statements that the Company believes are
“forward-looking statements.”  These statements relate to the
Company’s financial condition, results of operations, plans, objectives, future
performance or business. You should not place undue reliance on these
statements, as they are subject to risks and uncertainties. When considering
these forward-looking statements, you should keep in mind these risks and
uncertainties, as well as any cautionary statements the Company may make.
Moreover, you should treat these statements as speaking only as of the date they
are made and based only on information then actually known to the Company. There
are a number of important factors that could cause future results to differ
materially from historical performance and these forward-looking statements.
Factors which could cause actual results to differ materially include, but are
not limited to, the credit risks of lending activities, including changes in the
level and trend of loan delinquencies and write-offs; changes in general
economic conditions, either nationally or in our market areas; changes in the
levels of general interest rates, deposit interest rates, our net interest
margin and funding sources; fluctuations in the demand for loans, the number of
unsold homes and other properties and fluctuations in real estate values in our
market areas; results of examinations of us by the OTS by the FDIC or other
regulatory authorities, including the possibility that any such regulatory
authority may, among other things, require us to increase our reserve for loan
losses or to write-down assets; our ability to comply with an agreements entered
into with the OTS or FDIC, including the recent Memorandum of Understanding
entered into with the OTS; our ability to control operating costs and expenses;
our ability to implement our branch expansion strategy; our ability to
successfully integrate any assets, liabilities, customers, systems, and
management personnel we have acquired or may in the future acquire into our
operations and our ability to realize related revenue synergies and cost savings
within expected time frames and any goodwill charges related thereto; our
ability to manage loan delinquency rates; our ability to retain key members of
our senior management team; costs and effects of litigation, including
settlements and judgments; increased competitive pressures among financial
services companies; changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business; adverse
changes in the securities markets; inability of key third-party providers to
perform their obligations to us; changes in accounting policies and practices,
as may be adopted by the financial institution regulatory agencies or the
Financial Accounting Standards Board; war or terrorist activities; other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services and other risks
detailed in Item 1A, “Risk Factors,” of this report. These factors should be
considered in evaluating the “forward-looking statements,” and undue reliance
should not be placed on such statements. The Company does not undertake to
update any forward-looking statement that may be made on behalf of the
Company.





Market
Area





The
Company conducts operations from its home office in Vancouver and eighteen
branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (seven branch offices) and Longview, Washington and
Portland (two branch offices), Wood Village and Aumsville,
Oregon.  The Company operates a trust and financial services company,
Riverview Asset Management Corp. (“RAMCorp”), located in downtown
Vancouver.  Riverview Mortgage, a mortgage broker division of the
Bank, originates mortgage loans for various mortgage companies predominantly in
the Vancouver/Portland metropolitan areas, as well as for the
Bank.  The Business and Professional Banking Division, with two
lending offices in Vancouver and two lending offices in Portland, offers
commercial and business banking services.





Vancouver
is located in Clark County, Washington, which is just north of Portland, Oregon.
Many businesses are located in the Vancouver area because of the favorable tax
structure and lower energy costs in Washington as compared to
Oregon.  Companies located in the Vancouver area include Sharp
Microelectronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory,
Wafer Tech, Nautilus and Barrett Business Services, as well as several support
industries.  In addition to this industry base, the Columbia River
Gorge Scenic Area is a source of tourism, which has helped to transform the area
from its past dependence on the timber industry.











4






Prior to
2008, national real estate and home values increased substantially, as a result
of the generally strong national economy, speculative investing, and aggressive
lending practices that provided loans to marginal borrowers (generally termed as
“subprime” loans).  That strong economy also resulted in significant
increases in residential and commercial real estate values and commercial and
residential construction.  The national and regional residential
lending market, however, experienced a notable slowdown in 2008, and loan
delinquencies and foreclosure rates have increased.  Foreclosures and
delinquencies are also being driven by investor speculation in many states,
while job losses and depressed economic conditions have resulted in the higher
levels of delinquent loans.  The continued economic downturn, and more
specifically the continued slowdown in residential real estate sales, has
resulted in further uncertainty in the financial markets.  During the
fiscal year ended 2009, the local economy has continued to
slow.  Unemployment in Clark County increased to 12.5% in March 2009
compared with 6.3% in March 2008.  Home values in the
Portland/Vancouver area at March 31, 2009 were lower than home values last year,
with certain areas seeing more significant declines.  The local area
has seen a reduction in new residential building starts which continued through
fiscal year 2009.  Commercial real estate leasing activity in the
Portland/Vancouver area, however, has remained steady, but it is generally
affected by a slow economy later than other indicators.  Commercial
vacancy rates in Clark County have continued to increase through the fiscal year
ended March 31, 2009.  As a result of these and other factors, the
Company has experienced a further decline in the values of real estate
collateral supporting certain of its construction real estate and land
acquisition and development loans, has experienced increased loan delinquencies
and defaults, and sees signs for potential further increased loan delinquencies
and defaults.   In addition, competition among financial
institutions for deposits has also continued to increase, making it more
expensive to attract core deposits.





Lending
Activities





General.  At March
31, 2009, the Company's net loans receivable totaled $784.1 million, or 85.8% of
total assets at that date.  The principal lending activity of the
Company is the origination of loans collateralized by commercial properties,
land for development and residential construction loans as well as commercial
loans (C&I loans).  A substantial portion of the Company's loan
portfolio is secured by real estate, either as primary or secondary collateral,
located in its primary market area.











5








Loan Portfolio
Analysis.  The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates
indicated.





At
      March 31,2009
            
            
            
            2008
            
            
            
            2007
            
            
            
            2006
            
            
            
            2005Amount
            
            Percent
            
            
            
            Amount
            
            Percent
            
            
            
            Amount
            
            Percent
            
            
            
            Amount
            
            Percent
            
            
            
            Amount
            
            Percent(Dollars
      in thousands)Commercial
      and construction:Commercial
            $
            127,150
            
            15.87
            %
            
            $
            109,585
            
            14.28
            %
            
            $
            91,174
            
            13.18
            %
            
            $
            90,083
            
            14.29
            %
            
            $
            78,280
            
            18.04
            %Other
      real estate mortgage
            
            447,652
            
            55.88
            
            
            
            429,422
            
            55.97
            
            
            
            360,930
            
            52.19
            
            
            
            329,631
            
            52.31
            
            
            
            220,813
            
            50.90Real
      estate construction
            
            139,476
            
            17.41
            
            
            
            148,631
            
            19.37
            
            
            
            166,073
            
            24.01
            
            
            
            137,598
            
            21.83
            
            
            
            58,699
            
            13.53Total
      commercial and construction
            
            714,278
            
            89.16
            
            
            
            687,638
            
            89.62
            
            
            
            618,177
            
            89.38
            
            
            
            557,312
            
            88.43
            
            
            
            357,792
            
            82.47Consumer:Real
      estate one-to-four family
            
            83,762
            
            10.46
            
            
            
            75,922
            
            9.90
            
            
            
            69,808
            
            10.10
            
            
            
            64,026
            
            10.16
            
            
            
            68,945
            
            15.89Other
      installment
            
            3,051
            
            0.38
            
            
            
            3,665
            
            0.48
            
            
            
            3,619
            
            0.52
            
            
            
            8,899
            
            1.41
            
            
            
            7,107
            
            1.64Total
      consumer loans
            
            86,813
            
            10.84
            
            
            
            79,587
            
            10.38
            
            
            
            73,427
            
            10.62
            
            
            
            72,925
            
            11.57
            
            
            
            76,052
            
            17.53Total
      loans
            
            801,091
            
            100.00
            %
            
            
            767,225
            
            100.00
            %
            
            
            691,604
            
            100.00
            %
            
            
            630,237
            
            100.00
            %
            
            
            433,844
            
            100.00
            %Less:Allowance
      for loan losses
            
            16,974
            
            
            
            
            
            10,687
            
            
            
            
            
            8,653
            
            
            
            
            
            7,221
            
            
            
            
            
            4,395Total
      loans receivable, net
            $
            784,117
            
            
            
            
            $
            756,538
            
            
            
            
            $
            682,951
            
            
            
            
            $
            623,016
            
            
            
            
            $
            429,449











6





Loan Portfolio
Composition.  The following
table sets forth the composition of the Company's commercial and construction
loan portfolio based on loan purpose at the dates indicated.




COMPOSITION OF COMMERCIAL
AND CONSTRUCTION LOAN TYPES BASED ON LOAN PURPOSE
 Commercial
              
              
              Other
                Real
      Estate Mortgage
              
              
              Real
      Estate
                Construction
              
              
              Commercial
      & Construction
                TotalMarch
      31, 2009
              (Dollars
      in thousands)Commercial
              $
              127,150
              
              $
              -
              
              $
              -
              
              $
              127,150Commercial
      construction
              
              -
              
              
              -
              
              
              65,459
              
              
              65,459Office
      buildings
              
              -
              
              
              90,621
              
              
              -
              
              
              90,621Warehouse/industrial
              
              -
              
              
              40,214
              
              
              -
              
              
              40,214Retail/shopping
      centers/strip malls
              
              -
              
              
              81,233
              
              
              -
              
              
              81,233Assisted living facilities
              
              -
              
              
              26,743
              
              
              -
              
              
              26,743Single
      purpose facilities
              
              -
              
              
              88,574
              
              
              -
              
              
              88,574Land
              
              -
              
              
              91,873
              
              
              -
              
              
              91,873Multi-family
              
              -
              
              
              28,394
              
              
              -
              
              
              28,394One-to-four
      family construction
              
              -
              
              
              -
              
              
              74,017
              
              
              74,017Total
              $
              127,150
              
              $
              447,652
              
              $
              139,476
              
              $
              714,278


Commercial
            
            
            Other
              Real
      Estate Mortgage
            
            
            Real
      Estate
              Construction
            
            
            Commercial
      & Construction
              TotalMarch
      31, 2008
            (Dollars
      in thousands)Commercial
            $
            109,585
            
            $
            -
            
            $
            -
            
            $
            109,585Commercial
      construction
            
            -
            
            
            -
            
            
            55,277
            
            
            55,277Office
      buildings
            
            -
            
            
            88,106
            
            
            -
            
            
            88,106Warehouse/industrial
            
            -
            
            
            39,903
            
            
            -
            
            
            39,903Retail/shopping
      centers/strip malls
            
            -
            
            
            70,510
            
            
            -
            
            
            70,510Assisted living facilities
            
            -
            
            
            28,072
            
            
            -
            
            
            28,072Single
      purpose facilities
            
            -
            
            
            65,756
            
            
            -
            
            
            65,756Land
            
            -
            
            
            108,030
            
            
            -
            
            
            108,030Multi-family
            
            -
            
            
            29,045
            
            
            -
            
            
            29,045One-to-four
      family construction
            
            -
            
            
            -
            
            
            93,354
            
            
            93,354Total
            $
            109,585
            
            $
            429,422
            
            $
            148,631
            
            $
            687,638





Commercial
Lending.Commercial loans are generally made to customers who
are well known to the Company and are typically secured by business assets or
other property. The Company’s commercial loans may be structured as term loans
or as lines of credit.  Commercial term loans are generally made to
finance the purchase of assets and usually have maturities of five years or
less.  Commercial lines of credit are typically made for the purpose
of providing working capital and usually have a term of one year or
less.  Lines of credit are made at variable rates of interest equal to
a negotiated margin above an index rate and term loans are at either a variable
or fixed rate.  The Company also generally obtains personal guarantees
from financially capable parties based on a review of personal financial
statements.





Commercial
lending involves risks that are different from those associated with residential
and commercial real estate lending.  Real estate lending is generally
considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral being viewed as the primary source of repayment in the event
of borrower default.  Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories may be obsolete or of limited use, among other
things.  Accordingly, the repayment of commercial business loans
depends primarily on the cash flow and credit worthiness of the borrower and
secondarily on the underlying collateral provided by the borrower.










7





Other Real Estate Mortgage
Lending.At March 31, 2009, the other real estate lending
portfolio totaled $447.7 million, or 55.88% of total loans. The Company
originates other real estate loans including office buildings,
warehouse/industrial, retail, assisted living facilities (collectively
“commercial real estate loans); as well as land and multi-family primarily
located in our market area.  At March 31, 2009, owner occupied
properties accounted for 30% of the Company’s commercial real estate portfolio
and non-owner occupied properties accounted for 70%.





The
Company actively pursues commercial real estate loans.  Typically,
these loans have higher loan balances, are more difficult to evaluate and
monitor, and involve a higher degree of risk than one-to-four family residential
loans.  Often payments on loans secured by commercial properties are
dependent on the successful operation and management of the property securing
the loan or business conducted on the property securing the loan; therefore,
repayment of these loans may be affected by adverse conditions in the real
estate market or the economy.   The Bank seeks to minimize these
risks by generally limiting the maximum loan-to-value ratio to 80% and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan.  The
Bank generally imposes a minimum debt service coverage ratio of 1.20 for loans
secured by income producing properties.





Land
acquisition and development loans are included in the other real estate mortgage
portfolio balance, and represent loans made to developers for the purpose of
acquiring raw land and/or for the subsequent development and sale of residential
lots.  Such loans typically finance land purchase and infrastructure
development of properties (i.e. roads, utilities, etc.) with the aim of making
improved lots ready for subsequent sale to consumers or builders for ultimate
construction of residential units.  The primary source of repayment is
generally the cash flow from developer sale of lots or improved parcels of land,
secondary sources and personal guarantees may provide an additional measure of
security for such loans.  Strong demand for housing has led to loan
growth in this category in recent years.  However, the recent
nationwide downturn in real estate has slowed lot and home sales within the
Company’s markets.  This has impacted certain developers by
lengthening the marketing period of their projects and negatively affecting
borrower’s liquidity and collateral values.  At March 31, 2009, land
acquisition and development loans totaled $91.9 million, or 11.47% of total
loans.  The largest loan had an outstanding balance of $6.1 million
and was performing according to its original terms.  With the
exception of three loans totaling $5.8 million, all of the land acquisition and
development loans were secured by properties located in Washington and
Oregon.  At March 31, 2009, the Company had seven land acquisition and
development loans totaling $5.8 million on non-accrual status.





Both
fixed and adjustable-rate loans are offered on other real estate loans.
Adjustable-rate other real estate loans are originated with rates that generally
adjust after an initial period ranging from one to five
years.  Adjustable-rate other real estate loans are generally priced
utilizing the FHLB of Seattle's fixed advance rate for an equivalent period plus
a margin ranging from 2.5% to 3.5%, with principal and interest payments fully
amortizing over terms up to 30 years.  These loans generally have a
prepayment penalty.





Real Estate
Construction.The real estate construction loan portfolio, not
including loan commitments, totaled $139.5 million at March 31, 2009. The
Company originates three types of residential construction loans: (i)
speculative construction loans, (ii) custom/presold construction loans and (iii)
construction/permanent loans.  The Company also originates
construction loans for the development of business properties and multi-family
dwellings.  All of the Company’s real estate construction loans were
made on properties located in Washington and Oregon.





The
composition of the Company’s construction loan portfolio including loan
commitments at was as follows:


At
      March 31,2009
            
            
            
            2008Amount
      (1)
            
            
            Percent
            
            
            
            Amount
      (1)
            
            
            Percent(Dollars
      in thousands)Speculative
      construction
            $
            60,494
            
            
            37.45
            %
            
            $
            91,704
            
            
            44.57
            %Commercial/multi-family
      construction
            
            77,842
            
            
            48.19
            
            
            
            92,140
            
            
            44.79Custom/presold
      construction
            
            11,337
            
            
            7.02
            
            
            
            11,661
            
            
            5.67Construction/permanent
            
            11,864
            
            
            7.34
            
            
            
            10,235
            
            
            4.97Total
            $
            161,537
            
            
            100.00
            %
            
            $
            205,740
            
            
            100.00
            %





(1)
Includes loans in process of $22.1 million and $57.1 million at March 31, 2009
and 2008, respectively.





Speculative
construction loans are made to home builders and are termed “speculative”
because the home builder does not have, at the time of loan origination, a
signed contract with a home buyer who has a commitment for permanent financing
with either the Company or another lender for the finished home. The home buyer
may be identified either during or after the construction period, with the risk
that the builder will have to debt service the speculative construction loan and
finance real estate taxes and other carrying costs of the completed home for a
significant time after the completion of construction until a home buyer is








8






identified.
Included in speculative construction loans are loans to finance the construction
of townhouses and condominiums. At March 31, 2009, loans for the construction of
townhouses and condominiums totaled $11.6 million and $28.6 million,
respectively. At March 31, 2009, the Company had sixteen borrowers with
aggregate outstanding loan balances of more than $1.0 million, which totaled
$42.7 million (the largest of which was $7.7 million) and were secured by
properties located in the Company’s market area. At March 31, 2009, five
speculative construction loans totaling $12.1 million were on non-accrual
status.





The
composition of the speculative construction and land development loans by
geographical area is as follows:




Northwest
      Oregon
            
            
            Other
              Oregon
            
            
            Southwest
      Washington
            
            
            Other
              Washington
            
            
            Other
            
            
            TotalMarch
      31, 2009
            
            
            
            
            
            
            (In
      thousands)Land
      development
            $
            6,659
            
            $
            9,130
            
            $
            66,776
            
            $
            3,540
            
            $
            5,768
            
            $
            91,873Speculative
      construction
            
            14,706
            
            
            15,730
            
            
            24,974
            
            
            2,343
            
            
            -
            
            
            57,753Total
      spec and land construction
            $
            21,365
            
            $
            24,860
            
            $
            91,750
            
            $
            5,883
            
            $
            5,768
            
            $
            149,626





Unlike
speculative construction loans, presold construction loans are made for homes
that have buyers. Presold construction loans are made to homebuilders who, at
the time of construction, have a signed contract with a home buyer who has a
commitment for permanent financing for the finished home from the Company or
another lender. Custom construction loans are made to the homeowner.
Custom/presold construction loans are generally originated for a term of 12
months.  At March 31, 2009, the largest custom construction loan and
presold construction loan had outstanding balances of $2.2 million and $949,000,
respectively, and were performing according to their original
terms.  At March 31, 2009, the Company had two custom or presold
construction loans on non-accrual status totaling $344,000.





Construction/permanent
loans are originated to the homeowner rather than the homebuilder along with a
commitment by the Company to originate a permanent loan to the homeowner to
repay the construction loan at the completion of construction.  The
construction phase of a construction/permanent loan generally lasts six to nine
months.  At the completion of construction, the Company may either
originate a fixed rate mortgage loan or an adjustable rate mortgage (“ARM”) loan
or use its mortgage brokerage capabilities to obtain permanent financing for the
customer with another lender. At completion of construction, the
Company-originated fixed rate permanent loan’s interest rate is set at a market
rate and for adjustable rate loans, the interest rates adjust on their first
adjustment date.  See “—Mortgage Brokerage,” and “—Mortgage Loan
Servicing.”  At March 31, 2009, the largest outstanding
construction/permanent loan had an outstanding balance of $748,000 and was
performing according to its original terms.  At March 31, 2009, the
Company had one construction/permanent loan on non-accrual status totaling
$239,000.





The
Company provides construction financing for non-residential business properties
and multi-family dwellings. At March 31, 2009, such loans totaled $65.5 million,
or 47.0% of total real estate construction loans and 8.2% of total loans.
Borrowers may be the business owner/occupier of the building who intends to
operate its business from the property upon construction, or non-owner
developers. The expected source of repayment of these loans is typically the
sale or refinancing of the project upon completion of the construction phase. In
certain circumstances, the Company may provide or commit to take-out financing
upon construction. Take-out financing is subject to the project meeting specific
underwriting guidelines.  No assurance can be given that such take-out
financing will be available upon project completion.  These loans are
secured by office buildings, retail rental space, mini storage facilities,
assisted living facilities and multi-family dwellings located in the Company’s
market area.  At March 31, 2009, the largest commercial construction
loan had a balance of $7.7 million and was performing according to its original
terms. At March 31, 2009, the Company had one commercial construction loan on
non-accrual status totaling $75,000.





Construction
lending affords the Company the opportunity to achieve higher interest rates and
fees with shorter terms to maturity than does its single-family permanent
mortgage lending.  Construction lending, however, generally involves a
higher degree of risk than single-family permanent mortgage lending because of
the inherent difficulty in estimating both a property’s value at completion of
the project and the estimated cost of the project, as well as the time needed to
sell the property at completion.  The nature of these loans is such
that they are generally more difficult to evaluate and
monitor.  Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and the
effects of governmental regulation of real property, it is relatively difficult
to evaluate accurately the total funds required to complete a project and the
related loan-to-value ratio.  This type of lending also typically
involves higher loan principal amounts and is often concentrated with a small
number of builders.  As a result, construction loans often involve the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or lease
the property or refinance the indebtedness, rather than the ability of the
borrower or guarantor to repay principal and interest.  If our
appraisal of the value of the completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of
construction of the project and may incur a loss.









9






Consumer
Lending.Consumer loans totaled $86.8 million at March 31,
2009, or 10.84% of total loans.  Consumer lending is comprised of
one-to-four family mortgage loans, home equity lines of credit, land loans to
consumers for the future construction of one-to-four family homes, totaling
$83.8 million, and other secured and unsecured consumer loans, totaling $3.1
million at March 31, 2009.





One-to-four
family residences located in the Company’s primary market area secure the
majority of the residential loans. Underwriting standards require that
one-to-four family portfolio loans generally be owner occupied and that loan
amounts not exceed 80% or (95% with private mortgage insurance) of the lesser of
current appraised value or cost of the underlying collateral. Terms typically
range from 15 to 30 years. The Company also offers balloon mortgage loans with
terms of either five or seven years and originates both fixed rate mortgages and
ARMs with repricing based on one-year constant maturity U.S. Treasury index or
other index.  At March 31, 2009, the Company had eight one-to-four
family loans totaling $1.3 million on non-accrual status.





The
Company originates a variety of installment loans, including loans for debt
consolidation and other purposes, automobile loans, boat loans and savings
account loans.  Consumer loans generally entail greater risk than do
residential mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly, such as mobile homes,
automobiles, boats and recreational vehicles.  At March 31, 2009, the
Company had no installment loans on non-accrual status.





Loan Maturity.  The
following table sets forth certain information at March 31, 2009 regarding the
dollar amount of loans maturing in the Company’s portfolio based on their
contractual terms to maturity, but does not include potential
prepayments.  Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.  Loan balances are reported net of deferred
fees.




Within
      1
                Year
              
              
              1
      – 3
                Years
              
              
              After
      3 – 5
                Years
              
              
              After
      5 – 10
                Years
              
              
              Beyond
      10 Years
              
              
              TotalCommercial
      and construction:
              
              (Dollars
      in thousands)CommercialAdjustable
      rate
              $
              69,579
              
              $
              6,171
              
              $
              4,947
              
              $
              16,716
              
              $
              -
              
              $
              97,413Fixed
      rate
              
              2,624
              
              
              14,891
              
              
              11,222
              
              
              1,000
              
              
              -
              
              
              29,737Other
      real estate mortgageAdjustable
      rate
              
              89,484
              
              
              12,255
              
              
              23,382
              
              
              222,845
              
              
              20,015
              
              
              367,981Fixed
      rate
              
              6,356
              
              
              21,301
              
              
              22,960
              
              
              27,633
              
              
              1,421
              
              
              79,671Real
      estate constructionAdjustable
      rate
              
              82,825
              
              
              99
              
              
              475
              
              
              18,418
              
              
              4,087
              
              
              105,904Fixed
      rate
              
              23,742
              
              
              3,829
              
              
              2,323
              
              
              3,678
              
              
              -
              
              
              33,572Total
      commercial & construction
              
              274,610
              
              
              58,546
              
              
              65,309
              
              
              290,290
              
              
              25,523
              
              
              714,278Consumer:Real
      estate one-to-four familyAdjustable
      rate
              
              355
              
              
              217
              
              
              210
              
              
              3,005
              
              
              43,811
              
              
              47,598Fixed
      rate
              
              1,902
              
              
              11,071
              
              
              5,211
              
              
              720
              
              
              17,260
              
              
              36,164Other
      installmentAdjustable
      rate
              
              44
              
              
              -
              
              
              -
              
              
              621
              
              
              -
              
              
              665Fixed
      rate
              
              494
              
              
              555
              
              
              973
              
              
              267
              
              
              97
              
              
              2,386Total
      consumer
              
              2,795
              
              
              11,843
              
              
              6,394
              
              
              4,613
              
              
              61,168
              
              
              86,813Total
      net loans
              $
              277,405
              
              $
              70,389
              
              $
              71,703
              
              $
              294,903
              
              $
              86,691
              
              $
              801,091




Loan Solicitation and
Processing. The Company’s lending activities are subject to the written,
non-discriminatory, underwriting standards and loan origination procedures
established by the Board of Directors (“Board”) and management.  The
customary sources of loan originations are realtors, walk-in customers,
referrals and existing customers.  The Company also uses commissioned
loan brokers and print advertising to market its products and
services.





The
Company’s loan approval process is intended to assess the borrower’s ability to
repay the loan, the viability of the loan, the adequacy of the value of the
property that will secure the loan, if any, and in the case of commercial and
multi-family real estate loans, the cash flow of the project and the quality of
management involved with the project. The Company’s lending policy requires
borrowers to obtain certain types of insurance to protect the Company’s interest
in any collateral securing the loan.  Loans are approved at various
levels of management, depending upon the amount of the loan.








10





Loan Commitments. The Company
issues commitments to originate commercial loans, other real estate mortgage
loans, construction loans, residential mortgage loans and other installment
loans conditioned upon the occurrence of certain events.  The Company
uses the same credit policies in making commitments as it does for on-balance
sheet instruments.  Commitments to originate loans are conditional,
and are honored for up to 45 days subject to the Company’s usual terms and
conditions.  Collateral is not required to support
commitments.  At March 31, 2009, the Company had outstanding
commitments to originate loans of $7.2 million, compared to $44.3 million at
March 31, 2008.  The decrease in loan commitments is primarily due to
a slowdown in loan demand as a result of the downturn in the local economy, and
due to the tightening of underwriting standards by the Company.  The
Company expects loan demand and growth to remain slow in the coming fiscal
year.





Mortgage Brokerage. In
addition to originating mortgage loans for retention in its portfolio, the
Company employs eleven commissioned brokers who originate mortgage loans
(including construction loans) for various mortgage companies, as well as for
the Company. The loans brokered to mortgage companies are closed in the name of
and funded by the purchasing mortgage company and are not originated as an asset
of the Company. In return, the Company receives a fee ranging from 1.0% to 1.5%
of the loan amount that it shares with the commissioned broker. Loans brokered
to the Company are closed on the Company's books and the commissioned broker
receives a fee of approximately 0.55% of the loan amount. During the year ended
March 31, 2009, brokered loans totaled $124.5 million (including $41.3 million
brokered to the Company), compared to $206.7 million of brokered loan in fiscal
year 2008. Gross fees of $840,000 (excluding the portion of fees shared with the
commissioned brokers) were recognized for the year ended March 31, 2009. The
interest rate environment has a strong influence on the loan volume and amount
of fees generated from the mortgage broker activity. In general, during periods
of rising interest rates the volume of loans and the amount of loan fees
generally decrease as a result of slower mortgage loan demand. Conversely,
during periods of falling interest rates, the volume of loans and the amount of
loan fees generally increase as a result of the increased mortgage loan demand.
Due to the slowdown in the real estate markets during fiscal year 2009, the loan
volume and amount of fees generated decreased compared to previous
years.





Mortgage Loan
Servicing.  The Company is a qualified servicer for the Federal
Home Loan Mortgage Corporation (“FHLMC”).  The Company generally sells
fixed-rate residential one-to-four mortgage loans that it originates with
maturities of 15 years or more and balloon mortgages to the FHLMC as part of its
asset liability strategy.  Mortgage loans are sold to FHLMC on a
non-recourse basis whereby foreclosure losses are generally the responsibility
of FHLMC and not the Company.  The Company's general policy is to
close its residential loans on the FHLMC modified loan documents to facilitate
future sales to FHLMC.  Upon sale, the Company continues to collect
payments on the loans, to supervise foreclosure proceedings, and to otherwise
service the loans. At March 31, 2009, total loans serviced for others were
$126.8 million, of which $108.9 million were serviced for FHLMC.





Nonperforming
Assets.  Loans are reviewed regularly and it is the Company’s
general policy that when a loan is 90 days delinquent or when collection of
principal or interest appears doubtful, it is placed on non-accrual status, at
which time the accrual of interest ceases and a reserve for any unrecoverable
accrued interest is established and charged against
operations.  Typically, payments received on non-accrual loans are
applied to reduce the outstanding principal balance on a cash-basis
method.





Nonperforming
assets were $41.7 million or 4.57% of total assets at March 31, 2009 compared
with $8.2 million or 0.92% of total assets at March 31, 2008. The Company also
had net charge offs totaling $9.9 million during fiscal 2009 compared to
$866,000 during fiscal 2008. Credit quality challenges continue to be centered
in residential land acquisition and development loans and speculative
construction loans, which represented approximately 77% of the Company’s
nonperforming assets at March 31, 2009. Slower sales and excess housing
inventory were the primary cause of the increase in delinquencies and
foreclosures of such loans. While the Company has not engaged in any sub-prime
lending programs the effect on home values, housing markets and construction
lending from problems associated with sub-prime and other non-traditional
mortgage lending programs has contributed to the increased levels of builder and
developer delinquencies. Continuation of these conditions could result in
additional increases in nonperforming assets, further increases in the provision
for loan losses and charge-offs in the future.





Nonperforming loans totaled $27.6
million and consisted of thirty-four loans to twenty-nine borrowers ranging in
size from $33,000 to $7.8 million.  As noted above, land acquisition
and development loans and speculative construction loans continue to be the
primary reason for the increase in our nonperforming loans, representing $18.7
million, or 68%, of the total nonperforming loan balance at March 31,
2009.  The
remaining balance includes seven commercial loans to six borrowers totaling $6.0
million, two multi-family loans totaling $1.5 million, and eight residential
real estate loans to seven borrowers totaling $1.3 million.  All of
these loans are to borrowers located in Oregon and Washington with the exception
of one land acquisition and development loan for $1.4 million to a Washington
borrower who has property located in Southern California.  Twelve of
the Company’s nonperforming loans, totaling $24.1 million or 87% of total
nonperforming loans, were measured for impairment at March 31,
2009.  The specific reserve associated with these impaired loans
totaled $3.3 million.  As a result, the $19.9 million increase in
nonperforming loans resulted in an increase of approximately $3 million to the
Company’s allowance for loan losses.








11







The
balance of nonperforming assets also consisted of $14.2 million in real estate
owned (“REO”).  The REO was comprised of thirty-three properties
limited to sixteen lending relationships. These properties consist of eleven
single-family homes totaling $2.4 million (all of which were former speculative
construction properties), seventeen residential building lots totaling $1.9
million, three finished subdivision properties totaling $4.6 million, one land
development property totaling $5.0 million and one multi-family real estate loan
totaling $269,000. Seven of the one-to-four family real estate properties are
former construction loans to a credit related borrower. These properties are
located in two separate subdivisions. Five of these properties are currently
being rented and one of the properties was formerly being rented. All of the REO
properties are located in Oregon and Washington. Because of the uncertain real
estate market, forward assurance cannot be given as to the timing of ultimate
disposition of such assets or that the selling price will be at or above the
carrying value. The orderly resolution of nonperforming loans and REO properties
remains a priority for management. We expect REO properties to remain at
elevated levels in the near future.





The
following table sets forth information regarding the Company’s nonperforming
assets.  At the dates indicated, the Company had no restructured loans
within the meaning of Statement of Financial Accounting Standards (“SFAS”) No.
15 (as amended by SFAS No. 114), Accounting by Debtors and Creditors
for Troubled Debt Restructuring.





At
      March 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)Loans
      accounted for on a non-accrual basis:Commercial
            $
            6,018
            
            $
            1,164
            
            $
            -
            
            $
            -
            
            $
            97Other
      real estate mortgage
            
            7,316
            
            
            3,892
            
            
            226
            
            
            415
            
            
            198Real
      estate construction
            
            12,720
            
            
            2,124
            
            
            -
            
            
            -
            
            
            -Real
      estate one-to-four family
            
            1,329
            
            
            382
            
            
            -
            
            
            -
            
            
            -Consumer
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            161Total
            
            27,383
            
            
            7,562
            
            
            226
            
            
            415
            
            
            456Accruing
      loans which are contractually
              past
      due 90 days or more
            
            187
            
            
            115
            
            
            -
            
            
            -
            
            
            -Total
      nonperforming loans
            
            27,570
            
            
            7,677
            
            
            226
            
            
            415
            
            
            456REO
            
            14,171
            
            
            494
            
            
            -
            
            
            -
            
            
            270Total
      nonperforming assets
            $
            41,741
            
            $
            8,171
            
            $
            226
            
            $
            415
            
            $
            726Total
      nonperforming loans to net loans
            
            3.44
            %
            
            1.00
            %
            
            0.03
            %
            
            0.07
            %
            
            0.10
            %Total
      nonperforming loans to total assets
            
            3.02
            
            
            0.87
            
            
            0.03
            
            
            0.05
            
            
            0.08Total
      nonperforming assets to total assets
            
            4.57
            
            
            0.92
            
            
            0.03
            
            
            0.05
            
            
            0.13





The
following table sets forth information regarding the Company’s nonperforming
assets by loan type and geographical area.





Northwest
      Oregon
            
            
            Other
              Oregon
            
            
            Southwest
      Washington
            
            
            Other
              Washington
            
            
            Other
            
            
            TotalMarch
      31, 2009
            (Dollars
      in thousands)Commercial
            $
            50
            
            $
            3,813
            
            $
            2,155
            
            $
            -
            
            $
            -
            
            $
            6,018Commercial
      real estate
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Land
            
            -
            
            
            -
            
            
            4,300
            
            
            115
            
            
            1,400
            
            
            5,815Multi-family
            
            1,341
            
            
            -
            
            
            160
            
            
            -
            
            
            -
            
            
            1,501Commercial
      construction
            
            -
            
            
            -
            
            
            -
            
            
            75
            
            
            -
            
            
            75One-to-four family construction
            
            425
            
            
            11,428
            
            
            740
            
            
            239
            
            
            -
            
            
            12,832Real
      estate one-to-four family
            
            -
            
            
            152
            
            
            1,104
            
            
            73
            
            
            -
            
            
            1,329Total nonperforming loans
            
            1,816
            
            
            15,393
            
            
            8,459
            
            
            502
            
            
            1,400
            
            
            27,570REO
            
            422
            
            
            2,267
            
            
            6,321
            
            
            5,161
            
            
            -
            
            
            14,171Total
      nonperforming assets
            $
            2,238
            
            $
            17,660
            
            $
            14,780
            
            $
            5,663
            
            $
            1,400
            
            $
            41,741





In
addition to the nonperforming assets set forth in the table above, at March 31,
2009 and 2008 the Company had other loans of concern totaling $10.1 million and
$6.8 million, respectively.  Other loans of concern at March 31, 2009
consisted of sixteen loans to fifteen borrowers.  Similar to trends
noted above, the increase in other loans of concern is concentrated around land
development and speculative construction loans.  Included in other
loans of concern are four real estate construction loans totaling








12






$7.9
million (the largest of which was $4.6 million).  The remaining $2.2
million of loans mainly consisted of commercial and land acquisition and
development loans.  Other loans of concern consist of loans where the
borrowers have cash flow problems, or the collateral securing the respective
loans may be inadequate.  In either or both of these situations the
borrowers may be unable to comply with the present loan repayment terms, and the
loans may subsequently be included in the non-accrual
category.  Management considers the allowance for loan losses to be
adequate to cover the probable losses inherent in these and other
loans.





At March
31, 2009, loans delinquent more than 30 days were 1.94% of total loans compared
to 2.25% for the linked-quarter and 0.70% at March 31, 2008. At March 31, 2009,
the delinquency rate in our commercial banking (C&I) portfolio was 2.45%.
There were no loans more than 30 days past due in our commercial real estate
(CRE) portfolio at March 31, 2009. CRE loans represent the largest portion of
our loan portfolio at 41% of total loans and the commercial banking loans
represent 16% of total loans. The Company has prepared a comprehensive
Classified Asset Reduction Plan detailing its strategy to reduce the Bank’s
level of classified assets.





Asset
Classification.  The OTS has adopted various regulations
regarding problem assets of savings institutions.  The regulations
require that each insured institution review and classify its assets on a
regular basis.  In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, require them to be classified.  There are three
classifications for problem assets:  substandard, doubtful and
loss.  Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected.  Doubtful
assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted.  If an asset or portion thereof is
classified as loss, the insured institution establishes specific allowances for
loan losses for the full amount of the portion of the asset classified as
loss.  All or a portion of general loan loss allowances established to
cover possible losses related to assets classified substandard or doubtful can
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.  Assets that do not currently expose the insured institution
to sufficient risk to warrant classification as a classified asset but possess
weaknesses are designated "special mention" and monitored by the
Company.





The
aggregate amount of the Company's classified loans, general loss allowances,
specific loss allowances and charge-offs were as follows at the dates
indicated:


At
      or For the YearEnded
      March 31,2009
            
            
            2008(In
      thousands)Classified
      loans
            $
            37,250
            
            $
            14,344General
      loss allowances
            
            12,659
            
            
            9,785Specific
      loss allowances
            
            4,315
            
            
            902Charge-offs
            
            9,890
            
            
            905





Classified
loans at March 31, 2009 are made up of thirteen real estate construction loans
totaling $20.6 million (the largest of which was $7.7 million), eleven
commercial loans totaling $7.4 million (the largest of these loans totaling $3.6
million), eleven land development loans totaling $6.3 million, eight one-to-four
family real estate loans totaling $1.3 million, five multi-family loans totaling
$1.6 million and one commercial real estate property totaling
$63,000.  As discussed elsewhere, the downturn in general economic
conditions, particularly in the local housing markets, was the primary reason
for the increased level of classified and other problem loans during fiscal year
2009.





Real Estate
Owned.  Real estate properties acquired through foreclosure or
by deed-in-lieu of foreclosure (REO) are recorded at the lower of cost or fair
value less estimated costs to sell. Fair value is generally determined by
management based on a number of factors, including third-party appraisals of
fair value in an orderly sale.  Accordingly, the valuation of REO is
subject to significant external and internal judgment.  Any
differences between management’s assessment of fair value, less estimated costs
to sell, and the carrying value of the loan at the date a particular property is
transferred into REO are charged to the allowance for loan
losses.  Management periodically reviews REO values to determine
whether the property continues to be carried at the lower of its recorded book
value or fair value, net of estimated costs to sell.  Any further
decreases in the value of REO are considered valuation adjustments and trigger a
corresponding charge to non-interest expense in the Consolidated Statements of
Operations.  Expenses for the maintenance and operations of REO are
included in other non-interest expense.











13






Allowance for Loan
Losses.  The Company maintains an allowance for loan losses to
provide for probable losses inherent in the loan portfolio.  The
adequacy of the allowance is evaluated monthly to maintain the allowance at
levels sufficient to provide for inherent losses.  A key component to
the evaluation is the Company’s external loan review and loan classification
systems.  Credit Administration reviews and monitors the risk and
quality of the Company’s loan portfolio.  Credit officers are expected
to monitor their portfolios and make recommendations to change loan grades
whenever changes are warranted.  Credit Administration approves any
changes to loan grades and monitors loan grades.  For additional
discussion of the Company’s methodology for assessing the appropriate level of
the allowance for loan losses see "Item 7.  Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Critical
Accounting Policies."





At March
31, 2009, the Company had an allowance for loan losses of $17.0 million, or
2.12% of total loans.  The allowance for loan losses, including
unfunded commitments of $296,000, was $17.3 million, or 2.15% of total loans at
March 31, 2009.  The change in the balance of the allowance for loan
losses at March 31, 2009 reflects the proportionate increase in loan balances,
the change in mix of loan balances, increased levels of delinquent loans,
deteriorating economic conditions (particularly related to the real estate
market) and a change in loss rate when compared to March 31,
2008.  The mix of the loan portfolio showed an increase in the loan
balances of commercial and commercial real estate as well as an increase in
one-to-four family at March 31, 2009 as compared to balances at March 31,
2008.  The increased balance in the allowance for loan losses was also
due to higher levels of nonperforming assets and classified
loans.  Classified assets were $37.3 million at March 31, 2009
compared to $14.3 million at March 31, 2008.  The increase is
primarily attributed to six real estate construction loans totaling $19.2
million (the largest of which was $7.7 million), and two commercial loan
totaling $4.8 million which were downgraded into classified assets during fiscal
year 2009.  Non-accrual loans increased $19.9 million during the
year-ended March 31, 2009, and specific reserves for such loans were $3.3
million.  The deterioration in the loan portfolio resulted in an
increase in the allowance for loan losses, which were partially offset by the
$9.9 million in net charge-offs during fiscal year 2009.   All of
the loans on non-accrual status as of March 31, 2009 were categorized as
classified loans.





The
Company has originated construction and land development loans where a component
of the cost of the project was the interest required to service the debt during
the construction period of the loan, sometimes known as interest
reserves.  The Company allows disbursements of this interest component
as long as the project is progressing as originally projected and if there has
been no deterioration of the financial standing of the borrower or the
underlying project.  If the Company makes a determination that there
is such deterioration, or if the loan becomes nonperforming, the Company halts
any disbursement of those funds identified for use in paying
interest.  In some cases, additional interest reserves may be taken by
use of deposited funds or through credit lines secured by separate and
additional collateral.





Management
considers the allowance for loan losses to be adequate to cover probable losses
inherent in the loan portfolio based on the assessment of various factors
affecting the loan portfolio and the Company believes it has established
its existing allowance for loan losses in accordance with accounting principles
generally accepted in the United States of America (“generally accepted
accounting principles” or "GAAP").  However, a further decline in
local economic conditions, results of examinations by the Company’s regulators,
or other factors could result in a material increase in the allowance for loan
losses and may adversely effect the Company’s financial condition and results of
operations. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses will be adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate or should collateral
values further decline as a result of the factors discussed elsewhere in this
document.The following table sets forth an analysis of the
Company's allowance for loan losses for the periods indicated.

















14








Year
      Ended March 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)Balance
      at beginning of period
            $
            10,687
            
            $
            8,653
            
            $
            7,221
            
            $
            4,395
            
            $
            4,481Provision
      for loan losses
            
            16,150
            
            
            2,900
            
            
            1,425
            
            
            1,500
            
            
            410Recoveries:Commercial
      and constructionCommercial
            
            25
            
            
            10
            
            
            165
            
            
            87
            
            
            156Other
      real estate mortgage
            
            -
            
            
            12
            
            
            -
            
            
            -
            
            
            -Total
      commercial and construction
            
            25
            
            
            22
            
            
            165
            
            
            87
            
            
            156ConsumerResidential
      real estate
            
            -
            
            
            -
            
            
            -
            
            
            48
            
            
            -Other
      installment
            
            2
            
            
            17
            
            
            28
            
            
            14
            
            
            17Total
      consumer
            
            2
            
            
            17
            
            
            28
            
            
            62
            
            
            17Total
      recoveries
            
            27
            
            
            39
            
            
            193
            
            
            149
            
            
            173Charge-offs:Commercial
      and constructionCommercial
            
            1,311
            
            
            794
            
            
            172
            
            
            577
            
            
            490Other
      real estate mortgage
            
            5,913
            
            
            42
            
            
            -
            
            
            -
            
            
            -Real
      estate construction
            
            2,073
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
      commercial and construction
            
            9,297
            
            
            836
            
            
            172
            
            
            577
            
            
            490ConsumerResidential real estate
            
            361
            
            
            48
            
            
            -
            
            
            41
            
            
            149Other installment
            
            232
            
            
            21
            
            
            14
            
            
            93
            
            
            30Total
      consumer
            
            593
            
            
            69
            
            
            14
            
            
            134
            
            
            179Total
      charge-offs
            
            9,890
            
            
            905
            
            
            186
            
            
            711
            
            
            669Net
      charge-offs (recoveries)
            
            9,863
            
            
            866
            
            
            (7
            )
            
            562
            
            
            496Allowance
      acquired from American Pacific Bank
            
            -
            
            
            -
            
            
            -
            
            
            1,888
            
            
            -Balance
      at end of period
            $
            16,974
            
            $
            10,687
            
            $
            8,653
            
            $
            7,221
            
            $
            4,395Ratio
      of allowance to total loans
              outstanding
      at end of period
            
            2.12
            %
            
            1.39
            %
            
            1.25
            %
            
            1.15
            %
            
            1.01
            %Ratio
      of net charge-offs to average net loans outstanding during
      period
            
            1.24
            
            
            0.12
            
            
            -
            
            
            0.10
            
            
            0.13Ratio
      of allowance to total nonperforming loans
            
            62
            
            
            139
            
            
            3,829
            
            
            1,740
            
            
            964











15





The
following table sets forth the breakdown of the allowance for loan losses by
loan category and is based on applying a specific loan loss factor to the
outstanding balances of related loan category as of the date of the allocation
for the periods indicated.





At
      March 31,2009
            
            
            
            2008
            
            
            
            2007
            
            
            
            2006
            
            
            
            2005Amount
            
            Loan
      Category as a Percent
              of
      Total Loans
            
            
            
            Amount
            
            Loan
      Category as a Percent of Total Loans
            
            
            
            Amount
            
            Loan
      Category as a Percent of Total Loans
            
            
            
            Amount
            
            Loan
      Category as a Percent of Total Loans
            
            
            
            Amount
            
            Loan
      Category as a Percent
              of
      Total Loans(Dollars
      in thousands)Commercial
      and construction:Commercial
            $
            2,668
            
            15.87
            %
            
            $
            1,339
            
            14.28
            %
            
            $
            1,553
            
            13.18
            %
            
            $
            1,549
            
            14.29
            %
            
            $
            1,834
            
            18.02
            %Other
      real estate mortgage
            
            6,475
            
            55.88
            
            
            
            5,415
            
            55.97
            
            
            
            4,066
            
            52.19
            
            
            
            3,553
            
            52.30
            
            
            
            1,863
            
            50.84Real
      estate construction
            
            4,592
            
            17.41
            
            
            
            2,092
            
            19.37
            
            
            
            2,060
            
            24.01
            
            
            
            1,365
            
            21.83
            
            
            
            276
            
            13.51Consumer:Real
      estate one-to-four family
            
            1,148
            
            10.46
            
            
            
            669
            
            9.90
            
            
            
            333
            
            10.10
            
            
            
            292
            
            10.17
            
            
            
            278
            
            15.99Other
      installment
            
            61
            
            0.38
            
            
            
            64
            
            0.48
            
            
            
            63
            
            0.52
            
            
            
            168
            
            1.41
            
            
            
            144
            
            1.64Unallocated
            
            2,030
            
            -
            
            
            
            1,108
            
            -
            
            
            
            578
            
            -
            
            
            
            294
            
            -
            
            
            
            -
            
            -Total
      allowance for loan loss
            $
            16,974
            
            100.00
            %
            
            $
            10,687
            
            100.00
            %
            
            $
            8,653
            
            100.00
            %
            
            $
            7,221
            
            100.00
            %
            
            $
            4,395
            
            100.00
            %




















16




Investment
Activities


The Board
sets the investment policy of the Company. The Company's investment objectives
are: to provide and maintain liquidity within regulatory guidelines; to maintain
a balance of high quality, diversified investments to minimize risk; to provide
collateral for pledging requirements; to serve as a balance to earnings; and to
optimize returns.  The policy permits investment in various types of
liquid assets permissible under OTS regulation, which includes U.S. Treasury
obligations, securities of various federal agencies, "bank qualified" municipal
bonds, certain certificates of deposit of insured banks, repurchase agreements,
federal funds and mortgage-backed securities (“MBS), but does not permit
investment in non-investment grade bonds. The policy also dictates the criteria
for classifying securities into one of three categories:  held to
maturity, available for sale or trading.  At March 31, 2009, no
investment securities were held for trading.  See "Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Critical Accounting Policies."





The
Company’s MBS portfolio represents a participation interest in a pool of
single-family or multi-family mortgages. Principal and interest payments on MBS
are passed from the mortgage originators, through intermediaries such as Federal
National Mortgage Association (“FNMA”), FHLMC, or private issuers that pool and
repackage the participation interests in the form of securities to investors
such as the Company.  MBS generally increase the quality of the
Company's assets by virtue of the guarantees that back them, are more liquid
than individual loans and may be used to collateralize borrowings or other
obligations of the Company.





Real
estate mortgage investment conduits (“REMICs”) are created by redirecting the
cash flows from the pool of mortgages or MBS underlying these securities to
create two or more classes, or tranches, with different maturity or risk
characteristics designed to meet a variety of investor needs and
preferences.  Management believes these securities may represent
attractive alternatives relative to other investments because of the wide
variety of maturity, repayment and interest rate options
available.  Current investment practices of the Company prohibit the
purchase of high risk REMICs.  REMICs may be sponsored by private
issuers, such as mortgage bankers or money center banks, or by U.S. Government
agencies and government-sponsored entities.  At March 31, 2009, the
Company owned no privately issued REMICs.





Investments
in MBS, including REMICs, involve a risk that actual prepayments will be greater
than estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities.  In addition, the market value of such securities may be
adversely affected by changes in interest rates.  See Note 4 of the
Notes to the Consolidated Financial Statements contained in Item 8 of this Form
10-K for additional information.





The
following table sets forth the investment securities portfolio and carrying
values at the dates indicated.





At
      March 31,2009
            
            
            
            2008
            
            
            
            2007Carrying
              Value
            
            Percent
      of
              Portfolio
            
            
            
            Carrying
              Value
            
            Percent
      of
              Portfolio
            
            
            
            Carrying
              Value
            
            Percent
      of
              Portfolio(Dollars
      in thousands)Held
      to maturity (at amortized cost):REMICs
            $
            348
            
            2.55
            %
            
            $
            624
            
            4.55
            %
            
            $
            923
            
            3.40
            %FHLMC
      mortgage-backed securities
            
            94
            
            0.69
            
            
            
            104
            
            0.76
            
            
            
            116
            
            0.43FNMA
      mortgage-backed securities
            
            128
            
            0.94
            
            
            
            157
            
            1.15
            
            
            
            193
            
            0.71Municipal
      securities
            
            529
            
            3.87
            
            
            
            -
            
            -
            
            
            
            -
            
            -1,099
            
            8.05
            
            
            
            885
            
            6.46
            
            
            
            1,232
            
            4.54Available
      for sale (at fair value):Agency
      securities
            
            5,054
            
            37.01
            
            
            
            -
            
            -
            
            
            
            10,740
            
            39.57REMICs
            
            685
            
            5.02
            
            
            
            858
            
            6.25
            
            
            
            1,083
            
            4.00FHLMC
      mortgage-backed securities
            
            3,310
            
            24.24
            
            
            
            4,390
            
            32.02
            
            
            
            5,439
            
            20.04FNMA
      mortgage-backed securities
            
            71
            
            0.52
            
            
            
            90
            
            0.66
            
            
            
            118
            
            0.43Municipal
      securities
            
            2,292
            
            16.78
            
            
            
            2,875
            
            20.97
            
            
            
            3,508
            
            12.93Trust
      preferred securities
            
            1,144
            
            8.38
            
            
            
            4,612
            
            33.64
            
            
            
            5,019
            
            18.4912,556
            
            91.95
            
            
            
            12,825
            
            93.54
            
            
            
            25,907
            
            95.46Total
      investment securities
            $
            13,655
            
            100.00
            %
            
            $
            13,710
            
            100.00
            %
            
            $
            27,139
            
            100.00
            %











17




The
following table sets forth the maturities and weighted average yields in the
securities portfolio at March 31, 2009.





Less
      Than One Year
            
            
            
            One
      to Five Years
            
            
            
            More
      Than Five to Ten Years
            
            
            
            More
      Than
              Ten
      YearsAmount
            
            Weighted
      Average
              Yield
      (1)
            
            
            
            Amount
            
            Weighted
      Average
              Yield
      (1)
            
            
            
            Amount
            
            Weighted
      Average
              Yield
      (1)
            
            
            
            Amount
            
            Weighted
      Average
              Yield
      (1)(Dollars
      in thousands)Municipal
      securities
            $
            540
            
            4.30
            %
            
            $
            -
            
            -
            %
            
            $
            1,163
            
            4.90
            %
            
            $
            1,118
            
            4.38
            %Agency
      securities
            
            -
            
            -
            
            
            
            5,054
            
            5.00
            
            
            
            -
            
            -
            
            
            
            -
            
            -REMICs
            
            -
            
            -
            
            
            
            -
            
            -
            
            
            
            261
            
            5.01
            
            
            
            772
            
            1.64FHLMC
      mortgage-backed securities
            
            -
            
            -
            
            
            
            1,483
            
            4.02
            
            
            
            1,828
            
            4.00
            
            
            
            93
            
            4.75FNMA
      mortgage-backed securities
            
            -
            
            -
            
            
            
            4
            
            12.19
            
            
            
            53
            
            6.02
            
            
            
            142
            
            4.54Trust
      preferred securities
            
            -
            
            -
            
            
            
            -
            
            -
            
            
            
            -
            
            -
            
            
            
            1,144
            
            4.25Total
            $
            540
            
            4.30
            %
            
            $
            6,541
            
            4.78
            %
            
            $
            3,305
            
            4.43
            %
            
            $
            3,269
            
            3.70
            %





(1)
            For
      available for sale securities carried at fair value, the weighted average
      yield is computed using amortized
              cost
      without a tax equivalent adjustment for tax-exempt
      obligations.







The
Company does not believe that it has any exposure to sub-prime lending in its
mortgage-backed securities portfolio.





Investment
securities available-for-sale were $8.5 million at March 31, 2009, compared to
$7.5 million at March 31, 2008.  The $1.0 million increase was
attributable to a new $5.0 million agency security purchased, which was offset
by maturities, scheduled cash flows and an impairment charge of $3.4 million.
The investment security that the Company recognized a non-cash impairment charge
on is a trust preferred pooled security issued by other bank holding companies.
Management reviews investment securities quarterly for the presence of other
than temporary impairment (“OTTI”), taking into consideration current market
conditions, the extent and nature of changes in fair value, issuer rating
changes and trends, financial condition of the underlying issuers, current
analysts’ evaluations, the Company’s ability and intent to hold investments
until a recovery of fair value, which may be maturity, as well as other factors.
During the second quarter of fiscal 2009, the investment rating of the security
was lowered from “A1” to “Baa3” by one rating agency, two of the issuers of the
security invoked their original contractual right to defer interest payments and
one issuer of the security defaulted. Although management believes it is
possible that all principal and interest will be received and the Company has
the ability and intention to continue to hold the security until there is a
recovery in value, general market concerns over these and similar types of
securities, as well as the lowering of the investment rating for the security,
caused the fair value to decline severely enough during the second quarter to
warrant an OTTI charge. Using a discounted cash flow approach, we estimated the
security’s fair value to be $1.6 million and recognized a $3.4 million OTTI
charge.





Since the
end of the second quarter, the investment rating of the security was lowered to
“Ca” and seven additional issuers announced their intent to defer interest
payments. At March 31, 2009, actual market prices, or relevant observable
inputs, continued to be unavailable as a result of the secondary market for
trust preferred securities being restricted to a level determined to be
inactive. This determination was made considering the low number of observable
transactions for trust preferred securities or similar CDO securities, the low
number of new issuances for similar securities, the significant increase in
implied liquidity risk premiums, the lack of information that is released
publicly, and from discussions management had with third-party industry
analysts. Therefore, similar to December 31, 2008, the Company determined that
an income approach valuation technique (using cash flows and present value
techniques) that maximizes the use of relevant observable inputs and minimizes
the use of unobservable inputs is more representative of fair value then relying
on the estimation of market value technique used prior to September 30, 2008,
which now has few observable inputs and relies on an inactive market with
distressed sales conditions that would require significant
adjustment.  Management used significant unobservable inputs that
reflect our assumptions of what a market participant would use to price this
security at March 31, 2009. Significant unobservable inputs included selecting
an appropriate discount rate, default rate and repayment assumptions. We
estimated the discount rate by comparing rates for similarly rated corporate
bonds, with additional consideration given to market liquidity. We estimated the
default rates and repayment assumptions based on the individual issuer’s
financial conditions, historical repayment information, as well as our future
expectations of the capital markets. Using this information, we estimated the
fair value of the security at March 31, 2009 and concluded the results warranted
a further write-down of the security by $442,000 to a fair value of $1.1
million.  Additionally, we received two independent








18






Level 3
valuation estimates for this security. Those valuation estimates were based on
proprietary pricing models utilizing significant unobservable
inputs.  Although our estimate of fair value fell within the range of
valuations provided, the magnitude in the range of fair values estimates further
supported the difficulty in estimating the fair value for these types securities
in the current environment.





In April
2009, the FASB issued FASB Staff Position (“FSP”) 115-2 and FAS 124-2 – see
"Item 7.  Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Critical Accounting Policies."  The
Company elected to early adopt FSP 115-2 for the period ended March 31,
2009.  In accordance with the adoption of FSP 115-2, the Company
separated the $3.4 million OTTI charge previously taken into the amount related
to credit losses and the amount related to all other factors.  To
determine the component of OTTI related to credit losses, the Company compared
the amortized cost basis of the security to the present value of the revised
expected cash flows, discounted using the current pre-impairment
yield.  The revised expected cash flow estimates were based primarily
on an analysis of default rates, prepayment speeds and third-party analytical
reports.  In determining the expected default rates and prepayment
speeds, management evaluated, among other things, the individual issuers
financial condition including capital levels, NPA amounts, loan loss reserve
levels, and portfolio composition and concentrations.  As a result of
this analysis, the Company recorded an adjustment, net of taxes, which decreased
accumulated other comprehensive income with a corresponding adjustment to
increase beginning retained earnings totaling $1.5 million at March 31,
2009.





We do not
believe that the OTTI charge that was previously recognized has any other
implications for the Company’s business fundamentals or its outlook. For
additional information on our Level 3 fair value measurements see “Fair Value of
Level 3 Assets” included in Item 7.





Deposit
Activities and Other Sources of Funds





General.  Deposits,
loan repayments and loan sales are the major sources of the Company's funds for
lending and other investment purposes.  Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions.  Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other
sources.  They may also be used on a longer-term basis for general
business purposes.





Deposit
Accounts.  The Company attracts deposits from within its
primary market area by offering a broad selection of deposit instruments,
including demand deposits, negotiable order of withdrawal ("NOW") accounts,
money market accounts, regular savings accounts, certificates of deposit and
retirement savings plans.  Historically, the Company has focused on
retail deposits.  Expansion in commercial lending has led to growth in
business deposits including demand deposit accounts. Business checking accounts
grew $11.2 million to $74.1 million at March 31, 2009 from $62.9 million at
March 31, 2008, an increase of 17.7%.  Deposit account terms vary
according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors.  In
determining the terms of its deposit accounts, the Company considers the rates
offered by its competition, profitability to the Company, matching deposit and
loan products and customer preferences and concerns. The Company generally
reviews its deposit mix and pricing weekly.





The
following table sets forth the balances of deposit accounts offered by the
Company at the dates indicated.





Year
      Ended March 31,2009
            
            
            
            2008
            
            
            
            2007Average
      Balance
            
            Average
              Rate
            
            
            
            Average
      Balance
            
            Average
              Rate
            
            
            
            Average
      Balance
            
            Average
              Rate(Dollars
      in thousands)Non-interest-bearing
      demand
            $
            81,566
            
            0.00
            %
            
            $
            82,776
            
            0.00
            %
            
            $
            91,888
            
            0.00
            %Interest
      checking
            
            86,986
            
            1.13
            
            
            
            129,552
            
            3.02
            
            
            
            139,600
            
            3.17Regular
      savings accounts
            
            27,138
            
            0.55
            
            
            
            27,403
            
            0.55
            
            
            
            32,591
            
            0.55Money
      market accounts
            
            173,853
            
            2.19
            
            
            
            219,528
            
            4.05
            
            
            
            161,590
            
            4.31Certificates
      of deposit
            
            282,055
            
            3.66
            
            
            
            197,049
            
            4.67
            
            
            
            202,506
            
            4.41Total
            $
            651,598
            
            2.34
            %
            
            $
            656,308
            
            3.37
            %
            
            $
            628,175
            
            3.26
            %










19





Deposit
accounts totaled $670.1 million at March 31, 2009 compared to $667.0 million at
March 31, 2008.  The impact of falling interest rates during fiscal
year 2009 has resulted in a shift in customer deposit choices from money market
deposit and interest checking accounts into certificates of
deposit.  As a result the average balance of certificates of deposit
increased $85.0 million to $282.1 million at March 31, 2009, compared to $197.0
million at March 31, 2008.  Conversely, the average balance in money
market and interest checking accounts decreased $88.2 million during this same
period.  During the quarter ended March 31, 2009 customer demand began
to shift back towards money market and interest checking accounts.





Total
wholesale brokered deposits at March 31, 2009 were $19.9 million, or 2.9% of
total deposits compared to $25.7 million, or 3.9% of total deposits, at March
31, 2008.  Customer relationship deposit balances increased a total of
$18.9 million since March 31, 2008.  The increase in deposits resulted
from a continued effort by the Company to increase its core
deposits.  The Company continues to focus deposit growth around
customer relationships as opposed to obtaining deposits through the wholesale
markets.  However, the Company has continued to experience increased
competition for customer deposits within its market area.  Overall,
growth in deposits was dampened by a decrease in the average account balances of
many of our real estate related customers reflecting the slowdown of home sales
and other transaction closings.  Additionally, the Company had $22.7
million in CDARS deposits, which were gathered from customers within the
Company’s primary market-area.  In April 2009, the OTS informed the
Company that it was placing a restriction on the Company’s ability to increase
brokered deposits, including the Company’s reciprocal CDARS
program.





At March
31, 2009 and 2008, deposits from RAMCorp. totaled $29.0 million and $41.4
million, respectively.  These deposits were included in interest
checking accounts and represent assets under management by
RAMCorp.  Additionally, at March 31, 2009 the Company had $7.5 million
of deposit from public entities located in the State of Washington, all of which
was fully covered by FDIC insurance.





Deposit
growth remains a key strategic focus for the Company and our ability to achieve
deposit growth, particularly growth in core deposits, is subject to many risk
factors including the effects of competitive pricing pressures, changing
customer deposit behavior, and increasing or decreasing interest rate
environments.  Adverse developments with respect to any of these risk
factors could limit the Company’s ability to attract and retain deposits and
could have a material negative impact on the Company’s financial condition and
results of operations.





The
following table presents the amount and weighted average rate of certificates of
deposit equal to or greater than $100,000 at March 31, 2009.




Maturity Period
            
            Amount
            
            Weighted
              Average
      Rate(Dollars
      in thousands)Three
      months or less
            $
            58,088
            
            2.52
            %Over
      three through six months
            
            24,624
            
            3.30Over
      six through 12 months
            
            38,566
            
            3.36Over
      12 Months
            
            21,219
            
            3.60Total
            $
            142,497
            
            3.04
            %





Borrowings.  Deposits
are the primary source of funds for the Company's lending and investment
activities and for its general business purposes.  The Company relies
upon advances from the FHLB of Seattle and the Federal Reserve Bank of San
Francisco (“FRB”) to supplement its supply of lendable funds and to meet deposit
withdrawal requirements.  Advances from the FHLB of Seattle and the
FRB are typically secured by the Bank's commercial loans, commercial real estate
loans, first mortgage loans and investment securities.





The FHLB
functions as a central reserve bank providing credit for savings and loan
associations and certain other member financial institutions.  As a
member, the Bank is required to own capital stock in the FHLB and is authorized
to apply for advances on the security of such stock and certain of its mortgage
loans and other assets (principally securities which are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met.  The FHLB determines specific lines of
credit for each member institution and the Bank has a 30% of total assets line
of credit with the FHLB of Seattle to the extent the Bank provides qualifying
collateral and holds sufficient FHLB stock. At March 31, 2009, the Bank had
$37.9 million of outstanding advances from the FHLB of Seattle under an
available credit facility of $276.8 million, which is limited to available
collateral.







20





The
Company also has a borrowing arrangement with the FRB under the
Borrower-In-Custody program.  Under this program, the Bank had an
available credit facility of $182.5 million, subject to pledged collateral, as
of March 31, 2009.  At March 31, 2009, the Bank had $85.0 million of
outstanding advances from the FRB.





The
following tables set forth certain information concerning the Company's FHLB and
FRB borrowings at the dates and for the periods indicated.  All of the
FHLB and FRB advances are scheduled to mature during fiscal year
2010.





At
      March 31,2009
            
            
            
            2008
            
            
            
            2007(Dollars
      in thousands)FHLB
      advances outstanding
            $
            37,850
            
            
            $
            92,850
            
            
            $
            35,050Weighted
      average rate on FHLB advances
            
            2.02
            %
            
            
            3.35
            %
            
            
            5.66
            %FRB
      advances outstanding
            $
            85,000
            
            
            $
            -
            
            
            $
            -Weighted
      average rate on FRB advances
            
            0.25
            %
            
            
            -
            
            
            
            -








Year
      Ended March 31,2009
            
            
            
            2008
            
            
            
            2007(Dollars
      in thousands)Maximum
      amounts of FHLB advances outstanding at any month end
            $
            144,860
            
            
            $
            122,200
            
            
            $
            90,000Average
      FHLB advances outstanding
            
            115,303
            
            
            
            47,769
            
            
            
            68,300Weighted
      average rate on FHLB advances
            
            1.99
            %
            
            
            4.32
            %
            
            
            5.26
            %Maximum
      amounts of FRB advances outstanding at any month end
            $
            85,000
            
            
            $
            -
            
            
            $
            -Average
      FRB advances outstanding
            
            10,000
            
            
            
            -
            
            
            
            -Weighted
      average rate on FRB advances
            
            0.25
            %
            
            
            -
            
            
            
            -





In
addition, the Bank has a Fed Funds borrowing facility with Pacific Coast
Bankers’ Bank with a guideline limit of $10.0 million through June 30,
2009.  The facility may be reduced or withdrawn at any
time.  As of March 31, 2009, the Bank did not have any outstanding
advances on this facility.  See Note 12
of the Notes to Consolidated Financial Statements contained in Item 8 of this
Form 10-K.





At March
31, 2009, the Company had established two wholly-owned subsidiary grantor trusts
totaling $22.7 million for the purpose of issuing trust preferred securities and
common securities.  The trust preferred securities accrue and pay
distributions periodically at specified annual rates as provided in each
indenture.  The trusts used the net proceeds from each of the
offerings to purchase a like amount of junior subordinated debentures (the
“Debentures”) of the Company.  The Debentures are the sole assets of
the trusts.  The Company’s obligations under the Debentures and
related documents, taken together, constitute a full and unconditional guarantee
by the Company of the obligations of the trusts.  The trust preferred
securities are mandatorily redeemable upon maturity of the Debentures, or upon
earlier redemption as provided in the indentures.  The Company has the
right to redeem the Debentures in whole or in part on or after specific dates,
at a redemption price specified in the indentures plus any accrued but unpaid
interest to the redemption date.  The common securities issued by the
grantor trusts were purchased by the Company, and the Company’s investment in
the common securities of $681,000 at March 31, 2009 and 2008 is included in
prepaid expenses and other assets in the Consolidated Balance
Sheets.  See Note 13 of the Notes to the Consolidated Financial
Statements contained in Item 8 of the Form 10-K.





Taxation





For
details regarding the Company’s taxes, see Note 14 of the Notes to the
Consolidated Financial Statements contained in Item 8 of this Form
10-K.





Personnel





As of
March 31, 2009, the Company had 247 full-time equivalent employees, none of whom
are represented by a collective bargaining unit.  The Company believes
its relationship with its employees is good.










21





Corporate
Information





The
Company’s principal executive offices are located at 900 Washington Street,
Vancouver, Washington 98660. Its telephone number is (360) 693-6650. The Company
maintains a website with the address www.riverviewbank.com.
The information contained on the Company’s website is not included as a part of,
or incorporated by reference into, this Annual Report on Form 10-K. Other than
an investor’s own Internet access charges, the Company makes available free of
charge through its website the Annual Report on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K, and amendments to these reports, as
soon as reasonably practicable after it has electronically filed such material
with, or furnished such material to, the Securities and Exchange Commission
(“SEC”).





Subsidiary
Activities





Under OTS
regulations, the Bank is authorized to invest up to 3% of its assets in
subsidiary corporations, with amounts in excess of 2% only if primarily for
community purposes. At March 31, 2009, the Bank’s investments of $1.0 million in
Riverview Services, Inc. (“Riverview Services”), its wholly owned subsidiary,
and $1.9 million in RAMCorp, an 85% owned subsidiary were within these
limitations.





Riverview
Services acts as a trustee for deeds of trust on mortgage loans granted by the
Bank, and receives a reconveyance fee for each deed of trust. Riverview Services
had net income of $29,000 for the fiscal year ended March 31, 2009 and total
assets of $1.0 million at that date. Riverview Services’ operations are included
in the Consolidated Financial Statements of the Company.





RAMCorp
is an asset management company providing trust, estate planning and investment
management services. RAMCorp commenced business in December 1998 and had net
income of $478,000 for the fiscal year ended March 31, 2009 and total assets of
$2.5 million at that date. RAMCorp earns fees on the management of assets held
in fiduciary or agency capacity. At March 31, 2009, total assets under
management totaled $276.6 million. RAMCorp’s operations are included in the
Consolidated Financial Statements of the Company. The decrease in value of
assets under management is primarily attributable to the decline in the stock
market during fiscal year 2009.





Executive
Officers.  The following table sets forth certain information
regarding the executive officers of the Company.





Name
            
            Age(1)
            
            PositionPatrick
      Sheaffer
            
            69
            
            Chairman
      of the Board and Chief Executive OfficerRonald
      A. Wysaske
            
            56
            
            President
      and Chief Operating OfficerDavid
      A. Dahlstrom
            
            58
            
            Executive
      Vice President and Chief Credit OfficerKevin
      J. Lycklama
            
            31
            
            Senior
      Vice President and Chief Financial OfficerJohn
      A. Karas
            
            60
            
            Executive
      Vice PresidentJames
      D. Baldovin
            
            50
            
            Executive
      Vice President Retail Banking


(1)      At
March 31, 2009





Patrick Sheaffer isChairman of the Board
and Chief Executive Officerof the Company and Chief
Executive Officer of the Bank.  Prior to February 2004, Mr. Sheaffer
served as Chairman of the Board, President and Chief Executive Officer of the
Company since inception in 1997. He became Chairman of the Board of the Bank in
1993. Mr. Sheaffer joined the Bank in 1963. He is responsible for leadership and
management of the Company. Mr. Sheaffer is active in numerous professional and
civic organizations.





Ronald A. Wysaske is President
and Chief Operating Officer of the Bank. Prior to February 2004, Mr. Wysaske
served as Executive Vice President, Treasurer and Chief Financial Officer of the
Bank from 1981 to 2004 and of the Company at inception in 1997. He joined the
Bank in 1976. Mr. Wysaske is responsible for daily operations and management of
the Bank. He holds an M.B.A. from Washington State University and is active in
numerous professional, educational and civic organizations.





David A. Dahlstrom is
Executive Vice President and Chief Credit Officer and is responsible for all
Riverview lending divisions related to its commercial, mortgage and consumer
loan activities.  Prior to joining Riverview in May 2002, Mr.
Dahlstrom spent 14 years with First Interstate and progressed through a number
of management positions, including serving as Senior Vice President of the
Business Banking Group in Portland.  In 1999, Mr. Dahlstrom joined a
regional bank as Executive Vice President/Community Banking, responsible for all
branch operations and small business banking.





Kevin J. Lycklamais Senior
Vice President and Chief Financial Officer of the Company.  Prior to
February 2008, Mr. Lycklama served as Vice President and Controller of the Bank
since 2006.  Prior to joining Riverview, Mr. Lycklama spent








22






5 years
with a local public accounting firm advancing to the level of audit
manager.  He is responsible for accounting, SEC reporting as well as
treasury functions for the Bank and the Company.  He holds a Bachelor
of Arts degree from Washington State University and is a certified public
accountant.





John A. Karas is Executive
Vice President of the Bank and also serves as Chairman of the Board, President
and CEO of its subsidiary, RAMCorp.  Mr. Karas has been employed by
the Company since 1999 and has over 20 years of trust experience.  He
is familiar with all phases of the trust business and his experience includes
trust administration, trust legal council, investments and real estate. Mr.
Karas received his B.A. from Willamette University and his Juris Doctor degree
from Lewis & Clark Law School’s Northwestern School of Law.  He is
a member of the Oregon, Multnomah County and American Bar Associations and is a
Certified Trust and Financial Advisor.  Mr. Karas is also active in
numerous civic organizations.





James
D.Baldovin is
Executive Vice President of Retail Banking and is responsible for the Bank’s
branch banking network, customer service, sales and community
development.  Mr. Baldovin has been employed by the Bank since January
2003 and has over 25 years of banking expertise in developing and leading sales
and service cultures. He holds a Bachelor of Arts degree in economics from
Linfield College and is a graduate of the Pacific Coast Banking
School.





REGULATION





The
following is a brief description of certain laws and regulations which are
applicable to the Company and the Bank.  The description of these laws
and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.





Legislation
is introduced from time to time in the United States Congress that may affect
the Company’s operations.  In addition, the regulations governing the
Bank may be amended from time to time by the OTS.  Any such
legislation or regulatory changes in the future could have an adverse
affect.  We cannot predict whether any such changes may
occur.





General





As a
federally chartered savings institution, the Bank is subject to extensive
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the FDIC, as the insurer of its deposits. The Bank is a member of
the FHLB System and its deposit accounts are insured up to applicable limits by
the Deposit Insurance Fund, which is administered by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to evaluate the Bank’s
safety and soundness and compliance with various regulatory requirements. Under
certain circumstances the FDIC may also examine the Bank.  This
regulatory structure is intended primarily for the protection of the insurance
fund and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the
OTS, the FDIC or Congress, could have a material adverse impact on the Company
and the Bank and their operations. The Company, as a savings and loan holding
company, is required to file certain reports with, is subject to examination by,
and otherwise must comply with the rules and regulations of the
OTS.  The Company is also subject to the rules and regulations of the
SEC under the federal securities laws.  See “-- Savings and Loan
Holding Company Regulations.”





Federal
Regulation of Savings Institutions





Office of Thrift
Supervision.  The OTS has extensive authority over the
operations of savings institutions.  As part of this authority, the
Bank is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS. The OTS also has extensive enforcement
authority over all savings institutions and their holding companies, including
the Bank and the Company.  This enforcement authority includes, among
other things, the ability to assess civil money penalties, issue
cease-and-desist or removal orders and initiate prompt corrective action
orders.  In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound
practices.  Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS.  Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required.





In
January 2009, the OTS finalized an informal supervisory agreement, a Memorandum
of Understanding (“MOU”), which was reviewed and approved by the Board on
January 21, 2009.  The MOU restricts certain operations of the Bank
and requires the Bank to maintain a higher level of regulatory
capital.  The Board and Bank management do not believe that this
agreement will constrain the Bank’s business plan and furthermore, we believe
that the Bank is currently in compliance








23






with many
of the requirements through its normal business operations.  These
requirements will remain in effect until modified or terminated by the
OTS.  For more information about the MOU and its impact on the Bank,
see “Item 1A, Risk Factors – Risks Related to Our Business – We are subject to
extensive regulation that could restrict our activities and impose financial
requirements or limitations on the conduct of our business.”





In
addition, the investment, lending and branching authority of the Bank also are
prescribed by federal laws, which prohibit the Bank from engaging in any
activities not permitted by these laws. For example, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS.  Federal savings institutions are generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.





All
savings institutions are required to pay assessments to the OTS to fund the
agency's operations.  The general assessments, paid on a semi-annual
basis, are determined based on the savings institution's total assets, including
consolidated subsidiaries.  The Bank's OTS assessment for the fiscal
year ended March 31, 2009 was $222,000.





The
Bank's general permissible lending limit for loans-to-one-borrower is equal to
the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus).  At
March 31, 2009, the Bank's lending limit under this restriction was $15.1
million and, at that date, the Bank’s largest lending relationship with one
borrower was $11.1 million, which consisted of one commercial construction loan
for $2.6 million and one commercial real estate mortgage loan for $8.5 million,
both of which were performing according to their original terms.





The OTS,
as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits.  Any institution that fails to comply with these standards
must submit a compliance plan.





Federal Home Loan Bank
System.  The Bank is a member of the FHLB of Seattle, which is
one of 12 regional FHLBs that administer the home financing credit function of
savings institutions.  Each FHLB serves as a reserve or central bank
for its members within its assigned region.  It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System.  It makes loans or advances to members in accordance with
policies and procedures, established by the Board of Directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance
Board.  All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB.  In addition, all
long-term advances are required to provide funds for residential home
financing.  See Business – Deposit Activities and Other Sources of
Funds – Borrowings.





As a
member, the Bank is required to purchase and maintain stock in the FHLB of
Seattle.  At March 31, 2009, the Bank had $7.4 million in FHLB stock,
which was in compliance with this requirement.  The Bank received
$51,000 and $55,000 in dividends from the FHLB of Seattle for the years ended
March 31, 2009 and 2008, respectively.





The FHLBs
have continued and continue to contribute to low- and moderately-priced housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing
projects.  These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future.  These
contributions could also have an adverse effect on the value of FHLB stock in
the future.  A reduction in value of the Bank's FHLB stock may result
in a corresponding reduction in the Bank's capital.





Federal Deposit Insurance
Corporation.  The Bank's deposits are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC. Under new legislation, through
December 31, 2013, the insurance limit is $250,000. The Deposit Insurance Fund
is the successor to the Bank Insurance Fund and the Savings Association
Insurance Fund, which were merged effective March 31, 2006. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the fund. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.




The FDIC
assesses deposit insurance premiums on each FDIC-insured institution quarterly
based on annualized rates for four risk categories applied to its deposits,
subject to certain adjustments. Each institution is assigned to one of four risk
categories based on its capital, supervisory ratings and other factors. Well
capitalized institutions that are financially sound








24






with only
a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III
and IV present progressively greater risks to the DIF. Under FDIC’s risk-based
assessment rules, effective April 1, 2009, the initial base assessment rates
prior to adjustments range from 12 to 16 basis points for Risk Category I,
and  are 22 basis points for Risk Category II, 32 basis points for
Risk Category III, and 45 basis points for Risk Category IV.  Initial
base assessment rates are subject to adjustments based on an institution’s
unsecured debt, secured liabilities and brokered deposits, such that the total
base assessment rates after adjustments range from 7 to 24 basis points for Risk
Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points
for Risk Category III, and 40 to 77.5 basis points for Risk Category
IV.  The rule also includes authority for the FDIC to increase or
decrease total base assessment rates in the future by as much as three basis
points without a formal rulemaking proceeding.  In addition to the
regular quarterly assessments, due to losses and projected losses attributed to
failed institutions, the FDIC has adopted a rule imposing a special assessment
of 5 basis points on the amount of each depository institution’s assets reduced
by the amount of its Tier 1 capital (not to exceed 10 basis points of its
assessment base for regular quarterly premiums) as of June 30, 2009, to be
collected on September 30, 2009.  The special assessment rule also
permits the FDIC to impose two additional special assessments, each of the same
amount or less, based on assets, capital and deposits as of September 30, 2009
and December 31, 2009, to be collected, respectively, on December 31, 2009 and
March 30, 2010.  The FDIC has announced that the first of the
additional special assessments is probable and the second is less
certain.





The FDIC
has authority to increase insurance assessments. A significant increase in
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank. There can be no prediction as to what
insurance assessment rates will be in the future. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. Management of the Bank is not aware of
any practice, condition or violation that might lead to termination of the
Bank’s deposit insurance.





In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and during the fiscal year ending March 31, 2009 averaged 1.12 basis
points of assessable deposits. The Financing Corporation was chartered in 1987,
by the FHLB board solely for the purpose of functioning as a vehicle for the
recapitalization of the Federal Savings and Loan Insurance
Corporation.





Prompt Corrective
Action.  The OTS is required to take certain supervisory
actions against undercapitalized savings institutions, the severity of which
depends upon the institution's degree of
undercapitalization.  Generally, an institution that has a ratio of
total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4%, or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized."  An
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and an institution that has a
tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized."  Subject to a narrow exception, the OTS
is required to appoint a receiver or conservator for a savings institution that
is "critically undercapitalized."  OTS regulations also require that a
capital restoration plan be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  “Significantly undercapitalized” and “critically
undercapitalized” institutions are subject to more extensive mandatory
regulatory actions.  The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.  At
March 31, 2009, the Bank’s capital ratios met the "well capitalized"
standards.





Qualified Thrift Lender
Test.  All savings institutions, including the Bank, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations.  This test requires a savings
institution to have at least 65% of its total assets, as defined by regulation,
in qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis.  As an alternative, the savings institution
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code ("Code").  Under either test, such assets
primarily consist of residential housing related loans and
investments.





A savings
institution that fails to meet the QTL is subject to certain operating
restrictions and may be required to convert to a national bank charter. As of
March 31, 2009, the Bank maintained 68.75% of its portfolio assets in qualified
thrift investments and, therefore, met the qualified thrift lender
test.










25









Capital
Requirements. Federally insured savings institutions, such as the
Bank, are required by the OTS to maintain minimum levels of regulatory
capital.  These minimum capital standards include: a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards,
discussed above, also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS system) and, together with the risk-based capital standard itself,
a 4% Tier 1 risk-based capital standard. The OTS regulations also require that,
in meeting the tangible, leverage and risk-based capital standards, institutions
must generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national
bank.





The
risk-based capital standard requires federal savings institutions to maintain
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight factor
of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Tier 1 (core) capital is defined as
common stockholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core
capital.





The OTS
also has authority to establish individual minimum capital requirements for
financial institutions. As previously discussed, in January 2009, the Bank
entered into an MOU with the OTS which requires the Bank to achieve and maintain
capital levels in excess of the minimum capital standards required under OTS’s
Prompt Corrective Actions.  Under the MOU, the Bank must achieve and
maintain Tier 1 (core) leverage ratio of 8% and total risk-based capital ratio
of 12%.  For additional information, see “Item 1A, Risk Factors –
Risks Related to Our Business – We are subject to extensive regulation that
could restrict our activities and impose financial requirements or limitations
on the conduct of our business” and Note 17 of the Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.





Limitations on Capital
Distributions.  OTS regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital
account.  Generally, savings institutions, such as the Bank, that
before and after the proposed distribution are well-capitalized, may make
capital distributions during any calendar year equal to up to 100% of net income
for the year-to-date plus retained net income for the two preceding
years.  However, an institution deemed to be in need of more than
normal supervision by the OTS, such as the Bank, may have its dividend authority
restricted by the OTS.  In accordance with the provisions of the MOU,
the Bank may not pay dividends to the Company without prior approval of the
OTS.





Generally,
savings institutions proposing to make any capital distribution need not submit
written notice to the OTS prior to such distribution unless they are a
subsidiary of a holding company or would not remain well capitalized following
the distribution.  Savings institutions that do not, or would not meet
their current minimum capital requirements following a proposed capital
distribution or propose to exceed these net income limitations, must obtain OTS
approval prior to making such distribution.  The OTS may object to the
distribution during that 30-day period based on safety and soundness
concerns.  See "- Capital Requirements."





Emergency Economic Stabilization Act
of 2008 (“EESA”).In October 2008, the EESA was
enacted.  The EESA authorizes the Treasury Department to purchase from
financial institutions and their holding companies up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program
(“TARP”).  The purpose of TARP is to restore confidence and stability
to the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other.  Under the TARP Capital
Purchase Program (“CPP”), the Treasury will purchase debt or equity securities
from participating institutions.  The TARP also will include direct
purchases or guarantees of troubled assets of financial
institutions.  Participants in the CPP are subject to executive
compensation limits and are encouraged to expand their lending and mortgage loan
modifications.  The Company has not received funds from, nor
anticipated participating in the TARP CPP.











26






The American Recovery and
Reinvestment Act of 2009.On February 17, 2009, President
Obama signed The American Recovery and Reinvestment Act of 2009 (“ARRA”) into
law.  The ARRA is intended to revive the US economy by creating
millions of new jobs and stemming home foreclosures.  For financial
institutions that have received or will receive financial assistance under TARP
or related programs, the ARRA significantly rewrites the original executive
compensation and corporate governance provisions of Section 111 of the
EESA.  Among the most important changes instituted by the ARRA are new
limits on the ability of TARP recipients to pay incentive compensation to up to
20 of the next most highly-compensated employees in addition to the “senior
executive officers,” a restriction on termination of employment payments to
senior executive officers and the five next most highly-compensated employees
and a requirement that TARP recipients implement “say on pay” shareholder
votes.   Further legislation is anticipated to be passed with
respect to the economic recovery.  However, the executive compensation
limitations contained in the ARRA will not have any effect on the Company since
it elected not to participate in the TARP CPP.





In
February 2009, the Administration also announced its Financial Stability Plan
and Homeowners Affordability and Stability Plan (“HASP”). The Financial
Stability Plan is the second phase of TARP, to be administrated by the Treasury.
Its four key elements include:





•
            the
      development of a public/private investment fund essentially structured as
      a government sponsored enterprise with the mission to purchase troubled
      assets from banks with an initial capitalization from government
      funds;





•
            the
      Capital Assistance Program under which the Treasury will purchase
      additional preferred stock available only for banks that have undergone a
      new stress test given by their
regulator;





•
            an
      expansion of the Federal Reserve’s term asset-backed liquidity facility to
      support the purchase of up to $1 trillion in AAA–rated asset backed
      securities backed by consumer, student, and small business loans, and
      possible other types of loans; and





•
            the
      establishment of a mortgage loan modification program with $50 billion in
      federal funds further detailed in the
HASP.





The HASP
is a program aimed to help seven to nine million families restructure their
mortgages to avoid foreclosure. The plan also develops guidance for loan
modifications nationwide. HASP provides programs and funding for eligible
refinancing of loans owned or guaranteed by Fannie Mae or Freddie Mac, along
with incentives to lenders, mortgage servicers, and borrowers to modify
mortgages of “responsible” homeowners who are at risk of defaulting on their
mortgage. The goals of HASP are to assist in the prevention of home foreclosures
and to help stabilize falling home prices.





These
programs are not expected to have any direct impact on the Company since it is
currently not a participant in the TARP CPP.  The Company will benefit
from these programs if they help stabilize the national banking system and aid
in the recovery of the housing market.





Initiatives Prompted by the
Subprime Mortgage Crisis.  In response to the recent subprime
mortgage crisis, federal and state regulatory agencies have focused attention on
subprime and nontraditional mortgage products both with an aim toward enhancing
the regulation of such loans and providing relief to adversely affected
borrowers.





Guidance on Subprime Mortgage
Lending.On July 10, 2007, the federal banking agencies issued
guidance on subprime mortgage lending to address issues related to certain
mortgage products marketed to subprime borrowers, particularly adjustable rate
mortgage products that can involve “payment shock” and other risky
characteristics.  Although the guidance focuses on subprime borrowers,
the banking agencies note that institutions should look to the principles
contained in the guidance when offering such adjustable rate mortgages to
non-subprime borrowers.  The guidance prohibits predatory lending
programs; provides that institutions should underwrite a mortgage loan on the
borrower’s ability to repay the debt by its final maturity at the fully-indexed
rate, assuming a fully amortizing repayment schedule; encourages reasonable
workout arrangements with borrowers who are in default; mandates clear and
balanced advertisements and other communications; encourages arrangements for
the escrowing of real estate taxes and insurance; and states that institutions
should develop strong control and monitoring systems.  The guidance
recommends that institutions refer to the Real Estate Lending Standards
(discussed above) which provide underwriting standards for all real estate
loans.





The
federal banking agencies announced their intention to carefully review the risk
management and consumer compliance processes, policies and procedures of their
supervised financial institutions and their intention to take action against
institutions that engage in predatory lending practices, violate consumer
protection laws or fair lending laws, engage in unfair or deceptive acts or
practices, or otherwise engage in unsafe or unsound lending
practices.










27







Guidance on Loss Mitigation
Strategies for Servicers of Residential Mortgages.On September 4, 2007,
the federal banking agencies issued a statement encouraging regulated
institutions and state-supervised entities that service residential mortgages to
pursue strategies to mitigate losses while preserving homeownership to the
extent possible and appropriate.  The guidance recognizes that many
mortgage loans, including subprime loans, have been transferred into
securitization trusts and servicing for such loans is governed by contract
documents. The guidance advises servicers to review governing documentation to
determine the full extent of their authority to restructure loans that are
delinquent or are in default or are in imminent risk of default.





The
guidance encourages loan servicers to take proactive steps to preserve
homeownership in situations where there are heightened risks to homeowners
losing their homes to foreclosures. Such steps may include loan modification;
deferral of payments; extensions of loan maturities; conversion of adjustable
rate mortgages into fixed rate or fully indexed, fully amortizing adjustable
rate mortgages; capitalization of delinquent amounts; or any combination of
these actions.  Servicers are instructed to consider the borrower’s
ability to repay the modified obligation to final maturity according to its
terms, taking into account the borrower’s total monthly housing-related payments
as a percentage of the borrower’s gross monthly income, the borrower’s other
obligations, and any additional tax liabilities that may result from loan
modifications.  Where appropriate, servicers are encouraged to refer
borrowers to qualified non-profit and other homeownership counseling services
and/or to government programs that are able to work with all parties and avoid
unnecessary foreclosures.  The guidance states that servicers are
expected to treat consumers fairly and to adhere to all applicable legal
requirements.





Relief for Homeowners.In
October 2007, the Treasury helped to facilitate the creation of the HOPE NOW
Alliance, a private sector coalition formed to encourage mortgage servicers,
mortgage counselors, government officials and non-profit groups to coordinate
their efforts to help struggling borrowers restructure their mortgage payments
and stay in their homes.  HOPE NOW is aimed at coordinating and
improving outreach to borrowers, developing best practices for mortgage
counselors across the country and ensuring that groups able to help homeowners
work out new loan arrangements with lenders have adequate resources to carry out
this mission.  Treasury has worked with other agencies and HOPE NOW to
create a stream-lined loan modification program.  In October 2003, HUD
implemented Hope for Homeowners, a voluntary FHA program for refinancing
affordable home mortgages.





Housing and Economic Recovery Act of
2008.The Housing and Economic Recovery Act of 2008, signed by President
Bush on July 30, 2008, was designed to address a variety of issues relating to
the subprime mortgage crises.  This act established a new maximum
conforming loan limit for Fannie Mae and Freddie Mac in high cost areas to 150%
of the conforming loan limit of $417,000 to take effect after December 31, 2008.
The FHA’s maximum conforming loan limit has been increased from 95% to 110% of
the area median home price up to 150% of the Fannie Mae/Freddie Mac conforming
loan limit, to take effect at the same time.  Among other things, the
Housing and Economic Recovery Act of 2008 enhanced the regulation of Fannie Mae,
Freddie Mac and Federal Housing Administration loans; established a new Federal
Housing Finance Agency to replace the prior Federal Housing Finance Board and
Office of Federal Housing Enterprise Oversight; will require enhanced mortgage
disclosures; and will require a comprehensive licensing, supervisory, and
tracking system for mortgage originators.  Using its new powers, on
September 7, 2008 the Federal Housing Finance Agency announced that it had put
Fannie Mae and Freddie Mac under conservatorship. The Housing and Economic
Recovery Act of 2008 also establishes the HOPE for Homeowners program, which is
a new, temporary, voluntary program to back Federal Housing
Administration-insured mortgages to distressed borrowers. The new mortgages
offered by Federal Housing Administration-approved lenders will refinance
distressed loans at a significant discount for owner-occupants at risk of losing
their homes to foreclosure.





New Regulations Establishing
Protections for Consumers in the Residential Mortgage Market.The Federal
Reserve Board has issued new regulations under the federal Truth-in-Lending Act
and the Home Ownership and Equity Protection Act.  For mortgage loans
governed by the Home Ownership and Equity Protection Act, the new regulations
further restrict prepayment penalties, and enhance the standards relating to the
consumer’s ability to repay.  For a new category of closed-end
“higher-priced” mortgage loans, the new regulations restrict prepayment
penalties, and require escrows for property taxes and property-related insurance
for most first lien mortgage loans.  For all closed-end loans secured
by a principal dwelling, the new regulations prohibit the coercion of
appraisers; require the prompt crediting of payments; prohibit the pyramiding of
late fees; require prompt responses to requests for pay-off figures; and require
the delivery of transaction-specific Truth-in-Lending Act disclosures are to be
provided within three business days following the receipt of an application for
a closed-end home loan.  The new regulations also impose new
restrictions on mortgage loan advertising for both open-end and closed-end
products.  In general, the new regulations are effective October 1,
2009, but the rules governing escrows for higher-priced mortgages are effective
on April 1, 2010, and for higher-priced mortgage loans secured by manufactured
housing, on October 1, 2010.










28







Pending Legislation and Regulatory
Proposals.As a result of the credit crisis and current financial
conditions, federal and state legislators and agencies are considering a broad
variety of legislative and regulatory proposals covering lending products, loan
terms and underwriting standards, risk management practices, supervision and
consumer protection.  It is unclear which, if any, of these
initiatives will be adopted, what effect they will have on the Company or the
Bank and whether any of these initiatives will change the competitive landscape
in the banking  industry.





Guidance on Nontraditional Mortgage
Product Risks.On September 29, 2006, the federal banking agencies issued
guidance to address the risks posed by nontraditional residential mortgage
products, that is, mortgage products that allow borrowers to defer repayment of
principal or interest. The guidance instructs institutions to ensure that loan
terms and underwriting standards are consistent with prudent lending practices,
including consideration of a borrower’s ability to repay the debt by final
maturity at the fully indexed rate and assuming a fully amortizing repayment
schedule; requires institutions to recognize, for higher risk loans, the
necessity of verifying the borrower’s income, assets and liabilities; requires
institutions to address the risks associated with simultaneous second-lien
loans, introductory interest rates, lending to subprime borrowers,
non-owner-occupied investor loans, and reduced documentation loans; requires
institutions to recognize that nontraditional mortgages, particularly those with
risk-layering features, are untested in a stressed environment; requires
institutions to recognize that nontraditional mortgage products warrant strong
controls and risk management standards, capital levels commensurate with that
risk, and allowances for loan and lease losses that reflect the collectibility
of the portfolio; and ensure that consumers have sufficient information to
clearly understand loan terms and associated risks prior to making product and
payment choices. The guidance recommends practices for addressing the risks
raised by nontraditional mortgages, including enhanced communications with
consumers, beginning when the consumer is first shopping for a mortgage;
promotional materials and other product descriptions that provide information
about the costs, terms, features and risks of nontraditional mortgages,
including with respect to payment shock, negative amortization, prepayment
penalties, and the cost of reduced documentation loans; more informative monthly
statements for payment option adjustable rate mortgages; and specified practices
to avoid. Subsequently, the federal banking agencies produced model disclosures
that are designed to provide information about the costs, terms, features and
risks of nontraditional mortgages.





Guidance on Real Estate
Concentrations.On December 6, 2006, the federal banking
agencies issued  guidance on sound risk management practices for
concentrations in commercial real estate lending.  The particular
focus is on exposure to commercial real estate loans that are dependent on the
cash flow from the real estate held as collateral and that are likely to be
sensitive to conditions in the commercial real estate market (as opposed to real
estate collateral held as a secondary source of repayment or as an abundance of
caution).  The purpose of the guidance is not to limit a bank’s
commercial real estate lending but to guide banks in developing risk management
practices and capital levels commensurate with the level and nature of real
estate concentrations.  The FDIC and other bank regulatory agencies
will be focusing their supervisory resources on institutions that may have
significant commercial real estate loan concentration risk.  A bank
that has experienced rapid growth in commercial real estate lending, has notable
exposure to a specific type of commercial real estate loan, or is approaching or
exceeding the following supervisory criteria may be identified for further
supervisory analysis with respect to real estate concentration
risk:





•
            Total
      reported loans for construction, land development and other land represent
      100% or more of the bank’s capital;
or





•
            Total
      commercial real estate loans (as defined in the guidance) represent 300%
      or more of the bank’s total capital and the outstanding balance of the
      bank’s commercial real estate loan portfolio has increased 50% or more
      during the prior 36 months.





The
guidance provides that the strength of an institution’s lending and risk
management practices with respect to such concentrations will be taken into
account in the supervisory evaluation of capital adequacy.





On March
17, 2008, the FDIC issued a release to re-emphasize the importance of strong
capital and loan loss allowance levels and robust credit risk management
practices for institutions with concentrated commercial real estate
exposures.  The FDIC suggested that institutions with significant
construction and development and commercial real estate loan concentrations
increase or maintain strong capital levels; ensure that loan loss allowances are
appropriately strong; manage construction and development and commercial real
estate loan portfolios closely; maintain updated financial and analytical
information on their borrowers and collateral; and bolster the loan workout
infrastructure.








29





Temporary Liquidity Guaranty
Program. Following a systemic risk determination, the FDIC established
its Temporary Liquidity Guarantee Program (“TLGP”) in October,
2008.  Under the interim rule for the TLGP, there are two parts to the
program: the Debt Guarantee Program (“DGP”) and the Transaction Account
Guarantee Program (“TAGP”).   Eligible entities are participants
unless they opted out on or before December 5, 2008.





For the
DGP, eligible entities are generally US bank holding companies, savings and loan
holding companies, and FDIC-insured institutions. Under the DGP, the FDIC
guarantees new senior unsecured debt, and with special approval certain
convertible debt of an eligible entity issued not later than October 31, 2009.
The guarantee is effective through the earlier of the maturity date or June 30,
2012 (for debt issued before April 1, 2009) or December 31, 2012 (for debt
issued on or after April 1, 2009). The DGP coverage limit is generally 125% of
the eligible entity’s eligible debt outstanding on September 30, 2008 and
scheduled to mature on or before June 30, 2009, or for certain institutions, 2%
of liabilities as of September 30, 2008.  The nonrefundable DGP fee
ranges from 50 to 100 basis points (annualized), depending on maturity, for
covered debt outstanding during the period until the earlier of maturity or June
30, 2012, with various surcharges of 10 to 50 basis points applicable to debt
with a maturity of one year or more issued on or after April 1, 2009. Generally,
eligible debt of a participating entity becomes covered when and as issued until
the coverage limit is reached, except that under some circumstances,
participating entities can issue nonguaranteed debt. Various features of the
program require applications and approvals. The Bank and the Company participate
in the DGP, however, no such debt has been issued as of March 31,
2009.





For the
TAGP, eligible entities are FDIC-insured institutions. Under the TAGP, the FDIC
provides unlimited deposit insurance coverage through December 31, 2009 for
noninterest-bearing transaction accounts (typically business checking accounts),
NOW accounts bearing interest at 0.5% or less, and certain funds swept into
noninterest-bearing savings accounts.  NOW accounts and money market
deposit accounts are not covered.  Participating institutions pay fees
of 10 basis points (annualized) on the balance of each covered account in excess
of $250,000.  The Bank participates in the TAGP.





Activities of Associations and their
Subsidiaries.  When a savings institution establishes or
acquires a subsidiary or elects to conduct any new activity through a subsidiary
that the association controls, the savings institution must file a notice or
application with the FDIC and the OTS at least 30 days in advance and receive
regulatory approval or non-objection.  Savings institutions also must
conduct the activities of subsidiaries in accordance with existing regulations
and orders.





The OTS
may determine that the continuation by a savings institution of its ownership
control of, or its relationship to, the subsidiary constitutes a serious risk to
the safety, soundness or stability of the association or is inconsistent with
sound banking practices or with the purposes of the FDIC.  Based upon
that determination, the FDIC or the OTS has the authority to order the savings
institution to divest itself of control of the subsidiary.  The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the Deposit Insurance Fund.  If so, it may require
that no FDIC insured institution engage in that activity directly.





Transactions with
Affiliates. The Bank’s authority to engage in transactions with
“affiliates” is limited by OTS regulations and by Sections 23A and 23B of the
Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W.
The term “affiliates” for these purposes generally means any company that
controls or is under common control with an institution. The Company and its
non-savings institution subsidiaries are affiliates of the Bank. In general,
transactions with affiliates must be on terms that are as favorable to the
institution as comparable transactions with non-affiliates. In addition, certain
types of transactions are restricted to an aggregate percentage of the
institution’s capital. Collateral in specified amounts must be provided by
affiliates in order to receive loans from an institution. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.





The
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act")generally prohibits a company from making loans to its executive officers
and directors. However, that act contains a specific exception for loans by a
depository institution to its executive officers and directors in compliance
with federal banking laws. Under such laws, the Bank’s authority to extend
credit to executive officers, directors and 10% stockholders of the Bank and its
affiliates (“insiders”), as well as entities such persons control is limited.
The law restricts both the individual and aggregate amount of loans the Bank may
make to insiders based, in part, on the Bank’s capital position and requires
certain Board approval procedures to be followed. Such loans must be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. There are additional restrictions applicable to
loans to executive officers.








30





Community Reinvestment
Act. Under the Community Reinvestment Act (“CRA”), every
FDIC-insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income
neighborhoods.  The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
CRA.  The CRA requires the OTS, in connection with the examination of
the Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the
Bank.  An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.  Due to the heightened attention
being given to the CRA in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local
community.  The Bank was examined for CRA compliance and received a
rating of outstanding in its latest examination.





Enforcement. The OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including shareholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution.  Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of
officers or directors, receivership, conservatorship or termination of deposit
insurance.  Civil penalties cover a wide range of violations and can
range from $25,000 to $1.1 million per day.  The FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution.  If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances.  Federal law also establishes criminal
penalties for certain violations.





Standards for Safety and
Soundness.  As required by statute, the federal banking
agencies have adopted Interagency Guidelines prescribing Standards for Safety
and Soundness. The guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the OTS determines
that a savings institution fails to meet any standard prescribed by the
guidelines, the OTS may require the institution to submit an acceptable plan to
achieve compliance with the standard.





Environmental Issues Associated with
Real Estate Lending.  The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), a federal statute, generally imposes
strict liability on all prior and present "owners and operators" of sites
containing hazardous waste.  However, Congress asked to protect
secured creditors by providing that the term "owner and operator" excludes a
person whose ownership is limited to protecting its security interest in the
site.  Since the enactment of the CERCLA, this "secured creditor
exemption" has been the subject of judicial interpretations which have left open
the possibility that lenders could be liable for cleanup costs on contaminated
property that they hold as collateral for a loan.  In addition, we may
be subject to environmental liabilities with respect to real estate properties
that are placed in foreclosure that we subsequently take title
to.  See Item 1A, “Risk Factors – Our real estate lending also exposes
us to the risk of environmental liabilities.”





To the
extent that legal uncertainty exists in this area, all creditors, including the
Bank, that have made loans secured by properties with potential hazardous waste
contamination (such as petroleum contamination) could be subject to liability
for cleanup costs, which could substantially exceed the value of the collateral
property.





Privacy
Standards.  The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), which was enacted in 1999, modernized the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers.   The Bank is subject to OTS
regulations implementing the privacy protection provisions of the GLBA. These
regulations require the Bank to disclose its privacy policy, including
identifying with whom it shares "non-public personal information," to customers
at the time of establishing the customer relationship and annually
thereafter.





Anti-Money Laundering and Customer
Identification.  Congress enacted the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the "USA Patriot Act") on October 26, 2001 in response to
the terrorist events of September 11, 2001. The USA Patriot Act gives the
federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased information
sharing, and broadened anti-money laundering requirements. In March 2007,
Congress re-enacted certain expiring provisions of the USA Patriot
Act.








31





Savings
and Loan Holding Company Regulations





General. The Company is a
unitary savings and loan holding company subject to regulatory oversight of the
OTS.  Accordingly, the Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to present a serious risk to the subsidiary
savings institution.





Activities
Restrictions. The GLBA provides that no company may acquire control
of a savings association after May 4, 1999 unless it engages only in the
financial activities permitted for financial holding companies under the law or
for multiple savings and loan holding companies as described below. Further, the
GLBA specifies that, subject to a grandfather provision, existing savings and
loan holding companies may only engage in such activities. The Company qualifies
for the grandfathering and is therefore not restricted in terms of its
activities. Upon any non-supervisory acquisition by the Company of another
savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be limited to activities
permitted multiple holding companies by OTS regulation. OTS has issued an
interpretation concluding that multiple savings holding companies may also
engage in activities permitted for financial holding companies, including
lending, trust services, insurance activities and underwriting, investment
banking and real estate investments.





Mergers and Acquisitions. The
Company must obtain approval from the OTS before acquiring more than 5% of the
voting stock of another savings institution or savings and loan holding company
or acquiring such an institution or holding company by merger, consolidation or
purchase of its assets.  In evaluating an application for the Company
to acquire control of a savings institution, the OTS would consider the
financial and managerial resources and future prospects of the Company and the
target institution, the effect of the acquisition on the risk to the Deposit
Insurance Fund, the convenience and the needs of the community and competitive
factors.





The OTS
may not approve any acquisition that would result in a multiple savings and loan
holding company controlling savings institutions in more than one state, subject
to two exceptions; (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company
acquisitions.




Acquisition of the
Company.Under
the Savings and Loan Holding Company Act and the Change in Bank Control Act, a
notice or application must be submitted to the OTS if any person (including a
company), or a group acting in concert, seeks to acquire 10% or more of the
Company’s outstanding voting stock, unless the OTS has found that the
acquisition will not result in a change in control of the Company. In acting on
such a notice or application, the OTS must take into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effect of the acquisition. Any company that acquires control will
be subject to regulation as a savings and loan holding company.





Sarbanes-Oxley Act of
2002.  The Sarbanes-Oxley Act of 2002 (“SOX Act”) was signed
into law on July 30, 2002 in response to public concerns regarding corporate
accountability in connection with recent accounting scandals. The stated goals
of the SOX Act are to increase corporate responsibility, to provide for enhanced
penalties for accounting and auditing improprieties at publicly traded companies
and to protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The SO Act generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the SEC under the Securities Exchange Act of 1934, including the
Company.





The SOX
Act includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and securities exchanges to adopt extensive
additional disclosure, corporate governance and related rules.  The
SOX Act represents significant federal involvement in matters traditionally left
to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship between a board
of directors and management and between a board of directors and its
committees.





Item1A.  Risk
Factors





An investment in our common stock is
subject to risks inherent in our business.  Before making an
investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included in this
report.  In addition to the risks and uncertainties described below,otherrisks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially and adversely affect our business, financial condition and results of
operations. The value or
market price of our common stock could decline due to any of these identified or
other risks, and you could lose all or part of your
investment.





32





Risks
Related to the U.S. Financial Industry





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 resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities, major commercial and investment banks, and
regional financial institutions such as our Company.  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 have adversely affected 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 us and others in the financial
institutions industry.  In particular, we may face the following risks
in connection with these events:





•
            We
      potentially 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 approaches 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 loan and investment
      portfolios requires difficult, subjective and complex judgments, including
      forecasts of economic conditions and how these economic conditions might
      impair the ability of our borrowers and trust preferred securities issuers
      to repay their debts.  The level of uncertainty concerning
      economic conditions may adversely affect the accuracy of our estimates
      which may, in turn, impact the reliability of the
  process.





•
            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 FDIC premiums because market
      developments have significantly depleted the insurance fund of the FDIC
      and reduced the ratio of reserves to insured
  deposits.





Risks
Related to our Business





We
are currently considering raising additional capital which may dilute your
ownership interest.  In addition, as a result of market conditions and
other factors that may not be available to us.





We are
required by federal regulatory authorities to maintain adequate levels of
capital to support our operations.  In this regard, as part of our
strategic planning; we are currently considering raising additional
capital.  We anticipate that this capital will be raised through
non-government sources for the purpose of increasing our capital position and
achieving compliance with the additional capital requirements contained in the
MOU.  This additional capital would also be available to support our
future acquisitions.  We do not, however, have any plans arrangements
or understandings regarding any acquisition transactions.  We have not
decided on the type of securities we will issue but it may include common stock,
preferred stock, warrants or a combination of these obligations.





There can
be no assurance that we will be successful in our efforts to raise additional
capital. Our ability to raise additional capital, if needed, will depend on
conditions in the capital markets, economic conditions and a number of other
factors, many of which are outside our control, and on our financial
performance. If we are able to raise additional capital, it would likely be on
terms that are dilutive to our current common shareholders. If we cannot raise
additional capital when needed, it may have a material adverse effect on our
financial condition, results of operations and prospects.





Current
levels of market volatility are unprecedented.





The
capital and credit markets have been experiencing volatility and disruption for
more than a year, reaching unprecedented levels.  In some cases, the
markets have produced downward pressure on stock prices and credit availability
for certain issuers without regard to those issuers underlying financial
strength.  If current levels of market disruption and volatility
continue or worsen, our ability to access capital may be adversely affected,
which in turn could adversely affect our business, financial condition and
results of operations.










33





We
are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our
business.





We are
subject to extensive examination, supervision and comprehensive regulation by
the OTS, the FDIC and the Federal Reserve Board. Our compliance with these
regulations is costly and may restrict certain activities, including but not
limited to, payment of dividends, mergers and acquisitions, investments, loans
and interest rates charged, interest rates paid on deposits, access to capital
and brokered deposits and location of banking offices. If we were unable to meet
these or other regulatory requirements, our financial condition, liquidity and
results of operations would be materially and adversely affected.





We must
also meet regulatory capital requirements imposed by our
regulators.  In January 2009, the Bank entered into a MOU with the
OTS. Under that agreement, the Bank must, among other things, develop a plan for
achieving and maintaining a minimum Tier 1 Capital (Leverage) Ratio of 8% and a
minimum Total Risk-Based Capital Ratio of 12%, compared to its current minimum
Tier 1 Capital (Leverage) Ratio of 4% and Total Risk-Based Capital Ratio of
8%.  As of March 31, 2009, the Bank’s leverage ratio was 9.50% (1.50%
over the new required minimum) and its risk based capital ratio was 11.46%
(0.54% less than the new required minimum).





Our business is subject to various
lending risks that could adversely impact our results of operations and
financial condition.





Our emphasis on commercial lending
may expose us to increased lending risks.Our current business strategy
is focused on the expansion of commercial real estate and commercial business
lending.  These types of lending activities, while potentially more
profitable than single-family residential lending, are generally more sensitive
to regional and local economic conditions, making loss levels more difficult to
predict.  Collateral evaluation and financial statement analysis in
these types of loans requires a more detailed analysis at the time of loan
underwriting and on an ongoing basis.  In our primary market of southwest
Washington and northwest Oregon, the housing market has slowed, with weaker
demand for housing, higher inventory levels and longer marketing
times.  A further downturn in housing, or the real estate market,
could increase loan delinquencies, defaults and foreclosures, and significantly
impair the value of our collateral and our ability to sell the collateral upon
foreclosure.  In addition, these loans generally expose a lender to
greater risk of non-payment and loss because repayment of the loans often
depends on the successful operation of the property and the income stream of the
borrowers.  Further, such loans typically involve larger loan balances
to single borrowers or groups of related borrowers. Also, many of our commercial
borrowers have more than one loan outstanding with us.  Consequently,
an adverse development with respect to one loan or one credit relationship can
expose us to a significantly greater risk of loss. Accordingly, when there are
defaults and losses on these types of loans, they are often larger on a per loan
basis than those for permanent single-family or consumer loans.  A
secondary market for most types of commercial real estate and construction loans
is not readily liquid, so we have less opportunity to mitigate credit risk by
selling part or all of our interest in these loans.





Our commercial real estate mortgage
loans involve higher principal amounts than other loans and repayment of these
loans may be dependent on factors outside our control or the control of our
borrowers.At March 31, 2009, we had $447.7 million of
commercial real estate mortgage loans, representing 55.88% of our total loan
portfolio.  We originate commercial real estate mortgage loans for
individuals and businesses for various purposes, which are secured by commercial
properties.  The credit risk related to commercial real estate
mortgage loans is considered to be greater than the risk related to one-to-four
family residential or other consumer loans because the repayment of these loans
typically is dependent on the income stream of the real estate securing the loan
as collateral and the successful operation of the borrower’s business, which can
be significantly affected by conditions in the real estate markets or in the
economy.  For example, if the cash flow from the borrower’s project is
reduced as a result of leases not being obtained or renewed, the borrower’s
ability to repay the loan may be impaired.  In addition, many of these
loans are not fully amortizing and contain large balloon payments upon
maturity.  These balloon payments may require the borrower to either sell
or refinance the underlying property in order to make the balloon
payment.





If we
foreclose on these loans, our holding period for the collateral typically is
longer than for one-to-four family residential mortgage loans because there are
fewer potential purchasers of the collateral.  Additionally, these
loans generally have relatively large balances to single borrowers or related
groups of borrowers.  Accordingly, if we make any errors in judgment
in the collectibility of our commercial real estate mortgage loans, any
resulting charge-offs may be larger on a per loan basis than those incurred with
our residential or other consumer loans.








34





Our real estate construction and
land acquisition and development loans are based upon estimates of costs and
value associated with the complete project. These estimates may be inaccurate.We originate construction loans for commercial properties, as well as for
single-family home construction.   At March 31, 2009,
construction loans totaled $139.5 million, or 17.41% of our total loan
portfolio. Land acquisition and development loans totaled $91.9 million, or
11.47% of our total loan portfolio at March 31, 2009. In general, construction,
land acquisition and development lending involves additional risks because of
the inherent difficulty in estimating both a property’s value at completion of
the project and the estimated cost of the project. As a result, construction
loans and land acquisition and development loans often involve the disbursement
of funds with repayment dependent, in part, on the success of the ultimate
project and the ability of the borrower to sell or lease the property or
refinance the indebtedness, rather than the ability of the borrower or guarantor
to repay principal and interest. The nature of these loans is also such that
they are generally more difficult to monitor.  In addition,
speculative construction loans to a builder are often associated with homes that
are not pre-sold, and thus pose a greater potential risk than construction loans
to individuals on their personal residences. If our appraisal of the completed
project proves to be overstated, we may have inadequate security for the
repayment of the loan upon completion of the construction project and may incur
a loss. These loans also pose additional risks because of the lack of income
being produced by the property and the potential illiquid nature of the
collateral. Market conditions may result in borrowers having difficulty selling
lots or homes in their developments for an extended period, which in turn could
result in an increase in delinquencies and non-accrual loans. Additionally, if
the current economic environment continues for a prolonged period of time or
deteriorates further, collateral values may further decline and are likely to
result in increased credit losses in these loans.





Our
profitability depends significantly on economic conditions in the States of
Washington and Oregon.





Our
success depends primarily on the general economic conditions of the states of
Washington and Oregon and the specific local markets in which we
operate.  Unlike larger national or other regional banks that are more
geographically diversified, we provide banking and financial services to
customers located primarily in seven counties of Washington and
Oregon.  As of March 31, 2009, substantially our entire real estate
portfolio consisted of loans secured by properties located in these
states.  The local economic conditions in our market areas have a
significant impact on the demand for our products and services as well as the
ability of our customers to repay loans, the value of the collateral securing
loans and the stability of our deposit funding sources.





Adverse
economic conditions unique to these Northwest markets could have a material
adverse effect on our financial condition and results of
operations.  Further, a significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these state and
local markets and, in turn, also have a material adverse effect on our financial
condition and results of operations.





Beginning
in 2007 and throughout 2008, the housing market in the United States has
experienced significant adverse trends, including accelerated price depreciation
in some markets and rising delinquency and default rates.  Our
construction and land loan portfolios, commercial and multifamily loan
portfolios and certain of our other loans have been affected by the downturn in
the residential real estate market.  During 2008, evidence of this
downturn became more apparent in the markets we serve.  If real estate
values continue to decline, the collateral for our loans will provide less
security and our ability to recover on defaulted loans by selling the underlying
real estate will be diminished, making it more likely that we will suffer losses
on defaulted loans.  As a result of these trends, we have recently
experienced an increase in delinquency and default rates particularly in
construction and land loans in our primary market areas.  These trends
if they continue or worsen could cause further credit losses and loan loss
provisioning and could adversely affect our earnings and financial
condition.





We
may be required to make further increases in our provisions for loan losses and
to charge off additional loans in the future, which could adversely affect our
results of operations.





As noted
in other sections of this Annual Report on Form 10-K, we are experiencing
increasing loan delinquencies and credit losses and we substantially increased
our provision for loan losses in fiscal 2009, which adversely affected our
results of operations.  With the exception of residential construction
and development loans, nonperforming loans and assets generally reflect unique
operating difficulties for individual borrowers rather than weakness in the
overall economy of the Pacific Northwest; however, more recently the
deterioration in the general economy activity has become a significant
contributing factor to the increased levels of delinquencies and nonperforming
loans.  Slower sales and excess inventory in the housing market has
been the primary cause of the increase in delinquencies and foreclosures for
residential construction and land development loans, which represent 77% of our
nonperforming assets at March 31, 2009.  Further, our portfolio is
concentrated in construction and land loans and commercial and commercial real
estate loans, all of which have a higher risk






35






of loss
than residential mortgage loans.  If current trends in the housing and
real estate markets continue, we expect that we will continue to experience
higher than normal delinquencies and credit losses.  Moreover, if a
prolonged recession occurs we expect that it could severely impact economic
conditions in our market areas and that we could experience significantly higher
delinquencies and credit losses.  As a result, we may be required to
make further increases in our provision for loan losses and to charge off
additional loans in the future, which could adversely affect our results of
operations.





If
our allowance for loan losses is not sufficient to cover loan losses, our
earnings could be reduced





We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans.  In determining the amount of the allowance for loan
losses, we review our loans and the loss and delinquency experience, and
evaluate economic conditions.  Management recognizes that significant
new growth in loan portfolios, new loan products and the refinancing of existing
loans can result in portfolios comprised of unseasoned loans that may not
perform in a historical or projected manner.  If our assumptions are
incorrect, the allowance for loan losses may not be sufficient to cover losses
inherent in our loan portfolio, resulting in the need for additions to our
allowance through an increase in the provision for loan
losses.  Material additions to the allowance or increases in our
provision for loan losses could have a material adverse effect on our financial
condition and results of operations.  Our allowance for loan losses
was 2.12% of total loans and 62% of nonperforming loans at March 31,
2009.





In
addition, bank regulators periodically review our allowance for loan losses and
may require us to increase our allowance for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by the bank regulators may have a material adverse
effect on our financial condition and results of operations.





Our
real estate lending also exposes us to the risk of environmental
liabilities.





In the
course of our business, we may foreclose and take title to real estate, and
could be subject to environmental liabilities with respect to these properties.
We may be held liable to a governmental entity or to third persons for property
damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required to
investigate or clean up hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation activities
could be substantial. In addition, as the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
the property. If we ever become subject to significant environmental
liabilities, our business, financial condition and results of operations could
be materially and adversely affected.





Our
deposit insurance assessments will increase substantially, which will adversely
affect our profits.





Our FDIC
deposit insurance assessments expense for the twelve months ended March 31, 2009
was $760,000.  Deposit insurance assessments will increase in 2009 due
to recent strains on the FDIC deposit insurance fund resulting from the cost of
recent bank failures and an increase in the number of banks likely to fail over
the next few years. Effective April 1, 2009, FDIC assessments increased to a
range of 12 to 45 basis points. Additional premiums are charged for institutions
that rely on excessive amounts of brokered deposits, including CDARS, and
excessive use of secured liabilities, including FHLB and FRB
advances.   The FDIC may adjust rates from one quarter to the
next, except that no single adjustment can exceed three basis points without a
rulemaking proceeding. In May 2009, the FDIC approved a special assessment of 5
basis points applied to the amount of assets reduced by the amount of Tier 1
capital as of June 30, 2009 (not to exceed 10 basis points of the deposit
assessment base). Two additional special assessments, each of the same amount or
less, may be imposed for the third and fourth quarters of 2009. The FDIC has
announced that the first of the additional special assessments is likely and the
second is less certain.





Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.





Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits and
borrowings.  We expect that we will periodically experience imbalances
in the interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any period of time,
our interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products may
not change to the same degree over a given time period.  In any event,
if market interest rates should move contrary to our position, our earnings may
be negatively affected. In addition, loan volume and quality and deposit volume
and mix can be affected by market interest rates. Changes in levels of market
interest rates could materially adversely affect our net interest spread, asset
quality, origination volume and overall profitability.








36





Interest
rates have recently decreased after increasing for several years.  The
U.S. Federal Reserve increased its target for the federal funds rate 17 times,
from 1.00% to 5.25% during the period from June 30, 2004 to June 30,
2006.  The U.S. Federal Reserve then decreased its target for the
federal funds rate by 500 basis points to 0.25% during the period from September
18, 2007 to March 31, 2009.  A sustained falling interest rate
environment has a negative impact on margins as the Bank has more
interest-earning assets that adjust downward than interest-bearing liabilities
that adjust downward.





We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities.  In a changing interest rate
environment, we may not be able to manage this risk effectively.  If
we are unable to manage interest rate risk effectively, our business, financial
condition and results of operations could be materially harmed.





Our
funding sources may prove insufficient to replace deposits and support our
future growth.





We rely
on customer deposits and advances from the FHLB, the FRB and other borrowings to
fund our operations.  Although we have historically been able to
replace maturing deposits and advances if desired, we may not be able to replace
such funds in the future if, among other things, our financial condition, the
financial condition of the FHLB or FRB, or market conditions were to change. Our
financial flexibility will be severely constrained if we are unable to maintain
our access to funding or if adequate financing is not available to accommodate
future growth at acceptable interest rates.  Finally, if we are
required to rely more heavily on more expensive funding sources to support
future growth, our revenues may not increase proportionately to cover our
costs.





Although
we consider such sources of funds adequate for our liquidity needs, we may seek
additional debt in the future to achieve our long-term business
objectives.  Additional borrowings, if sought, may not be available to
us or, if available, may not be available on reasonable terms.  If
additional financing sources are unavailable or are not available on reasonable
terms, our financial condition, results of operations, growth and future
prospects could be materially adversely affected.





We
rely on dividends from subsidiaries for most of our revenue





Riverview
Bancorp, Inc. is a separate and distinct legal entity from its
subsidiaries.  We receive substantially all of our revenue from
dividends from our subsidiaries. These dividends are the principal source of
funds to pay dividends on our common stock and interest and principal on our
debt. Various federal and/or state laws and regulations limit the amount of
dividends that the Bank may pay us. Also, our right to participate in a
distribution of assets upon a subsidiary's liquidation or reorganization is
subject to the prior claims of the subsidiary's creditors.  In the
event the Bank is unable to pay dividends to us, we may not be able to service
our debt, pay obligations or pay dividends on our common stock.  The
inability to receive dividends from the Bank could have a material adverse
effect on our business, financial condition and results of
operations.





Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.





Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a substantial
negative effect on our liquidity. Our access to funding sources in amounts
adequate to finance our activities or the terms of which are acceptable to us
could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Factors that could detrimentally impact
our access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans are
concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil
faced by banking organizations and the continued deterioration in credit
markets.





If
we defer payments of interest on our outstanding junior subordinated debentures
or if certain defaults relating to those debentures occur, we will be prohibited
from declaring or paying dividends or distributions on, and from making
liquidation payments with respect to, our common stock.





We have
junior subordinated debentures issued in connection with the sale of trust
preferred securities that are statutory business trusts. We have also guaranteed
those trust preferred securities. There are currently two separate series of
these junior subordinated debentures outstanding, each series having been issued
under a separate indenture and with a separate guarantee. Each of these
indentures, together with the related guarantee, prohibits us, subject to
limited exceptions, from declaring or paying any dividends or distributions on,
or redeeming, repurchasing, acquiring or making any liquidation payments with
respect to, any of our capital stock at any time when (i) there shall have
occurred and be continuing an event of default under such indenture or any
event, act or condition that with notice or lapse of time or both would
constitute an event of default under such indenture; or (ii) we are in default
with respect to payment of any obligations under such guarantee; or (iii) we
have deferred payment of interest on the junior subordinated debentures
outstanding under that indenture. In that regard, we are entitled, at our option
but








37






subject
to certain conditions, to defer payments of interest on the junior subordinated
debentures of each series from time to time for up to five years.





As a
result of these provisions, if we were to elect to defer payments of interest on
any series of junior subordinated debentures, or if any of the other events
described in clause (i) or (ii) of the first paragraph of this risk factor were
to occur, we would be prohibited from declaring or paying any dividends on the
common stock, from repurchasing or otherwise acquiring any such common stock,
and from making any payments to holders of common stock in the event of our
liquidation, which would likely have a material adverse effect on the market
value of our common stock. Moreover, without notice to or consent from the
holders of our common stock, we may issue additional series of junior
subordinated debentures in the future with terms similar to those of our
existing junior subordinated debentures or enter into other financing agreements
that limit our ability to purchase or to pay dividends or distributions on our
capital stock, including our common stock.





Recently
enacted legislation and other measures undertaken by the Treasury, the Federal
Reserve and other governmental agencies may not be successful in stabilizing the
U.S. financial system or improving the housing market.





Emergency Economic Stabilization Act
of 2008.On October 3, 2008, President Bush signed into law
the Emergency Economic Stabilization Act of 2008 (EESA) which, among other
measures, authorized the Treasury Secretary to establish the Troubled Asset
Relief Program (TARP).  The EESA gives broad authority to the Treasury
to purchase, manage, modify, sell and insure the troubled mortgage related
assets that triggered the current economic crisis as well as other troubled
assets. The EESA includes additional provisions directed at bolstering the
economy, including: authority for the Federal Reserve to pay interest on
depository institution balances; mortgage loss mitigation and homeowner
protection; temporary increase in FDIC insurance coverage from $100,000 to
$250,000 through December 31, 2009; and authority to the Securities and Exchange
Commission to suspend mark-to-market accounting requirements for any issuer or
class of category of transactions.





Pursuant
to the TARP, 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.





The EESA
followed, and has been followed by, numerous actions by the Federal Reserve,
Congress, Treasury, the Securities and Exchange Commission and others to address
the currently liquidity and credit crisis that has followed the sub-prime
meltdown that commenced in 2007.  These measures include homeowner
relief that encourages loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
investment banks; the repeated lowering of the federal funds rate; 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; coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.





In
addition, the Internal Revenue Service has issued an unprecedented wave of
guidance in response to the credit crisis, including a relaxation of limits on
the ability of financial institutions that undergo an ownership change to
utilize their pre-change net operating losses and net unrealized built-in
losses. The relaxation of these limits may make significantly more attractive
the acquisition of financial institutions whose tax basis in their loan
portfolios significantly exceeds the fair market value of those
portfolios.





Moreover,
on October 14, 2008, the FDIC announced the establishment of a TLGP to provide
full deposit insurance for all non-interest bearing transaction accounts and
guarantees of certain newly issued senior unsecured debt issued by FDIC insured
institutions and their holding companies.  Under the program, the FDIC
will guarantee timely payment of newly issued senior unsecured debt issued on or
before October 31, 2009.  The guarantee on debt issued before April 1,
2009, will expire no later than June 30, 2012.  The guarantee on debt
issued on or after April 1, 2009, will expire not later than December 31, 2012.
The Bank has elected to participate in the TLGP.





The
actual impact that EESA and such related measures undertaken to alleviate the
credit crisis will have generally on the financial markets, including the
extreme levels of volatility and limited credit availability currently being
experienced, 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.





American Recovery and Reinvestment
Act of 2009.  On February 17, 2009, President Obama signed The
American Recovery and Reinvestment Act of 2009, (ARRA), into law. The ARRA is
intended to revive the US economy by creating millions of new jobs and stemming
home foreclosures. In addition, the ARRA significantly rewrites the original
executive compensation and corporate governance provisions of Section 111 of the
EESA, which pertains to financial institutions that have received or will
receive financial assistance under TARP or related programs. The specific impact
that these measures may have on us is unknown.








38





If
other financial institutions holding deposits for government related entities in
Washington State fail, we may be assessed a pro-rata share of the uninsured
portion of the deposits by the State of Washington.





We
participate in the Washington Public Deposit Protection Program by accepting
deposits from local governments, school districts and other municipalities
located in the State of Washington.  Under the recovery provisions of
the 1969 Public Deposits Protection Act, when a participating bank fails and has
public entity deposits that are not insured by the FDIC, the remaining banks
that participate in the program are assessed a pro-rata share of the uninsured
deposits.





We
could see declines in our uninsured deposits, which would reduce the funds we
have available for lending and other funding purposes.





The FDIC
in the fourth quarter of 2008 increased the federal insurance of deposit
accounts from $100,000 to $250,000 and provided 100% insurance coverage for
noninterest-bearing transaction accounts for participating members including the
Bank.  These increases of coverage, with the exception of IRA and
certain retirement accounts, are scheduled to expire December 31, 2013. With the
increase of bank failures, depositors are reviewing deposit relationships to
maximize federal deposit insurance coverage.  We may see outflows of
uninsured deposits as customers restructure their banking relationships in
setting up multiple accounts in multiple banks to maximize federal deposit
insurance coverage.





Our
ability to foreclose on single family home loans may be restricted.





New
legislation proposed by Congress may give bankruptcy judges the power to reduce
the increasing number of home foreclosures.  Bankruptcy judges would
be given the authority to restructure mortgages and reduce a borrower's
payments.  Property owners would be allowed to keep their property
while working out their debts.  This legislation may restrict our
collection efforts on one-to-four family loans.  Separately, the
administration has announced a voluntary program under the Troubled Asset Relief
Program law, which provides for government subsidies for reducing a borrower's
interest rate, which a lender would have to match with its own
money.





Our
investment in Federal Home Loan Bank stock may become impaired.





At March
31, 2009, we owned $7.4 million of stock of the FHLB.  As a condition
of membership in the FHLB, we are required to purchase and hold a certain amount
of FHLB stock.  Our stock purchase requirement is based, in part, upon
the outstanding principal balance of advances from the FHLB and is calculated in
accordance with the Capital Plan of the FHLB.  Our FHLB stock has a
par value of $100, is carried at cost and is subject to recoverability testing
per SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The FHLB recently
announced that it had a risk-based capital deficiency under the regulations of
the Federal Housing Finance Agency (the “FHFA”), its primary regulator, as of
December 31, 2008, and that it would suspend future dividends and the repurchase
and redemption of outstanding common stock.  As a result, the FHLB did
not pay a dividend for the fourth quarter of 2008 or the first quarter of
2009.  The FHLB has communicated that it believes the calculation of
risk-based capital under the current rules of the FHFA significantly overstates
the market risk of the FHLB’s private-label mortgage-backed securities in the
current market environment and that it has enough capital to cover the risks
reflected in its balance sheet.  As a result, we have not recorded an
other-than-temporary impairment on our investment in FHLB
stock.  However, continued deterioration in the FHLB’s financial
position may result in impairment in the value of those
securities.  We will continue to monitor the financial condition of
the FHLB as it relates to, among other things, the recoverability of our
investment.





Competition
with other financial institutions could adversely affect our
profitability.





The
banking and financial services industry is very competitive. Legal and
regulatory developments have made it easier for new and sometimes unregulated
competitors to compete with us. Consolidation among financial service providers
has resulted in fewer very large national and regional banking and financial
institutions holding a large accumulation of assets. These institutions
generally have significantly greater resources, a wider geographic presence or
greater accessibility. Our competitors sometimes are also able to offer more
services, more favorable pricing or greater customer convenience than we do. In
addition, our competition has grown from new banks and other financial services
providers that target our existing or potential customers. As consolidation
continues, we expect additional institutions to try to exploit our
market.





Technological
developments have allowed competitors including some non-depository
institutions, to compete more effectively in local markets and have expanded the
range of financial products, services and capital available to our target
customers. If we are unable to implement, maintain and use such technologies
effectively, we may not be able to offer products or achieve cost-efficiencies
necessary to compete in our industry. In addition, some of these competitors
have fewer regulatory constraints and lower cost structures.








39







We
rely heavily on the proper functioning of our technology.





We rely
heavily on communications and information systems to conduct our
business.  Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems.  While we
have policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of our information systems, there can
be no assurance that any such failures, interruptions or security breaches will
not occur or, if they do occur, that they will be adequately
addressed.  The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny, or
expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of
operations.





We rely
on third-party service providers for much of our communications, information,
operating and financial control systems technology. If any of our third-party
service providers experience financial, operational or technological
difficulties, or if there is any other disruption in our relationships with
them, we may be required to locate alternative sources of such services, and we
cannot assure that we could negotiate terms that are as favorable to us, or
could obtain services with similar functionality, as found in our existing
systems, without the need to expend substantial resources, if at all. Any of
these circumstances could have an adverse effect on our business.





Changes
in accounting standards may affect our performance.





Our
accounting policies and methods are fundamental to how we record and report our
financial condition and results of operations.  From time to time
there are changes in the financial accounting and reporting standards that
govern the preparation of our financial statements.  These changes can
be difficult to predict and can materially impact how we report and record our
financial condition and results of operations.  In some cases, we
could be required to apply a new or revised standard retroactively, resulting in
a retrospective adjustment to prior financial statements.





We
may experience future goodwill impairment, which could reduce our
earnings.





We
performed our test for goodwill impairment for fiscal year 2009, but no
impairment was identified.  Our assessment of the fair value of
goodwill is based on an evaluation of current purchase transactions, discounted
cash flows from forecasted earnings, our current market capitalization and a
valuation of our assets. Our evaluation of the fair value of goodwill involves a
substantial amount of judgment. If impairment of goodwill was deemed to exist,
we would be required to write down our assets resulting in a charge to earnings,
however, it would have no impact on our liquidity, operations or regulatory
capital.





Item
1B. Unresolved Staff Comments





None.





Item
2.  Properties





The
executive offices of the Company are located in downtown Vancouver, Washington
at 900 Washington Street.   The Company’s operational center,
opened in 2006, is also located in Vancouver, Washington (both offices are
leased).  At March 31, 2009, the Bank had 10 offices located in Clark
County (six of which are leased), one office in Cowlitz County, two offices in
Klickitat County, and one office in Skamania County.  The Bank also
had three offices in Multnomah County (two of which are leased), one leased
office in Clackamas County, and one office in Marion County.





Item 3.  Legal
Proceedings





Periodically,
there have been various claims and lawsuits involving the Company, such as
claims to enforce liens, condemnation proceedings on properties in which the
Company holds security interests, claims involving the making and servicing of
real property loans and other issues incident to the Company’s
business.  The Company is not a party to any pending legal proceedings
that it believes would have a material adverse effect on the financial
condition, results of operations or liquidity of the Company.









40





Item
4.  Submission of Matters to a Vote of Security
Holders





No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended March 31, 2009.




PART
II





Item
5.   Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities





At March
31, 2009, there were 10,923,773 shares of Company common stock issued and
outstanding, 805 stockholders of record and an estimated 2,267 holders in
nominee or “street name.”  Under Washington law, the Company is
prohibited from paying a dividend if, as a result of its payment, the Company
would be unable to pay its debts as they become due in the normal course of
business, or if the Company’s total liabilities would exceed its total
assets.  The principal source of funds for the Company is dividend
payments from the Bank.  OTS regulations require the Bank to give the
OTS 30 days advance notice of any proposed declaration of dividends to the
Company, and the OTS has the authority under its supervisory powers to prohibit
the payment of dividends to the Company.  The OTS imposes certain
limitations on the payment of dividends from the Bank to the Company which
utilize a three-tiered approach that permits various levels of distributions
based primarily upon a savings association’s capital level.  See
“REGULATION – Federal Regulation of Savings Associations – Limitations on
Capital Distributions.”  In addition, the Company may not declare or
pay a cash dividend on its capital stock if the effect thereof would be to
reduce the regulatory capital of the Bank below the amount required for the
liquidation account established pursuant to the Bank’s conversion from the
mutual stock form of organization.  See Note 1 of the Notes to the
Consolidated Financial Statements contained in Item 8 of this Form
10-K.





The
common stock of the Company is traded on the Nasdaq Global Select Market under
the symbol “RVSB”.  The following table sets forth the high and low
trading prices, as reported by Nasdaq, and cash dividends paid for each quarter
during 2009 and 2008 fiscal years.  At March 31, 2009, there were 18
market makers in the Company’s common stock as reported by the Nasdaq Global
Select Market.





Fiscal
      Year Ended March 31, 2009
            
            High
            
            
            Low
            
            
            Cash
              Dividends
      DeclaredQuarter
      ended March 31, 2009
            $
            4.35
            
            $
            1.60
            
            $
            0.000Quarter
      ended December 31, 2008
            
            6.10
            
            
            2.25
            
            
            0.000Quarter
      ended September 30, 2008
            
            7.38
            
            
            4.52
            
            
            0.045Quarter
      ended June 30, 2008
            
            9.79
            
            
            7.42
            
            
            0.090





Fiscal
      Year Ended March 31, 2008
            
            High
            
            
            Low
            
            
            Cash
              Dividends
              DeclaredQuarter
      ended March 31, 2008
            $
            12.84
            
            $
            9.93
            
            $
            0.090Quarter
      ended December 31, 2007
            
            15.36
            
            
            11.55
            
            
            0.110Quarter
      ended September 30, 2007
            
            15.73
            
            
            13.30
            
            
            0.110Quarter
      ended June 30, 2007
            
            16.28
            
            
            13.69
            
            
            0.110







Stock
Repurchase





Shares
are repurchased from time-to-time in open market transactions.  The
timing, volume and price of purchases are made at our discretion, and are also
contingent upon our overall financial condition, as well as general market
conditions.




On June
21, 2007, the Company announced a stock repurchase program of up to 750,000
shares of its outstanding common stock, representing approximately 6% of
outstanding shares at that date.  The Company did not repurchase any
shares during the year ended March 31, 2009.  As of March 31, 2009,
there were 125,000 shares that may be repurchased under the program, there is no
stated expiration date for the stock repurchase program.





Securities
for Equity Compensation Plans





Please
refer to Item 12 in this Form 10-K for a listing of securities authorized for
issuance under equity compensation plans.





41




COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN *


Among Riverview Bancorp,
Inc., The S&P 500 Index


And The NASDAQ Bank
Index





3/31/04*
            3/31/05
            3/31/06
            3/31/07
            3/31/08
            3/31/09Riverview
      Bancorp, Inc.
            
            100.00
            108.31
            140.47
            172.02
            111.35
            43.99S
      & P 500
            
            100.00
            106.69
            119.20
            133.31
            126.54
            78.34NASDAQ
      Bank
            
            100.00
            101.09
            113.50
            115.46
            91.97
            56.72





*$100
invested on 3/31/04 in stock or index-including reinvestment of dividends fiscal
year ending March 31,





Copyright
© 2009, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All
rights reserved.


www.researchdatagroup.com/S&P.htm













42





Item
6.   Selected Financial Data





The
following condensed consolidated statements of operations and financial
condition and selected performance ratios as of March 31, 2009, 2008, 2007, 2006
and 2005 and for the years then ended have been derived from the Company’s
audited Consolidated Financial Statements. The information below is qualified in
its entirety by the detailed information included elsewhere herein and should be
read along with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8. Financial Statement and
Supplementary Data.”





At
      March 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
      (1)
            
            
            2005(Dollars
      in thousands)FINANCIAL
      CONDITION DATA:Total
      assets
            $
            914,333
            
            $
            886,849
            
            $
            820,348
            
            $
            763,847
            
            $
            572,571Loans
      receivable, net
            
            784,117
            
            
            756,538
            
            
            682,951
            
            
            623,016
            
            
            429,449Loans
      held for sale
            
            1,332
            
            
            -
            
            
            -
            
            
            65
            
            
            510Mortgage-backed
      securities held
              to
      maturity
            
            570
            
            
            885
            
            
            1,232
            
            
            1,805
            
            
            2,343Mortgage-backed
      securities available
              for
      sale
            
            4,066
            
            
            5,338
            
            
            6,640
            
            
            8,134
            
            
            11,619Cash
      and interest-bearing deposits
            
            19,199
            
            
            36,439
            
            
            31,423
            
            
            31,346
            
            
            61,719Investment
      securities held to maturity
            
            529
            
            
            -
            
            
            -
            
            
            -
            
            
            -Investment
      securities available for
              sale
            
            8,490
            
            
            7,487
            
            
            19,267
            
            
            24,022
            
            
            22,945Deposit
      accounts
            
            670,066
            
            
            667,000
            
            
            665,405
            
            
            606,964
            
            
            456,878FHLB
      advances
            
            37,850
            
            
            92,850
            
            
            35,050
            
            
            46,100
            
            
            40,000Federal
      Reserve Bank advances
            
            85,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -Shareholders’
      equity
            
            88,663
            
            
            92,585
            
            
            100,209
            
            
            91,687
            
            
            69,522Year
      Ended March 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
      (1)
            
            
            2005(Dollars
      in thousands, except per share data)OPERATING
      DATA:Interest
      income
            $
            52,850
            
            $
            60,682
            
            $
            61,300
            
            $
            47,229
            
            $
            29,968Interest
      expense
            
            19,183
            
            
            25,730
            
            
            24,782
            
            
            14,877
            
            
            7,395Net
      interest income
            
            33,667
            
            
            34,952
            
            
            36,518
            
            
            32,352
            
            
            22,573Provision
      for loan losses
            
            16,150
            
            
            2,900
            
            
            1,425
            
            
            1,500
            
            
            410Net
      interest income after provision
              for
      loan losses
            
            17,517
            
            
            32,052
            
            
            35,093
            
            
            30,852
            
            
            22,163Gains
      (losses) from sale of loans,
              securities
      and REO
            
            729
            
            
            368
            
            
            434
            
            
            382
            
            
            (672)Impairment
      on investment security
            
            (3,414
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Gain
      on sale of land and fixed assets
            
            -
            
            
            6
            
            
            3
            
            
            2
            
            
            830Other
      non-interest income
            
            8,215
            
            
            8,508
            
            
            8,597
            
            
            8,453
            
            
            6,348Non-interest
      expenses
            
            27,259
            
            
            27,791
            
            
            26,353
            
            
            25,374
            
            
            19,104Income
      (loss) before income taxes
            
            (4,212
            )
            
            13,143
            
            
            17,774
            
            
            14,315
            
            
            9,565Provision
      (benefit) for income taxes
            
            (1,562
            )
            
            4,499
            
            
            6,168
            
            
            4,577
            
            
            3,036Net
      income (loss)
            $
            (2,650
            )
            $
            8,644
            
            $
            11,606
            
            $
            9,738
            
            $
            6,529





(1)  On
April 22, 2005, the Company acquired American Pacific Bank.





Earnings
per share:


Basic
            $
            (0.25
            )
            $
            0.79
            
            $
            1.03
            
            $
            0.87
            
            $
            0.68Diluted
            
            (0.25
            )
            
            0.79
            
            
            1.01
            
            
            0.86
            
            
            0.67Dividends
      per share
            
            0.135
            
            
            0.42
            
            
            0.395
            
            
            0.34
            
            
            0.31









43


At
      March 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
      (1)
            
            
            2005OTHER
      DATA:Number
      of:Real
      estate loans outstanding
            
            2,841
            
            
            2,926
            
            
            2,978
            
            
            3,084
            
            
            3,037Deposit
      accounts
            
            42,740
            
            
            41,354
            
            
            38,989
            
            
            39,095
            
            
            29,341Full
      service offices
            
            18
            
            
            18
            
            
            18
            
            
            17
            
            
            13At
      or For the Year Ended March 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
      (1)
            
            
            2005(Dollars
      in Thousands)KEY
      FINANCIAL RATIOS:Performance
      Ratios:Return
      on average assets
            
            (0.29
            )%
            
            1.04
            %
            
            1.43
            %
            
            1.36
            %
            
            1.24
            %Return
      on average equity
            
            (2.85
            )
            
            8.92
            
            
            11.88
            
            
            10.95
            
            
            9.56Dividend
      payout ratio (2)
            
            (54.00
            )
            
            53.16
            
            
            38.35
            
            
            39.08
            
            
            45.59Interest
      rate spread
            
            3.73
            
            
            4.09
            
            
            4.37
            
            
            4.55
            
            
            4.38Net
      interest margin
            
            4.08
            
            
            4.66
            
            
            5.01
            
            
            5.03
            
            
            4.74Non-interest
      expense to average assets
            
            3.02
            
            
            3.34
            
            
            3.24
            
            
            3.54
            
            
            3.62Efficiency
      ratio
            
            69.5
            
            
            63.40
            
            
            57.85
            
            
            61.60
            
            
            65.70Asset
      Quality Ratios:Average
      interest-earning assets
              to
      interest-bearing liabilities
            
            114.85
            
            
            116.75
            
            
            118.96
            
            
            121.14
            
            
            123.45Allowance
      for loan losses to
              total
      net loans at end of period
            
            2.12
            
            
            1.39
            
            
            1.25
            
            
            1.15
            
            
            1.01Net
      charge-offs to average outstanding
              loans
      during the period
            
            1.24
            
            
            0.12
            
            
            -
            
            
            0.10
            
            
            0.13Ratio
      of nonperforming assets
              to
      total assets
            
            4.57
            
            
            0.92
            
            
            0.03
            
            
            0.05
            
            
            0.13Capital
      Ratios:Average
      equity to average assets
            
            10.29
            
            
            11.65
            
            
            12.01
            
            
            12.39
            
            
            12.92Equity
      to assets at end of fiscal year
            
            9.70
            
            
            10.44
            
            
            12.22
            
            
            12.00
            
            
            12.14





(1)
            On
      April 22, 2005, the Company acquired American Pacific
  Bank.


(2)
            Dividends
      per share divided by earnings per
share









44





Item
7.   Management’s Discussion and Analysis of Financial Condition
and Results of Operations





General





Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
intended to assist in understanding the financial condition and results of
operations of the Company.  The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes thereto contained in Item 8 of this Form 10-K and the other
sections contained in this Form 10-K.





Critical
Accounting Policies





The
Company has established various accounting policies that govern the application
of accounting principles generally accepted in the United States of America in
the preparation of the Company’s Consolidated Financial
Statements.  The Company has identified three policies, that due to
judgments, estimates and assumptions inherent in those policies, are critical to
an understanding of the Company’s Consolidated Financial
Statements.  These policies relate to the methodology for the
determination of the allowance for loan losses, the valuation of investment
securities, the valuation of REO and foreclosed assets, goodwill valuation and
the calculation of income taxes.  These policies and the judgments,
estimates and assumptions are described in greater detail in subsequent sections
of Management’s Discussions and Analysis contained herein and in the Notes to
the Consolidated Financial Statements contained in Item 8 of this Form
10-K.  In particular, Note 1 of the Notes to Consolidated Financial
Statements, “Summary of Significant Accounting Policies,” describes generally
the Company’s accounting policies.  Management believes that the
judgments, estimates and assumptions used in the preparation of the Company’s
Consolidated Financial Statements are appropriate given the factual
circumstances at the time.  However, given the sensitivity of the
Company’s Consolidated Financial Statements to these critical accounting
policies, the use of other judgments, estimates and assumptions could result in
material differences in the Company’s results of operations or financial
condition.





Allowance for Loan
Losses


The
allowance for loan losses is maintained at a level sufficient to provide for
probable loan losses based on evaluating known and inherent risks in the loan
portfolio. The allowance is provided based upon management’s ongoing quarterly
assessment of the pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the loan
portfolio, delinquency levels, actual loan loss experience, current economic
conditions, and detailed analysis of individual loans for which full
collectibility may not be assured.  The detailed analysis includes
techniques to estimate the fair value of loan collateral and the existence of
potential alternative sources of repayment. The allowance consists of specific,
general and unallocated components. The specific component relates to loans that
are considered impaired. For such loans that are classified as impaired, an
allowance is established when the net realizable value of the impaired loan is
lower than the carrying value of that loan. The general component covers
non-impaired loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management’s estimate of probable losses. Such
factors include uncertainties in economic conditions, uncertainties in
identifying triggering events that directly correlate to subsequent loss rates,
changes in appraised value of underlying collateral, risk factors that have not
yet manifested themselves in loss allocation factors and historical loss
experience data that may not precisely correspond to the current portfolio or
economic conditions.  The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying assumptions used
in the methodologies for estimating specific and general losses in the
portfolio. The appropriate allowance level is estimated based upon factors and
trends identified by management at the time the consolidated financial
statements are prepared.





When
available information confirms that specific loans or portions thereof are
uncollectible, identified amounts are charged against the allowance for loan
losses. The existence of some or all of the following criteria will generally
confirm that a loss has been incurred: the loan is significantly delinquent and
the borrower has not demonstrated the ability or intent to bring the loan
current; the Bank has no recourse to the borrower, or if it does, the borrower
has insufficient assets to pay the debt; the estimated fair value of the loan
collateral is significantly below the current loan balance, and there is little
or no near-term prospect for improvement.





In
accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, An Amendment of SFAS No. 114,
a loan is considered impaired when it is probable that a creditor will be unable
to collect all amounts (principal and interest) due according to the contractual
terms of the loan agreement. Large groups of smaller balance homogenous loans
such as consumer secured loans, residential mortgage loans and consumer
unsecured loans are collectively evaluated for potential loss. Impaired loans
are generally carried at the lower of cost or fair value, which are determined
by management based upon a number of factors, including recent independent
appraisals which are further reduced for estimated selling costs or as a
practical expedient by estimating the present value of expected future cash
flows,








45






discounted
at the loan’s effective interest rate.  When the measurement of the
impaired loan is less than the recorded investment in the loan (including
accrued interest, net deferred loan fees or costs, and unamortized premium or
discount), impairment is recognized by creating or adjusting an allocation of
the allowance for loan losses.





Investment
Valuation


In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115,
Accounting for Certain
Investments in Debt and Equity Securities, investment securities are
classified as held to maturity when the Company has the ability and positive
intent to hold such securities to maturity. Investment securities held to
maturity are carried at amortized cost. Unrealized losses due to fluctuations in
fair value are recognized when it is determined that a credit related other than
temporary decline in value has occurred. Investment securities bought and held
principally for the purpose of sale in the near term are classified as trading
securities. Securities that the Company intends to hold for an indefinite
period, but not necessarily to maturity are classified as available for sale.
Securities available for sale are reported at fair value. Unrealized gains and
losses, net of the related deferred tax effect, are reported as a net amount in
a separate component of shareholders’ equity entitled “accumulated other
comprehensive income (loss).” Realized gains and losses on securities available
for sale, determined using the specific identification method, are included in
earnings.  Premiums and discounts are amortized using the interest
method over the period to maturity or expected call, if sooner.





Unrealized
losses on available for sale and held to maturity securities are evaluated at
least quarterly to determine whether the declines in value should be considered
other than temporary. In accordance with FSP 115-2, OTTI is separated into a
credit and noncredit component.  Noncredit component losses are
recorded in other comprehensive income (loss) when the Company a) does not
intend to sell the security or b) is not more likely than not to have to sell
the security prior to the security’s anticipated recovery. Credit component
losses are reported through earnings. To determine the component of OTTI related
to credit losses, the Company compares the amortized cost basis of the OTTI
security to the present value of the revised expected cash flows, discounted
using the current pre-impairment yield. Expected cash flow estimates are based
primarily on an analysis of default rates, prepayment speeds and third-party
analytical reports. Significant judgment of management is required in this
analysis that includes, but is not limited to, assumptions regarding the
ultimate collectibility of principal and interest on the underlying
collateral.





Although
the determination of whether an impairment is other-than-temporary involves
significant judgment, the underlying principle used is based on positive
evidence indicating that an investment’s carrying value is recoverable within a
reasonable period of time outweighs negative evidence to the
contrary.  Evidence that is objectively determinable and verifiable is
given greater weight than evidence that is subjective and or not verifiable.
Evidence based on future events will generally be less objective as it is based
on future expectations and therefore is generally less verifiable or not
verifiable at all.  Factors considered in evaluating whether a decline
in value is other-than-temporary include, (a) the length of time and the extent
to which the fair value has been less than amortized cost, (b) the financial
condition and near-term prospects of the issuer and (c) the Company’s intent and
ability to retain the investment for a period of time. Other factors that may be
considered include the ratings by recognized rating agencies; capital strength
and other near-term prospects of the issuer and recommendation of investment
advisors or market analysts.  In situations in which the security’s
fair value is below amortized cost but it continues to be probable that all
contractual terms of the security will be satisfied, the decline is solely
attributable to noncredit factors, and the Company asserts that it has positive
intent and ability to hold that security to maturity, no other-than-temporary
impairment is recognized.





Valuation of REO and
Foreclosed Assets


Real
estate properties acquired through foreclosure or by deed-in-lieu of foreclosure
(REO) are recorded at the lower of cost or fair value less estimated costs to
sell. Fair value is generally determined by management based on a number of
factors, including third-party appraisals of fair value in an orderly sale.
Accordingly, the valuation of REO is subject to significant external and
internal judgment. Any differences between management’s assessment of fair
value, less estimated costs to sell, and the carrying value of the loan at the
date a particular property is transferred into REO are charged to the allowance
for loan losses. Management periodically reviews REO values to determine whether
the property continues to be carried at the lower of its recorded book value or
fair value, net of estimated costs to sell. Any further decreases in the value
of REO are considered valuation adjustments and trigger a corresponding charge
to non-interest expense in the Consolidated Statements of Operations. Expenses
from the maintenance and operations of REO are included in other non-interest
expense.





Goodwill
Valuation


Goodwill
is initially recorded when the purchase price paid for an acquisition exceeds
the estimated fair value of the net identified tangible and intangible assets
acquired.  Goodwill is presumed to have an indefinite useful life and
is tested, at least annually, for impairment at the reporting unit
level.  The Company has one reporting unit, the Bank, for purposes of
computing goodwill.  All of the Company’s goodwill has been allocated
to this single reporting unit.  The Company








46






performs
an annual review in the third quarter of each year, or more frequently if
indications of potential impairment exist, to determine if the recorded goodwill
is impaired.  If the fair value exceeds the carrying value, goodwill
at the reporting unit level is not considered impaired and no additional
analysis is necessary.   If the carrying value of the reporting
unit is higher than its fair value, there is an indication that impairment may
exist and additional analysis must be performed to measure the amount of
impairment loss, if any.  The amount of impairment is determined by
comparing the implied fair value of the reporting unit’s goodwill to the
carrying value of the goodwill in the same manner as if the reporting unit was
being acquired in a business combination.  Specifically, the Company
would allocate the fair value to all of the assets and liabilities of the
reporting unit, including unrecognized intangible assets, in a hypothetical
analysis that would calculate the implied fair value of goodwill.  If
the implied fair value of goodwill is less than the recorded goodwill, the
Company would record an impairment charge for the difference.





A
significant amount of judgment is involved in determining if an indicator of
impairment has occurred. Such indicators may include, among others; a
significant decline in our expected future cash flows; a sustained, significant
decline in our stock price and market capitalization; a significant adverse
change in legal factors or in the business climate; adverse action or assessment
by a regulator; and unanticipated competition. Any adverse change in these
factors could have a significant impact on the recoverability of these assets
and could have a material impact on the Company’s Consolidated Financial
Statements.





The
goodwill impairment test involves a two-step process.  The first step
is a comparison of the reporting unit’s fair value to its carrying
value.  The Company estimates fair value using the best information
available, including market information and a discounted cash flow analysis,
which is also referred to as the income approach.  The income approach
uses a reporting unit’s projection of estimated operating results and cash flows
that is discounted using a rate that reflects current market
conditions.  The projection uses management’s best estimates of
economic and market conditions over the projected period including growth rates
in loans and deposits, estimates of future expected changes in net interest
margins and cash expenditures.  The market approach estimates fair
value by applying cash flow multiples to the reporting unit’s operating
performance.  The multiples are derived from comparable publicly
traded companies with similar operating and investment characteristics of the
reporting unit. We validate our estimated fair value by comparing the fair value
estimates using the income approach to the fair value estimates using the market
approach.





Income
taxes


The
Company estimates tax expense based on the amount it expects to owe various tax
authorities.  Accrued taxes represent the net estimated amount due or
to be received from taxing authorities.  In estimating accrued taxes,
management assesses the relative merits and risks of the appropriate tax
treatment of transactions taking into account statutory, judicial and regulatory
guidance in the context of our tax position.  For additional
information see Note 1 and Note 14 of the Notes to the Consolidated Financial
Statements in Item 8 of this Form 10-K.





Operating
Strategy





Fiscal
year 2009 marked the 86th anniversary since the Bank opened its doors in
1923.  The historical emphasis had been on residential real estate
lending. Since 1998, however, the Company has been diversifying its loan
portfolio through the expansion of its commercial and construction loan
portfolios.  At March 31, 2009, commercial and construction loans
represented 89.2% of total loans.  Commercial lending including
commercial real estate has higher credit risk, wider interest margins and
shorter terms than residential lending which can increase the loan portfolio’s
profitability.





The
Company’s growing commercial customer base has enjoyed new products and the
improvements in existing products.  These new products include
business checking, internet banking, remote deposit capture, expanded cash
management services, bankcard merchant services, CDARS deposit offerings and new
loan products.  Retail customers have benefited from expanded choices
ranging from additional automated teller machines, consumer lending products,
checking accounts, debit cards, 24 hour account information service and internet
banking.





During
fiscal year 2007, the Company opened a new full service branch and commercial
lending center (Gateway branch) in Portland, Oregon. During fiscal year 2008,
the Company opened a new lending office in Clackamas Oregon and relocated one of
its leased branches in Vancouver into a new Company-owned facility.





The
Company’s relationship banking has continued to be enhanced by the 1998 addition
of RAMCorp., a trust company directed by experienced trust officers. Assets
under management by RAMCorp. totaled $276.6 million at March 31,
2009.  The Company’s relationship banking has also benefited through
expanded loan products serviced by experienced commercial and consumer lending
officers, and an expanded branch network led by experienced branch
managers.  Development of relationship banking has been the key to the
Company’s growth.








47





In
response to the adverse economic conditions, the Company has been, and will
continue to work toward reducing the amount of nonperforming assets, adjusting
the balance sheet by reducing loan totals and other assets as possible, reducing
controllable operating costs, and augmenting deposits while maintaining
available secured borrowing facilities to improve liquidity and preserve capital
over the coming fiscal year.  In this regard, as part of our strategic
planning; we are currently considering raising additional capital.  We
anticipate that this capital will be raised through non-government sources for
the purpose of increasing our capital position and achieving compliance with the
additional capital requirements contained in the MOU.  This additional
capital would also be available to support our future
acquisitions.  We do not, however, have any plans arrangements or
understandings regarding any acquisition transactions.  We have not
decided on the type of securities we will issue but it may include common stock,
preferred stock, warrants or a combination of these obligations.





Comparison
of Financial Condition at March 31, 2009 and 2008





At March
31, 2009, the Company had total assets of $914.3 million compared with $886.8
million at March 31, 2008.  The increase in total assets was primarily
a result of the increase in the balance of loans outstanding.





Cash,
including interest-earning accounts, totaled $19.2 million at March 31, 2009,
compared to $36.4 million at March 31, 2008.  The $17.2 million
decrease was primarily attributable to a decrease in cash balances maintained at
the FRB as a result of the implementation of Check 21 during the second quarter
of fiscal 2009 and the utilization of cash to fund loan production.





Investment
securities available-for-sale totaled $8.5 million at March 31, 2009, compared
to $7.5 million at March 31, 2008.  The $1.0 million increase was
attributable to the purchase of a $5.0 million agency security, offset by an
impairment charge of $3.4 million as well as scheduled maturities.





Mortgage-backed
securities available-for-sale totaled $4.1 million at March 31, 2009, compared
to $5.3 million at March 31, 2008.  The $1.2 million decrease was a
result of pay downs.   The Company does not believe it has any
exposure to sub-prime mortgage-backed securities.





Loans
receivable, net, was $784.1 million at March 31, 2009, compared to $756.5
million at March 31, 2008, a 3.6% increase. Net loans receivable decreased $21.4
million, or 2.7%, at March 31, 2009 compared to the previous linked quarter
primarily as a result of $12.3 million in loans transferred to REO and $4.3
million in charge-offs.  A substantial portion of the loan portfolio
is secured by real estate, either as primary or secondary collateral, located in
the Company’s primary market area.  Risks associated with loans
secured by real estate include decreasing land and property values, material
increases in interest rates, deterioration in local economic conditions,
tightening credit or refinancing markets, and a concentration of loans within
any one area.  The Company has no sub-prime residential real estate
loans in its portfolio.





Goodwill
was $25.6 million at March 31, 2009 and 2008.  The Company performed
its annual goodwill impairment test during the third quarter ended December 31,
2008.  The results of these tests indicated that the Company’s
goodwill was not impaired.  For additional information on our goodwill
impairment testing, see "Item 7.  Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Goodwill
Valuation."





Deposit
accounts totaled $670.1 million at March 31, 2009 compared to $667.0 million at
March 31, 2008.  The impact of falling interest rates during fiscal
year 2009 has resulted in a shift in customer deposit choices from money market
deposit and interest checking accounts into certificates of
deposit.  As a result, the balance of certificates of deposit
increased $12.0 million to $277.7 million at March 31, 2009, compared to $265.7
million at March 31, 2008.  Total brokered deposits at March 31, 2009
were $19.9 million, or 2.9% of total deposits compared to $25.7 million, or 3.9%
of total deposits, at March 31, 2008.  Customer relationship deposits
balances increased $18.9 million since March 31, 2008.





FHLB
advances decreased to $37.9 million at March 31, 2009 as compared to $92.9
million at March 31, 2008.  The decrease was the result of the
Company’s advances from the FRB during the fourth quarter of the fiscal year
ended March 31, 2009.  FRB advances totaled $85.0 million at March 31,
2009.  The decision to shift the Company’s borrowings to the FRB
during the quarter was due to lower cost of FRB borrowings as compared to those
from the FHLB.





Shareholders'
equity decreased $3.9 million to $88.7 million at March 31, 2009 from $92.6
million at March 31, 2008. The decrease in equity resulting from cash dividends
declared to shareholders of $1.4 million and a net loss of $2.7 million for the
year ended March 31, 2009.  The decrease was partially offset by the
exercise of stock options, earned ESOP shares and the net tax effect of SFAS No.
115 adjustment to securities of $169,000.








48





Goodwill
Valuation





As part
of our process for performing the step one impairment test of goodwill, the
Company estimated the fair value of the reporting unit utilizing the income
approach and the market approach in order to derive an enterprise value of the
Company.  Assumptions used by the Company in its discounted cash flow
model (income approach) included an annual revenue growth rate that approximated
4%, a net interest margin that approximated 4% and a return on assets that
ranged from 0.50% to 0.78% (average of 0.70%).  In addition to
utilizing the above projections of estimated operating results, key assumptions
used to determine the fair value estimate under the income approach was the
discount rate of 15 percent utilized for our cash flow estimates and a terminal
value estimated at 1.0 times the ending book value of the reporting
unit.  The Company used a build-up approach in developing the discount
rate that included: an assessment of the risk free interest rate, the rate of
return expected from publicly traded stocks, the industry the Company operates
in and the size of the Company. The estimated market capitalization considers
trends in our market capitalization and an expected control premium. The Company
used an expected control premium of 30%, which was based on comparable
transactional history.  In applying the market approach method, the
Company selected nine publicly traded comparable institutions based on a variety
of financial metrics (tangible equity, leverage ratio, return on assets, return
on equity, net interest margin, nonperforming assets, net charge-offs, and
reserves for loan losses) and other relevant qualitative factors (geographical
location, lines of business, business model, risk profile, availability of
financial information, etc.)  After selecting comparable institutions,
the Company derived the fair value of the reporting unit by completing a
comparative analysis of the relationship between their financial metrics listed
above and their market values utilizing various market multiples.  The
Company calculated a fair value of its reporting unit of $74 million using the
income approach and $71 million using the market approach.  Based on
the results of the step one impairment analysis, the Company determined the
second step must be performed.





The
Company calculated the implied fair value of its reporting unit under the step
two goodwill impairment test.  Under this approach, the Company
calculated the fair value for its unrecognized deposit intangible, as well as
the remaining assets and liabilities of the reporting
unit.  Significant adjustments were made to the fair value of the
Company’s loans receivable compared to its recorded value.  Key
assumptions used in its fair value estimate of loans receivable was the discount
for comparable loan sales.  The Company used a weighted average
discount valuation that approximated the discount for similar loan sales by the
FDIC during the past year.  The Company segregated its loan portfolio
into seven categories, including performing loans, nonperforming loans and
sub-performing loans.  The weighted average discount valuation for
these individual categories ranged from 3.0% (for performing loans) to 73.0%
(for nonperforming real estate loans).  Based on results of the step
two impairment test, the Company determined no impairment charge of goodwill was
required.





An
interim impairment test was not deemed necessary as of March 31, 2009, due to
there not being a significant change in the reporting unit’s assets and
liabilities, the amount that the fair value of the reporting unit exceeded the
carrying value as of the most recent valuation, and because the Company
determined that, based on an analysis of events that have occurred and
circumstances that have changed since the most recent valuation date, the
likelihood that a current fair value determination would be less than the
current carrying amount of the reporting unit is remote.





Even
though the Company determined that there was no goodwill impairment during
fiscal year 2009, continued declines in the value of our stock price as well as
values of others in the financial industry, declines in revenue for the Bank
beyond our current forecasts and significant adverse changes in the operating
environment for the financial industry may result in a future impairment
charge.





It is
possible that changes in circumstances, existing at the measurement date or at
other times in the future, or in the numerous estimates associated with
management’s judgments, assumptions and estimates made in assessing the fair
value of our goodwill, could result in an impairment charge of a portion or all
of our goodwill.  If the Company recorded an impairment charge, its
financial position and results of operations would be adversely affected,
however, such an impairment charge would have no impact on our liquidity,
operations or regulatory capital.





Fair
Value of Level 3 Assets





The
Company fair values certain assets that are classified as Level 3 under the fair
value hierarchy established in SFAS No. 157.  These Level 3 assets are
valued using significant unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets. These
Level 3 assets include certain available for sale securities, loans measured for
impairment, and REO for which there is neither an active market for identical
assets from which to determine fair value, nor is there sufficient, current
market information about similar assets to use as observable, corroborated data
for all significant inputs in a valuation model. Under these circumstances, the
fair values of these assets are determined using pricing models, discounted cash
flow methodologies, appraisals, valuation in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan an amendment of FASB
Statements No. 5 and 15” or similar techniques, for which the determination of
fair value requires significant management judgment or estimation.








49






Valuations
using models or other techniques are sensitive to assumptions used for the
significant inputs.  Where market data is available, the inputs used
for valuation reflect that information as of the valuation date.  In
periods of extreme volatility, lessened liquidity or in illiquid markets, there
may be more variability in market pricing or a lack of market data to use in the
valuation process.  Judgment is then applied in formulating those
inputs.





At March
31, 2009, the market for the Company’s single trust preferred pooled security
was determined to be inactive in management’s judgment.  This
determination was made by the Company after considering the last known trade
date for this specific security, the low number of transactions for similar
types of securities, the low number of new issuances for similar securities, the
significant increase in the implied liquidity risk premium for similar
securities, the lack of information that is released publicly and discussions
with third-party industry analysts.  Due to the inactivity in the
market, observable market data was not readily available for all significant
inputs for this security.  Accordingly, the trust preferred pooled
security was classified as Level 3 in the fair value
hierarchy.   The Company utilized observable inputs where
available, unobservable data and modeled the cash flows adjusted by an
appropriate liquidity and credit risk adjusted discount rate using an income
approach valuation technique in order to measure the fair value of the security.
Significant unobservable inputs were used that reflect our assumptions of what a
market participant would use to price the security.  Significant
unobservable inputs included selecting an appropriate discount rate, default
rate and repayment assumptions.  In selecting our assumptions, we
considered the current rates for similarly rated corporate securities, market
liquidity, the individual issuer’s financial conditions, historical repayment
information, and future expectations of the capital markets. The reasonableness
of the fair value, and classification as a Level 3 asset, was validated through
comparison of fair value as determined by two independent third-party pricing
services.





Certain
loans included in the loan portfolio were deemed impaired in accordance with
SFAS No. 114 at March 31, 2009.  Accordingly, loans measured for
impairment were classified as Level 3 in the fair value hierarchy as there is no
active market for these loans.  Measuring impairment of a loan
requires judgment and estimates, and the eventual outcomes may differ from those
estimates.  Impairment was measured based on a number of factors,
including recent independent appraisals which are further reduced for estimated
selling costs or as a practical expedient by estimating the present value of
expected future cash flows, discounted at the loan’s effective interest
rate.





In
addition, REO was classified as Level 3 in the fair value
hierarchy.  Management generally determines fair value based on a
number of factors, including third-party appraisals of fair value less estimated
costs to sell.  The valuation of REO is subject to significant
external and internal judgment, and the eventual outcomes may differ from those
estimates.





For
additional information on our Level 1, 2 and 3 fair value measurements see Note
19– Fair Value Measurement in the Notes to Consolidated Financial Statements
contained herein.





Comparison of Operating Results for
the Years Ended March 31, 2009 and 2008





Net Income or
Loss.  Net loss was $2.7 million, or $0.25 per diluted earning
share for the year ended March 31, 2009, compared to net income of $8.6 million,
or $0.79 per diluted share for the year ended March 31, 2008.  The
decrease was primarily due to a decrease in net interest income, an increase in
the provision for loan losses and a $3.4 million OTTI charge related to a trust
preferred security held by the Company.





Net Interest
Income.  Net interest income for fiscal year 2009 was $33.7
million, representing a $1.3 million, or a 3.7% decrease, from $35.0 million in
fiscal year 2008.  The ratio of average interest-earning assets to
average interest-bearing liabilities decreased to 114.85% for the fiscal year
ended March 31, 2009 compared to 116.75% for the fiscal year ended March 31,
2008, which indicates that the interest-earning asset growth is being funded
more by interest-bearing liabilities as compared to capital and
non-interest-bearing demand deposits.  The net interest margin for the
fiscal year ended March 31, 2009 was 4.08% compared to 4.66% for the same prior
year period.  Generally, the Company’s balance sheet interest rate
sensitivity achieves better net interest rate margins in a stable or increasing
interest rate environment due to the balance sheet being slightly asset interest
rate sensitive.  In a decreasing interest rate environment, the
Company requires time to reduce deposit interest rates to recover the decline in
the net interest rate margin.  Interest rates on the Company’s
interest-earning assets reprice down faster than interest rates on the Company’s
interest-bearing liabilities.  As a result of the Federal Reserve’s
200 basis point reduction in the short-term federal funds rate during the year
ended March 31, 2009, approximately 36% of the Company’s loans immediately
repriced down 200 basis points.  The Company also immediately reduced
the interest rate paid on certain interest-bearing deposits.  During
the fourth quarter of fiscal 2009, the Company made further progress in reducing
its deposit and borrowing costs.  Further reductions will be reflected
in future deposit offering rates.  The amount and timing of these
reductions is dependent on competitive pricing pressures, yield curve shape and
changes in spreads.








50





Interest
Income.  Interest income was $52.9 million for the fiscal year
ended March 31, 2009 compared to $60.7 million, for the fiscal year ended March
31, 2008.  Decreases in interest income were due to the Federal
Reserve rate cuts described above as well as interest income reversals on
nonperforming loans.  The yield on interest-earning assets was 6.39%
for fiscal year 2009 compared to 8.09% for fiscal year 2008.  During
the year ended March 31, 2009 and 2008, the Company reversed $854,000 and
$74,000, respectively, of interest income on nonperforming
loans.  These decreases were partially offset by increases in the
average loan balance due to continued loan growth.  Average
interest-bearing assets increased $76.7 million to $827.7 million for fiscal
year 2009 from $751.0 million for fiscal year 2008.  Other interest
and dividend income decreased $770,000 to $212,000 for fiscal year 2009 compared
to $982,000 for fiscal year 2008.  This decrease was due to a
reduction in yield on daily interest-bearing assets to 1.17% for fiscal year
2009 compared to 4.73% for fiscal year 2008 as well as a reduction in the
average balance of such assets.  The decrease in the yield for such
assets was primarily due to falling interest rates during the year due to the
Federal Reserve interest rate cuts described above.





Interest
Expense.  Interest expense for the fiscal year ended March 31,
2009 totaled $19.2 million, a $6.5 million or 25.4% decrease from $25.7 million
for the fiscal year ended March 31, 2008.  The decrease in interest
expense is the result of lower rates of interest paid on deposits and borrowings
as a result of the Federal Reserve interest rate cuts described
above.  The weighted average interest rate on interest-bearing
deposits decreased from 3.86% for the year ended March 31, 2008 to 2.68% for the
year ended March 31, 2009.  The weighted average interest rate of FHLB
borrowings decreased from 4.32% for the year ended March 31, 2008 to 1.99% for
the year ended March 31, 2009.





Provision for Loan Losses. The
provision for loan losses for fiscal year 2009 was $16.2 million, compared to
$2.9 million for the same period in the prior year. The significantly greater
provision for loan losses is primarily the result of the current economic
conditions and slowdown in residential real estate sales that affected among
others, homebuilders and developers. A slowdown in home buying has resulted in
slower sales and declining real estate values which have significantly affected
these borrowers liquidity and ability to repay loans. This slowdown has led to
an increase in delinquent and nonperforming construction and land development
loans as well as additional loan charge-offs. Nonperforming loans generally
reflect unique operating difficulties for the individual borrower; however, more
recently the deterioration in the general economy has become a significant
contributing factor to the increased levels of delinquencies and nonperforming
loans. Net charge-offs for the year ended March 31, 2009 were $9.9 million,
compared to $866,000 for the same period last year. The increase in net
charge-offs is primarily attributable to the charge-off of land and lot loans
totaling $6.1 million, speculative construction loans totaling $1.8 million and
commercial loans totaling $1.2 million for the year ended March 31, 2009. Net
charge-offs to average net loans for the year ended March 31, 2009 were 1.24%,
compared to 0.12% for the same period last year. Nonperforming loans increased
to $27.6 million at March 31, 2009 compared to $7.7 million at March 31, 2008.
The ratio of allowance for loan losses and unfunded loan commitments to total
net loans was 2.15% at March 31, 2009, compared to 1.44% at March 31,
2008.  The allowance as a percentage of nonperforming loans decreased
to 61.6% at March 31, 2009, compared to 139.2% at March 31, 2008. The allowance
for loan losses to nonperforming loans decreased as more of the nonperforming
loan balances have been reduced to expected recovery values as a result of
specific impairment analysis and related charge-offs.





The
problem loans identified by the Company largely consist of land acquisition and
development loans.  Impaired loans are subjected to an impairment
analysis to determine an appropriate reserve amount to be held against each
loan. As of March 31, 2009, the Company had identified $28.7 million of impaired
loans as defined by SFAS No. 114. Because the significant majority of our
impaired loans are collateral dependent, nearly all of our specific allowances
are calculated on the fair value of the collateral.  Of those impaired
loans, $3.7 million have no specific valuation allowance as their estimated
collateral value is equal to or exceeds the carrying costs.  The
remaining $25.0 million have specific valuation allowances totaling $4.3
million.  Management’s evaluation of the allowance for loan losses is
based on ongoing, quarterly assessments of the known and inherent risks in the
loan portfolio.  Loss factors are based on the Company’s historical
loss experience with additional consideration and adjustments made for changes
in economic conditions, changes in the amount and composition of the loan
portfolio, delinquency rates, a detailed analysis of impaired loans and other
factors as deemed appropriate.  These factors are evaluated on a
quarterly basis.  Loss rates used by the Company are impacted as
changes in these risk factors increase or decrease from quarter to
quarter.  At March 31, 2009, management’s analysis placed greater
emphasis on the Company’s construction and land development loan portfolios and
the effect of various factors such as geographic and loan type
concentrations.  The Company also considered the effects of declining
home values and slower home sales. Based on its comprehensive analysis,
management deemed the allowance for loan losses of $16.97 million at March 31,
2009 (2.12% of total loans and 61.57% of nonperforming loans) adequate to cover
probable losses inherent in the loan portfolio.








51





Non-Interest
Income.  Non-interest income decreased $3.4 million to $5.5
million for the year ended March 31, 2009 from $8.9 million for the same period
in 2008.  The decrease in non-interest income is primarily due to the
OTTI charge of $3.4 million on a trust preferred security taken during the
second quarter of fiscal year 2009.  For the year ended March 31,
2009, broker loan fees decreased by $804,000 compared to the year ended March
31, 2008 primarily as a result the slowdown in real estate loan
sales.  The decrease in asset management fees of $68,000 for the year
ended March 31, 2009 compared to the same prior year period corresponds with the
decrease in assets under management by RAMCorp. from $330.5 million at March 31,
2008 to $276.6 million at March 31, 2009.  The decrease in value of
assets under management is primarily attributable to the decline in the stock
market during fiscal year 2009.  These decreases were partially offset
by an increase of $361,000 in gains on loans held for sale, as well as the
reversal of $489,000 for a contingent liability previously reserved for a
property, which the Company disposed of during the fourth quarter of fiscal year
2009.





Non-Interest
Expense.  Non-interest expense decreased $532,000 to $27.3
million for fiscal year ended March 31, 2009 compared to $27.8 million for
fiscal year ended March 31, 2008. Management continues to focus on managing
controllable costs as the Company proactively adjusts to lower levels of real
estate lending activity.  The principal components of the decrease in
the Company’s non-interest expense were decreases in salaries and employee
benefits and marketing expenses.  For the year ended March 31, 2009,
salaries and employee benefits, which includes mortgage broker commission
compensation, was $15.1 million, a 7.2% decrease over the prior year total of
$16.2 million. Salaries decreased primarily as a result of a decrease in the
number of full-time equivalent employees from 270 at March 31, 2008 to 247 at
March 31, 2009, and as a result of the decrease in mortgage broker
commissions.





These
decreases were partially offset by an increase in the Company’s FDIC deposit
insurance premium of $550,000 for the year ended March 31, 2009, compared to the
same prior year period.  The FDIC insurance premiums increased
primarily as a result of a one-time FDIC credit, which the Company applied
against its insurance expense in fiscal year 2008, and as a result of an
industry wide increase in FDIC insurance premiums.  We expect our
deposit insurance premiums to increase substantially in fiscal year 2010 as a
result of recent FDIC imposed increases in the assessment rates.





In
addition, REO related expenses (which includes operating costs, write-downs, and
losses on the disposition of property) increased $286,000 for the year ended
March 31, 2009 compared to the same prior year period. Professional fees
increased $284,000 from the year ended March 31, 2009 due primarily to increased
legal fees related to problem assets, including REO. We expect REO related
expense to increase in fiscal year 2010 due to expected increased levels of REO
activity.





Income Taxes.  The benefit for
income taxes was $1.6 million for the year ended March 31, 2009 compared to an
income tax provision of $4.5 million for the year ended March 31,
2008.  The benefit for income taxes was a result of the net pre-tax
loss incurred for the year ended March 31, 2009.  The effective tax
rate for fiscal year 2009 was 37.1% compared to 34.2% for fiscal year
2008.  When the Company incurs a pre-tax loss, its effective tax rate
is higher than the statutory tax rate primarily as a result of non-taxable
income generated from investments in bank owned life insurance and tax-exempt
municipal bonds.  Reference is made to Note 14 of the Notes to the
Consolidated Financial Statements contained in Item 8 of this Form 10-K, for
further discussion of the Company’s income taxes.





Comparison
of Operating Results for the Years Ended March 31, 2008 and 2007





Net Income.  Net
income was $8.6 million, or $0.79 per diluted share for the year ended March 31,
2008, compared to $11.6 million, or $1.01 per diluted share for the year ended
March 31, 2007.  The decrease was primarily due to a combination of
decreased net interest income and an increase in the provision for loan
losses.





Net Interest
Income.  Net interest income for fiscal year 2008 was $35.0
million, representing a $1.6 million, or a 4.3% decrease, from $36.5 million in
fiscal year 2007.  The ratio of average interest earning assets to
average interest bearing liabilities decreased to 116.75% in fiscal year 2008
from 118.96% in fiscal year 2007.





Interest
Income.  Interest income was $60.7 million for the fiscal year
ended March 31, 2008 compared to $61.3 million for the fiscal year ended March
31, 2007. Decreased interest income was the result of Federal Reserve rate cuts.
Average interest-bearing assets increased $19.9 million to $751.0 million for
fiscal 2008 from $731.1 million for fiscal year 2007.  The yield on
interest-earning assets was 8.09% for fiscal year 2008 compared to 8.40% for
fiscal year 2007.





Interest
Expense.  Interest expense for the fiscal year ended March 31,
2008 totaled $25.7 million, a $948,000 or 3.8% increase from $24.8 million for
the fiscal year ended March 31, 2007.  The increase in interest
expense is the result of higher rates of interest paid on deposits and
borrowings that occurred during the first half of fiscal year
2008.  The weighted average interest rate of total deposits increased
from 3.82% for the year ended March 31, 2007 to 3.86% for the year ended March
31, 2008.  The weighted average interest rate of FHLB borrowings
decreased from 5.26% for the year ended March








52






31, 2007
to 4.32% for the year ended March 31, 2008.  Due to the falling
interest rate environment, the mix of deposits shifted into certificates of
deposit.





Provision for Loan
Losses.  The provision for loan losses for fiscal year 2008 was
$2.9 million, compared to $1.4 million for the same period in the prior
year.  The increase in the provision for loan losses was the result of
increased loan growth, changes in the loan loss rates and a negative trend in
the risk rating migration of certain loans.  The risk rating migration
largely consisted of land acquisition and development loans and residential
construction loans being moved to higher risk rating categories.  The
ratio of allowance for loan losses and unfunded loan commitments to total net
loans was 1.44% at March 31, 2008, compared to 1.31% at March 31,
2007.  Net charge-offs for the year ended March 31, 2008 were
$866,000, compared to net recoveries of $7,000 for the same period last
year.  The increase in net charge-offs was primarily attributable to
the charge-off of three commercial loans totaling $787,000 for the year ended
March 31, 2008.  Annualized net charge-offs to average net loans for
the year ended March 31, 2008 were 0.12%, compared to 0.00% for the same period
in the prior year.





Non-Interest
Income.  Non-interest income decreased $152,000 to $8.9 million
for the year ended March 31, 2008 from $9.0 million for the same period in
2007.  Decreases in mortgage broker loan fees that are reported in
fees and service charges were partially offset by an increase in asset
management fees.  For the year ended March 31, 2008, broker loan fees
decreased by $480,000 compared to the year ended March 31, 2007.  The
increase in asset management fees of $271,000 for the year ended March 31, 2008
compared to the same prior year period reflected the increase in assets under
management by RAMCorp. from $285.6 million at March 31, 2007 to $330.5 million
at March 31, 2008.





Non-Interest
Expense.  Non-interest expense increased $1.4 million, or 5.5%,
to $27.8 million for fiscal year ended March 31, 2008 compared to $26.4 million
for fiscal year ended March 31, 2007. The principal component of the increase in
the Company's non-interest expense was salaries and employee
benefits.  For the year ended March 31, 2008, salaries and employee
benefits, which includes mortgage broker commission compensation, was $16.2
million, an 8.2% increase over the prior year total of $15.0 million. Salaries
increased as the number of full-time equivalent employees increased to 270 at
March 31, 2008 from 255 at March 31, 2007, which was primarily the result of the
expansion of the Company’s lending team and the opening of a new branch and
separate lending office.





Provision for Income
Taxes.  The provision for
income taxes was $4.5 million for the year ended March 31, 2008 compared to $6.2
million for the year ended March 31, 2007 as a result of the decrease in income
before taxes.  The effective tax rate for fiscal year 2008 was 34.2%
compared to 34.6% for fiscal year 2007.  Reference is made to Note 14
of the Notes to the Consolidated Financial Statements contained in Item 8 of
this Form 10-K, for further discussion of the Company’s income
taxes.





Average Balance
Sheet.  The following table sets forth, for the periods
indicated, information regarding average balances of assets and liabilities as
well as the total dollar amounts of interest income earned on average
interest-earning assets and interest expense paid on average interest-bearing
liabilities, resultant yields, interest rate spread, ratio of interest-earning
assets to interest-bearing liabilities and net interest margin. Average balances
for a period have been calculated using monthly average balances during such
period. Interest income on tax-exempt securities has been adjusted to a
taxable-equivalent basis using the statutory federal income tax rate of 34%.
Non-accruing loans were included in the average loan amounts outstanding. Loan
fees of $2.0 million, $2.8 million and $3.7 million are included in interest
income for the years ended March 31, 2009, 2008 and 2007,
respectively.











53







Year
      Ended March 31,2009
            
            
            2008
            
            
            2007Average
      Balance
            
            
            Interest
      and Dividends
            
            Yield/
      Cost
            
            
            
            Average
      Balance
            
            
            Interest
              and
              Dividends
            
            Yield/
              Cost
            
            
            
            Average
      Balance
            
            
            Interest
              and
              Dividends
            
            Yield/
              Cost(Dollars
      in thousands)Interest-earning
      assets:Mortgage
      loans
            $
            674,144
            
            $
            44,781
            
            6.64
            %
            
            $
            600,386
            
            $
            50,229
            
            8.37
            %
            
            $
            585,595
            
            $
            50,981
            
            8.71
            %Non-mortgage
      loans
            
            120,077
            
            
            7,102
            
            5.91
            
            
            
            105,470
            
            
            8,518
            
            8.08
            
            
            
            100,031
            
            
            8,515
            
            8.51Total net loans
            
            794,221
            
            
            51,883
            
            6.53
            
            
            
            705,856
            
            
            58,747
            
            8.32
            
            
            
            685,626
            
            
            59,496
            
            8.68Mortgage-backed
      securities (1)
            
            5,348
            
            
            211
            
            3.95
            
            
            
            7,101
            
            
            323
            
            4.55
            
            
            
            9,077
            
            
            421
            
            4.64Investment
      securities (1)
            
            10,063
            
            
            615
            
            6.11
            
            
            
            11,480
            
            
            703
            
            6.12
            
            
            
            22,260
            
            
            1,101
            
            4.95Daily
      interest-bearing assets
            
            9,593
            
            
            112
            
            1.17
            
            
            
            18,656
            
            
            883
            
            4.73
            
            
            
            6,559
            
            
            337
            
            5.14Other
      earning assets
            
            8,515
            
            
            100
            
            1.17
            
            
            
            7,930
            
            
            99
            
            1.25
            
            
            
            7,567
            
            
            29
            
            0.38Total interest-earning assets
            
            827,740
            
            
            52,921
            
            6.39
            
            
            
            751,023
            
            
            60,755
            
            8.09
            
            
            
            731,089
            
            
            61,384
            
            8.40Non-interest-earning
      assets:Office properties and equipment, net
            
            20,339
            
            
            
            
            
            
            
            
            21,427
            
            
            
            
            
            
            
            
            20,387Other
      non-interest-earning assets
            
            54,180
            
            
            
            
            
            
            
            
            59,589
            
            
            
            
            
            
            
            
            61,623Total
      assets
            $
            902,259
            
            
            
            
            
            
            
            $
            $832,039
            
            
            
            
            
            
            
            $
            813,099Interest-bearing
      liabilities:Regular
      savings accounts
            $
            27,138
            
            $
            149
            
            0.55
            
            
            $
            27,403
            
            $
            151
            
            0.55
            
            
            $
            32,591
            
            $
            179
            
            0.55Interest
      checking
            
            86,986
            
            
            983
            
            1.13
            
            
            
            129,552
            
            
            3,906
            
            3.02
            
            
            
            139,600
            
            
            4,421
            
            3.17Money
      market accounts
            
            173,853
            
            
            3,810
            
            2.19
            
            
            
            219,528
            
            
            8,882
            
            4.05
            
            
            
            161,590
            
            
            6,969
            
            4.31Certificates
      of deposit
            
            282,055
            
            
            10,337
            
            3.66
            
            
            
            197,049
            
            
            9,204
            
            4.67
            
            
            
            202,506
            
            
            8,938
            
            4.41Total interest-bearing deposits
            
            570,032
            
            
            15,279
            
            2.68
            
            
            
            573,532
            
            
            22,143
            
            3.86
            
            
            
            536,287
            
            
            20,507
            
            3.82Other
      interest-bearing liabilities
            
            150,681
            
            
            3,904
            
            2.59
            
            
            
            69,733
            
            
            3,587
            
            5.14
            
            
            
            78,259
            
            
            4,275
            
            5.46Total interest-bearing liabilities
            
            720,713
            
            
            19,183
            
            2.66
            
            
            
            643,265
            
            
            25,730
            
            4.00
            
            
            
            614,546
            
            
            24,782
            
            4.03Non-interest-bearing
      liabilities:Non-interest-bearing
      deposits
            
            81,566
            
            
            
            
            
            
            
            
            82,776
            
            
            
            
            
            
            
            
            91,888Other
      liabilities
            
            7,108
            
            
            
            
            
            
            
            
            9,068
            
            
            
            
            
            
            
            
            8,995Total liabilities
            
            809,387
            
            
            
            
            
            
            
            
            735,109
            
            
            
            
            
            
            
            
            715,429Shareholders’
      equity
            
            92,872
            
            
            
            
            
            
            
            
            96,930
            
            
            
            
            
            
            
            
            97,670Total
      liabilities and shareholders’ equity
            $
            902,259
            
            
            
            
            
            
            
            $
            $832,039
            
            
            
            
            
            
            
            $
            $813,099Net
      interest income
            
            
            
            $
            33,738
            
            
            
            
            
            
            
            $
            35,025
            
            
            
            
            
            
            
            $
            36,602Interest
      rate spread
            
            
            
            
            
            
            3.73
            %
            
            
            
            
            
            
            
            4.09
            %
            
            
            
            
            
            
            
            4.37
            %Net
      interest margin
            
            
            
            
            
            
            4.08
            %
            
            
            
            
            
            
            
            4.66
            %
            
            
            
            
            
            
            
            5.01
            %Ratio
      of average interest-earning assets
              to
      average interest-bearing liabilities
            
            
            
            
            
            
            114.85
            %
            
            
            
            
            
            
            
            116.75
            %
            
            
            
            
            
            
            
            118.96
            %Tax
      Equivalent Adjustment (2)
            
            
            
            $
            71
            
            
            
            
            
            
            
            $
            73
            
            
            
            
            
            
            
            $
            84(1)
      For purposes of the computation of average yield on investments available
      for sale, historical cost balances were utilized, therefore, the yield
      information does not give effect to change in fair value that are
      reflected as a component of shareholders’ equity.(2)
      Tax-equivalent adjustment relates to non-taxable investment interest
      income and preferred equity securities dividend income.  The
      federal statutory tax rate was 34% for all years
  presented.








54





Rate/Volume
Analysis





The
following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to: (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume). Rate/volume
variance is allocated based on the percentage relationship of changes in volume
and changes in rate to the total net change.





Year
      Ended March 31,2009
      vs. 2008
            
            2008
      vs. 2007Increase
      (Decrease) Due to
            
            
            
            
            
            Increase
      (Decrease) Due toTotal
            
            
            
            
            
            
            
            
            TotalIncrease
            
            
            
            
            
            
            
            
            Increase(in
      thousands)
            Volume
            
            Rate
            
            (Decrease)
            
            
            Volume
            
            Rate
            
            (Decrease)Interest
      Income:Mortgage
      loans
            $
            5,714
            
            $
            (11,162
            )
            $
            (5,448
            )
            
            $
            1,269
            
            $
            (2,021
            )
            $
            (752
            )Non-mortgage
      loans
            
            1,076
            
            
            (2,492
            )
            
            (1,416
            )
            
            
            447
            
            
            (444
            )
            
            3Mortgage-backed
      securities
            
            (73
            )
            
            (39
            )
            
            (112
            )
            
            
            (90
            )
            
            (8
            )
            
            (98
            )Investment
      securities (1)
            
            (87
            )
            
            (1
            )
            
            (88
            )
            
            
            (617
            )
            
            219
            
            
            (398
            )Daily
      interest-bearing
            
            (303
            )
            
            (468
            )
            
            (771
            )
            
            
            575
            
            
            (29
            )
            
            546Other
      earning assets
            
            7
            
            
            (6
            )
            
            1
            
            
            
            1
            
            
            69
            
            
            70Total
      interest income
            
            6,334
            
            
            (14,168
            )
            
            (7,834
            )
            
            
            1,585
            
            
            (2,214
            )
            
            (629
            )Interest
      Expense:Regular
      savings accounts
            
            (2
            )
            
            -
            
            
            (2
            )
            
            
            (28
            )
            
            -
            
            
            (28
            )Interest
      checking accounts
            
            (1,006
            )
            
            (1,917
            )
            
            (2,923
            )
            
            
            (311
            )
            
            (204
            )
            
            (515
            )Money
      market deposit accounts
            
            (1,582
            )
            
            (3,490
            )
            
            (5,072
            )
            
            
            2,357
            
            
            (444
            )
            
            1,913Certificates
      of deposit
            
            3,406
            
            
            (2,273
            )
            
            1,133
            
            
            
            (247
            )
            
            513
            
            
            266Other
      interest-bearing liabilities
            
            2,714
            
            
            (2,397
            )
            
            317
            
            
            
            (448
            )
            
            (240
            )
            
            (688
            )Total
      interest expense
            
            3,530
            
            
            (10,077
            )
            
            (6,547
            )
            
            
            1,323
            
            
            (375
            )
            
            948Net
      interest income
            $
            2,804
            
            $
            (4,091
            )
            $
            (1,287
            )
            
            $
            262
            
            $
            (1,839
            )
            $
            (1,577
            )(1)
      Interest is presented on a fully tax-equivalent basis under a tax rate of
      34%





Asset
and Liability Management





The
Company's principal financial objective is to achieve long-term profitability
while reducing its exposure to fluctuating market interest rates.  The
Company has sought to reduce the exposure of its earnings to changes in market
interest rates by attempting to manage the difference between asset and
liability maturities and interest rates.  The principal element in
achieving this objective is to increase the interest rate sensitivity of the
Company's interest-earning assets and interest-bearing
liabilities.  Interest rate sensitivity increases by retaining
portfolio loans with interest rates subject to periodic adjustment to market
conditions and selling fixed-rate one-to-four family mortgage loans with terms
to maturity of more than 15 years.  The Company relies on retail
deposits as its primary source of funds.  Management believes retail
deposits reduce the effects of interest rate fluctuations because they generally
represent a stable source of funds. As part of its interest rate risk management
strategy, the Company promotes transaction accounts and certificates of deposit
with terms up to ten years.





The
Company has adopted a strategy that is designed to maintain or improve the
interest rate sensitivity of assets relative to its liabilities.  The
primary elements of this strategy involve: the origination of adjustable rate
loans; increasing commercial, consumer loans that are adjustable rate and
short-term loans and residential construction loans as a portion of total net
loans receivable because of their generally shorter terms and higher yields than
other one-to-four family residential mortgage loans; matching asset and
liability maturities; investing in short term securities; and the origination of
fixed-rate loans for sale in the secondary market and the retention of the
related loan servicing rights. The strategy for liabilities has been to shorten
the maturities for both deposits and borrowings. This approach has remained
consistent throughout the past year, as the Company has experienced a change in
the mix of loans, deposits, FRB advances and FHLB advances.








55





The
Company's mortgage servicing activities provide additional protection from
interest rate risk.  The Company retains servicing rights on all
mortgage loans sold.  As market interest rates rise, the fixed rate
loans held in portfolio diminish in value.  However, the value of the
servicing portfolio tends to rise as market interest rates increase because
borrowers tend not to prepay the underlying mortgages, thus providing an
interest rate risk hedge versus the fixed rate loan portfolio.  The
mortgage loan servicing portfolio totaled $108.9 million at March 31,
2009.  The average balance of the servicing portfolio was $104.9
million and produced loan servicing income of $105,000 for the year ended March
31, 2009.  See "Item 1.  Business -- Lending Activities --
Mortgage Loan Servicing."





Consumer
loans, such as home equity lines of credit and installment loans, commercial and
construction loans typically have shorter terms and higher yields than permanent
residential mortgage loans, and accordingly reduce the Company's exposure to
fluctuations in interest rates.  Adjustable interest rate loans
totaled $618.9 million or 77.2% of total loans at March 31, 2009 as compared to
$575.1 million or 75.0% at March 31, 2008. Although the Company has sought to
originate adjustable rate loans, the ability to originate and purchase such
loans depends to a great extent on market interest rates and borrowers'
preferences. Particularly in lower interest rate environments, borrowers often
prefer to obtain fixed rate loans. See "Item 1. Business -- Lending Activities
-- Construction Lending" and " -- Lending Activities -- Consumer
Lending."





The
Company also invests in short-term to medium-term U.S. Government securities as
well as mortgage-backed securities issued or guaranteed by U.S. Government
agencies.  At March 31, 2009, the combined portfolio carried at $13.7
million had an average term to repricing or maturity of 3.04
years.  Adjustable rate mortgage-backed securities totaled $1.0
million at March 31, 2009 compared to $1.4 million at March 31,
2008.  See "Item 1.  Business -- Investment
Activities."





Liquidity
and Capital Resources





Liquidity
is essential to our business.  The objective of the Bank’s liquidity
management is to maintain ample cash flows to meet obligations for depositor
withdrawals, fund the borrowing needs of loan customers, and to fund ongoing
operations.  Core relationship deposits are the primary source of the
Bank’s liquidity.  As such, the Bank focuses on deposit relationships
with local consumer and business clients who maintain multiple accounts and
services at the Bank.  With the significant downturn in economic
conditions our customers in general have experienced reduced funds available to
deposit in the Bank.  Despite these difficult economic conditions, our
customer relationship deposit balances increased $18.9 million over fiscal year
2009, including an increase in non-interest bearing demand deposits of
approximately $6.4 million.  Overall, total deposits were $670.1
million at March 31, 2009 compared to $667.0 million at March 31,
2008.  However, the growth in our loan portfolio surpassed the growth
in our deposit accounts; as a result, the Company has increased its use of
secured borrowings from FHLB and FRB.  In response to the adverse
economic conditions, the Company has been, and will continue to work toward
reducing the amount of nonperforming assets, adjusting the balance sheet by
reducing loan totals and other assets as possible, reducing controllable
operating costs, and augmenting deposits while striving to maximize secured
borrowing facilities to improve liquidity and preserve capital over the coming
fiscal year.  However, the Company’s inability to successfully
implement its plans or further deterioration in economic conditions and real
estate prices could have a material adverse effect on the Company’s
liquidity.





Liquidity
management is both a short- and long-term responsibility of the Company's
management.  The Company adjusts its investments in liquid assets
based upon management's assessment of (i) expected loan demand, (ii) projected
loan sales, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits and (v) its asset/liability management program
objectives.  Excess liquidity is invested generally in
interest-bearing overnight deposits and other short-term government and agency
obligations.  If the Company requires funds beyond its ability to
generate them internally, it has additional diversified and reliable sources of
funds with the FHLB, the FRB, Pacific Coast Banker’s Bank and other wholesale
facilities. These sources of funds may be used on a long or short-term basis to
compensate for reduction in other sources of funds or on a long term basis to
support lending activities.





The
Company's primary source of funds are customer deposits, proceeds from principal
and interest payments on loans, the sale of loans, maturing securities and FHLB
and FRB advances.  While maturities and scheduled amortization of
loans and securities are a predictable source of funds, deposit flows and
prepayment of mortgage loans and mortgage-backed securities are greatly
influenced by general interest rates, economic conditions and
competition.  Management believes that its focus on core relationship
deposits coupled with access to borrowing through reliable counterparties
provides reasonable and prudent assurance that ample liquidity is
available.  However, depositor or counterparty behavior could change
in response to competition, economic or market situations or other unforeseen
circumstances, which could have liquidity implications that may require
different strategic or operational actions.








56






The
Company must maintain an adequate level of liquidity to ensure the availability
of sufficient funds in order to fund loan originations and deposit withdrawals,
satisfy other financial commitments and to take advantage of investment
opportunities. We generally maintain cash and readily marketable securities to
meet a portion of our short-term liquidity needs; however, our primary liquidity
management practice is to increase or decrease short-term borrowings, including
FHLB advances and FRB borrowings.  At March 31, 2009, advances from
FHLB totaled $37.9 million and the Bank had additional borrowing capacity
available of $204.2 million from the FHLB, subject to sufficient collateral and
stock investment.  At March 31, 2009, advances from the FRB totaled
$85.0 million and the Bank had additional borrowing capacity of $97.5 million
from the FRB, subject to sufficient collateral.  Borrowing capacity
from FHLB or FRB may fluctuate based on acceptability and risk rating of loan
collateral and counterparties could adjust discount rates applied to such
collateral at their discretion.  The Bank also has a $10.0 million fed
funds line with Pacific Coast Banker’s Bank at March 31, 2009.  The
Bank had no borrowings outstanding under this credit agreement at March 31,
2009.





An
additional source of wholesale funding includes brokered certificate of
deposits.  The Company has historically not relied on brokered
deposits to fund its operations.  At March 31, 2009, the Company had
$19.9 million in brokered deposits representing 2.96% of total deposits,
compared to $25.7 million at March 31, 2008, exclusive of CDARS
deposits.  The Bank participates in the CDARS product, which allows
the Bank to accept deposits in excess of the FDIC insurance limits for that
depositor and obtain “pass-through” insurance for the total
deposit.  The Bank’s CDARS balance was $22.2 million at March 31,
2009.  With news of bank failures and increased levels of distress in
the financial services industry and growing customer concern with FDIC insurance
limits, customer interest in and demand for CDARS deposits increased before
leveling off in the fourth quarter. In April 2009, the OTS informed the Bank
that it was placing a restriction on the Bank’s ability to increase wholesale
brokered deposits, including CDARS deposits.  As of the end of April
2009, the Bank paid down its brokered deposits to zero and had CDARS deposits of
$22.8 million.  There can be no assurance that CDARS deposits will be
available for the Company to offer its customers in the future.  The
combination of all the Bank’s funding sources, gives the Bank available
liquidity of $317 million, or 34.6% of total assets at March 31,
2009.





Under the
TLGP, all noninterest-bearing transaction accounts, IOLTA accounts, and certain
NOW accounts are fully guaranteed by the FDIC for the entire amount in the
account.  The Bank has elected to participate in this program at an
additional cost to the Bank.  Other deposits maintained at the Bank
are also insured by the FDIC up to $250,000 per account owner through December
31, 2013.





At March
31, 2009, the Company had commitments to extend credit of $123.1
million.  The Company anticipates that it will have sufficient funds
available to meet current loan commitments.  Certificates of deposit
that are scheduled to mature in less than one year from March 31, 2009 totaled
$232.9 million.  Historically, the Company has been able to retain a
significant amount of its deposits as they mature.  Offsetting these
cash outflows are scheduled loan maturities of less than one year totaling
$277.4 million at March 31, 2009.





Sources
of capital and liquidity for the Company include distributions from the Bank and
the issuance of debt or equity securities. Dividends and other capital
distributions from the Bank arise from the cash flow and earnings of the Bank,
which distributions are subject to regulatory restriction and approval. To the
extent the Bank cannot pay dividends to the Company, the Company may not have
sufficient funds to pay dividends to its stockholders or may be forced to defer
interest payments on its subordinated debentures, which in turn, may restrict
the Company’s ability to pay dividends on its common stock.





OTS
regulations require the Bank to maintain specific amounts of regulatory
capital.  For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements" and Note 17 of the Notes to the Consolidated Financial
Statements contained in Item 8 of this Form 10-K.  In this regard, as
part of our strategic planning; we are currently considering raising additional
capital.  We anticipate that this capital will be raised through
non-government sources for the purpose of increasing our capital position and
achieving compliance with the additional capital requirements contained in the
MOU.  We have not decided on the type of securities we will issue but
it may include common stock, preferred stock, warrants or a combination of these
obligations.





Effect
of Inflation and Changing Prices





The
Consolidated Financial Statements and related financial data presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation.  The primary impact of inflation is reflected in the
increased cost of the Company's operations.  Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature.  As a result, interest rates generally have a
more significant impact on a financial institution's performance than do general
levels of inflation.  Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and
services.








57





New
Accounting Pronouncements





For a
discussion of new accounting pronouncement and their impact on the Company, see
Note 1 of the Notes to the Consolidated Financial Statement included in Item 8
of this Form 10-K.





Contractual
Obligations





The
following table shows the contractual obligations by expected period. Further
discussion of these commitments is included in Note 21 to the Consolidated
Financial Statements included in Item 8 of this report on Form
10-K.




At March
31, 2009, scheduled maturities of certificates of deposit, FRB advances, FHLB
advances, future operating minimum lease commitments and subordinated debentures
were as follows (in thousands):





Within
              1
      Year
            
            
            1
      to 3
              Years
            
            
            3
      - 5
              Years
            
            
            After
              5
      Years
            
            
            Total
              BalanceCertificates
      of deposit
            $
            232,888
            
            $
            34,159
            
            $
            8,629
            
            $
            2,001
            
            $
            277,677FRB
      advances
            
            85,000
            
            
            -
            
            
            -
            
            
            -
            
            
            85,000FHLB
      advances
            
            37,850
            
            
            -
            
            
            -
            
            
            -
            
            
            37,850Operating
      leases
            
            1,632
            
            
            1,863
            
            
            1,586
            
            
            2,927
            
            
            8,008Capital
      leases
            
            40
            
            
            96
            
            
            152
            
            
            2,361
            
            
            2,649Junior
      subordinates debentures
            
            -
            
            
            -
            
            
            -
            
            
            22,681
            
            
            22,681Total
      other contractual obligations
            $
            357,410
            
            $
            36,118
            
            $
            10,367
            
            $
            29,970
            
            $
            433,865




The
Company is party to litigation arising in the ordinary course of
business.  In the opinion of management, these actions will not have a
material adverse effect, if any, on the Company’s financial position, results of
operations, or liquidity.





The Bank
has entered into employment contracts with certain key employees, which provide
for contingent payment subject to future events.





Off-Balance
Sheet Arrangements





The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments generally include commitments to originate mortgage,
commercial and consumer loans. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The Company’s maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance sheet instruments. Commitments to originate loans are
conditional, and are honored for up to 45 days subject to the Company’s usual
terms and conditions. Collateral is not required to support
commitments.





At March
31, 2009, the Company had outstanding real estate one-to-four family loan
commitments of $1.6 million and unused lines of credit secured by real estate
one-to-four family loans of $21.0 million.  Other installment loan
commitments totaled $8,000 and unused lines of credit on other installment loans
totaled $1.1 million at March 31, 2009.  Commercial real estate
mortgage loan commitments totaled $481,000 and the undisbursed balance of
commercial real estate mortgage loans closed was $5.4 million at March 31,
2009.  Commercial loan commitments totaled $1.1 million, undisbursed
balances of commercial loans totaled $7.0 million and unused commercial lines of
credit totaled $59.3 million at March 31, 2009.  Construction loan
commitments totaled $4.0 million and unused construction lines of credit totaled
$22.2 million at March 31, 2009.  For additional information regarding
future financial commitments, this discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this report including Note 21, “Commitments and
Contingencies.”





Item 7A. Quantitative and
Qualitative Disclosures About Market Risk





Quantitative Aspects of Market
Risk.  The Company does not maintain a trading account for any
class of financial instrument nor does it engage in hedging activities or
purchase high-risk derivative instruments.  Furthermore, the Company
is not subject to foreign currency exchange rate risk or commodity price
risk.  For information regarding the sensitivity to interest rate risk
of the Company's interest-earning assets and interest-bearing liabilities, see
the tables under “Item 1.  Business -- Lending
Activities,”  “-- Investment Activities” and “-- Deposit Activities
and Other Sources of Funds” contained herein.








58





Qualitative Aspects of Market
Risk.  The Company's principal financial objective is to
achieve long-term profitability while limiting its exposure to fluctuating
market interest rates.  The Company intends to reduce risk where
appropriate but accepts a degree of risk when warranted by economic
circumstances.  The Company has sought to reduce the exposure of its
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest
rates.  The principal element in achieving this objective is to
increase the interest rate sensitivity of the Company's interest-earning assets
by retainingin itsportfolio, short–term loans and loans with interest rates subject to
periodic adjustments.  The Company relies on retail deposits as its
primary source of funds.  As part of its interest rate risk management
strategy, the Company promotes transaction accounts and certificates of deposit
with terms up to ten years.





Consumer
and commercial loans are originated and held in portfolio as the short term
nature of these portfolio loans match durations more closely with the short term
nature of retail deposits such as interest checking, money market accounts and
savings accounts. The Company relies on retail deposits as its primary source of
funds. Management believes retail deposits reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds. As
part of its interest rate risk management strategy, the Company promotes
transaction accounts and certificates of deposit with longer terms to
maturity.  Except for immediate short-term cash needs, and depending
on the current interest rate environment, FHLB advances will have maturities of
long or short term. FRB advances have short term maturities. For additional
information, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained herein.





A number
of measures are utilized to monitor and manage interest rate risk, including
simulation modeling and traditional interest rate gap analysis. While both
methods provide an indication of risk for a given change in interest rates, the
simulation model is primarily used to assess the impact on earning changes in
interest rates may produce. Key assumptions in the model include cash flows and
maturities of financial instruments, changes in market conditions, loan volumes
and pricing, deposit sensitivity, consumer preferences and management’s capital
leverage plans. These assumptions are inherently uncertain; therefore, the model
cannot precisely estimate net interest income or precisely predict the impact of
higher or lower interest rates on net interest income. Actual results may
significantly differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions and specific
strategies among other factors.





The
following tables show the approximate percentage change in net interest income
as of March 31, 2009 over a 24-month period under several rate
scenarios.





Change
      in interest rates:
            Percent
      Change in Net
              Interest
      Income (12 months)
            
            Percent
      Change in Net
              Interest
      Income (24 months)Up
      200 basis points
            (0.7%)
            
            (1.7%)Base
      Case
            -
            
            1.4%Down
      100 basis points
            1.2%
            
            4.2%





Our
balance sheet continues to be slightly asset sensitive, meaning that
interest-earning assets reprice faster than interest-bearing liabilities in a
given period.  However, due to a number of loans in our loan portfolio
with interest rate floors, our net interest income will be negatively impacted
in a rising interest rate environment until such time as the current rate
exceeds these interest rate floors.  Conversely, in a falling interest
rate environment these interest rate floors will assist in maintaining our net
interest income.  We attempt to limit our interest rate risk through
managing the repricing characteristics of our assets and
liabilities.





As with
any method of measuring interest rate risk, certain shortcomings are inherent in
the method of analysis presented in the foregoing table.  For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates.  Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market
rates.  Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset.  Furthermore, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in calculating the
table.








59





The
following table shows the Company's financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair values at March 31, 2009.  Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.





Average
              Rate
            
            
            
            Within
              1
      Year
            
            
            1
      - 3
              Years
            
            
            After
              3
      - 5
              Years
            
            
            After
              5
      - 10
              Years
            
            
            Beyond
              10
              Years
            
            
            TotalInterest-Sensitive
      Assets:Loans
      receivable
            6.06
            %
            
            $
            277,405
            
            $
            70,389
            
            $
            71,703
            
            $
            294,903
            
            $
            86,691
            
            $
            801,091Mortgage-backedsecurities
            3.72
            
            
            
            1,015
            
            
            3,621
            
            
            -
            
            
            -
            
            
            -
            
            
            4,636Investments
      and otherinterest-earning
      assets
            3.45
            
            
            
            13,777
            
            
            -
            
            
            -
            
            
            529
            
            
            1,118
            
            
            15,424FHLB
      stock
            0.70
            
            
            
            1,470
            
            
            2,940
            
            
            2,940
            
            
            -
            
            
            -
            
            
            7,350Total
      assets
            
            
            
            $
            293,667
            
            $
            76,950
            
            $
            74,643
            
            $
            295,432
            
            $
            87,809
            
            $
            828,501Interest-Sensitive
      Liabilities:Interest
      checking
            0.53
            
            
            $
            19,325
            
            $
            38,652
            
            $
            38,652
            
            $
            -
            
            $
            -
            
            $
            96,629Non-interest
      checking accounts
            -
            
            
            
            17,706
            
            
            35,411
            
            
            35,411
            
            
            -
            
            
            -
            
            
            88,528Savings
      accounts
            0.55
            
            
            
            5,751
            
            
            11,501
            
            
            11,501
            
            
            -
            
            
            -
            
            
            28,753Money
      market accounts
            1.55
            
            
            
            35,695
            
            
            71,392
            
            
            71,392
            
            
            -
            
            
            -
            
            
            178,479Certificate
      accounts
            3.08
            
            
            
            232,888
            
            
            34,159
            
            
            8,629
            
            
            2,001
            
            
            -
            
            
            277,677FHLB
      advances
            2.02
            
            
            
            37,850
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            37,850FRB
      advances
            0.25
            
            
            
            85,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            85,000Subordinated
      debentures
            5.65
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22,681
            
            
            22,681Obligations
      under capital   lease
            7.16
            
            
            
            40
            
            
            96
            
            
            152
            
            
            492
            
            
            1,869
            
            
            2,649Total
      liabilities
            
            
            
            
            434,255
            
            
            191,211
            
            
            165,737
            
            
            2,493
            
            
            24,550
            
            
            818,246Interest
      sensitivity gap
            
            
            
            
            (140,588
            )
            
            (114,261
            )
            
            (91,094
            )
            
            292,939
            
            
            63,259
            
            $
            10,255Cumulative
      interest sensitivity gap
            
            
            
            $
            (140,588
            )
            $
            (254,849
            )
            $
            (345,943
            )
            $
            (53,004
            )
            $
            10,255Off-Balance
      Sheet Items:Commitments
      to extend credit
            -
            
            
            $
            7,180
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            7,180Unused
      lines of credit
            -
            
            
            $
            115,907
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            115,907














60





Item
8.   Financial Statements and Supplementary
Data





RIVERVIEW
BANCORP, INC. AND SUBSIDIARY




Consolidated
Financial Statements for the Years Ended March 31, 2009, 2008 and
2007


Report of
Independent Registered Public Accounting Firm








TABLE
      OF CONTENTSPageReport
      of Independent Registered Public Accounting Firm – Deloitte & Touche
      LLP
            62Consolidated
      Balance Sheets as of March 31, 2009 and 2008
            63Consolidated
      Statements of Operations for the Years Ended March 31, 2009, 2008 and
      2007
            64Consolidated
      Statements of Shareholders’ Equity for the Years Ended March 31, 2009,
      2008 and 2007
            65Consolidated
      Statements of Cash Flows for the Years Ended March 31, 2009, 2008 and
      2007
            66Notes
      to Consolidated Financial Statements
            67












61







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Shareholders of


Riverview
Bancorp, Inc.


Vancouver,
Washington






We have
audited the accompanying consolidated balance sheets of Riverview Bancorp, Inc.
and subsidiary (the "Company") as of March 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 2009.These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on the financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Riverview Bancorp, Inc. and subsidiary as of
March 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of March 31, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated June 12, 2009 expressed an
unqualified opinion on the Company's internal control over financial
reporting.











Portland,
Oregon


June 12,
2009













62










RIVERVIEW
BANCORP, INC. AND SUBSIDIARY




CONSOLIDATED
BALANCE SHEETS


MARCH
31, 2009 AND 2008





(Dollars
      in thousands, except share data)
            
            2009
            
            
            
            2008ASSETSCash
      (including interest-earning accounts of $6,405 and
$14,238)
            $
            19,199
            
            
            $
            36,439Loans
      held for sale
            
            1,332
            
            
            
            -Investment
      securities held to maturity, at amortized cost
              (fair
      value of $552 and none)
            
            529
            
            
            
            -Investment
      securities available for sale, at fair value
              (amortized
      cost of $11,244 and $7,825)
            
            8,490
            
            
            
            7,487Mortgage-backed
      securities held to maturity, at amortized cost
              (fair
      value of $572 and $892)
            
            570
            
            
            
            885Mortgage-backed
      securities available for sale, at fair value
              (amortized
      cost of $3,991 and $5,331)
            
            4,066
            
            
            
            5,338Loans
      receivable (net of allowance for loan losses of $16,974 and
      $10,687)
            
            784,117
            
            
            
            756,538Real
      estate and other personal property owned
            
            14,171
            
            
            
            494Prepaid
      expenses and other assets
            
            2,518
            
            
            
            2,679Accrued
      interest receivable
            
            3,054
            
            
            
            3,436Federal
      Home Loan Bank stock, at cost
            
            7,350
            
            
            
            7,350Premises
      and equipment, net
            
            19,514
            
            
            
            21,026Deferred
      income taxes, net
            
            8,209
            
            
            
            4,571Mortgage
      servicing rights, net
            
            468
            
            
            
            302Goodwill
            
            25,572
            
            
            
            25,572Core
      deposit intangible, net
            
            425
            
            
            
            556Bank
      owned life insurance
            
            14,749
            
            
            
            14,176TOTAL
      ASSETS
            $
            914,333
            
            
            $
            886,849LIABILITIES
      AND SHAREHOLDERS’ EQUITYLIABILITIES:Deposit
      accounts
            $
            670,066
            
            
            $
            667,000Accrued
      expenses and other liabilities
            
            7,064
            
            
            
            8,654Advanced
      payments by borrowers for taxes and insurance
            
            360
            
            
            
            393Federal
      Home Loan Bank advances
            
            37,850
            
            
            
            92,850Federal
      Reserve Bank advances
            
            85,000
            
            
            
            -Junior
      subordinated debentures
            
            22,681
            
            
            
            22,681Capital
      lease obligations
            
            2,649
            
            
            
            2,686Total
      liabilities
            
            825,670
            
            
            
            794,264COMMITMENTS
      AND CONTINGENCIES (See Note 21)SHAREHOLDERS’
      EQUITY:Serial
      preferred stock, $.01 par value; 250,000 authorized,
              issued
      and outstanding: none
            
            -
            
            
            
            -Common
      stock, $.01 par value; 50,000,000 authorized,issued
      and outstanding:2009
      – 10,923,773 issued and outstanding
            
            109
            
            
            
            1092008
      – 10,913,773 issued and outstandingAdditional
      paid-in capital
            
            46,866
            
            
            
            46,799Retained
      earnings
            
            44,322
            
            
            
            46,871Unearned
      shares issued to employee stock ownership trust
            
            (902
            )
            
            
            (976
            )Accumulated
      other comprehensive loss
            
            (1,732
            )
            
            
            (218
            )Total
      shareholders’ equity
            
            88,663
            
            
            
            92,585TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
            $
            914,333
            
            
            $
            886,849


See
notes to consolidated financial statements.







63





RIVERVIEW
BANCORP, INC. AND SUBSIDIARY




CONSOLIDATED
STATEMENTS OF OPERATIONS


YEARS
ENDED MARCH 31, 2009, 2008 AND 2007





(Dollars
      in thousands, except share data)
            
            2009
            
            
            
            2008
            
            
            
            2007INTEREST
      AND DIVIDEND INCOME:Interest
      and fees on loans receivable
            $
            51,883
            
            
            $
            58,747
            
            
            $
            59,496Interest
      on investment securities – taxable
            
            407
            
            
            
            488
            
            
            
            854Interest
      on investment securities – non taxable
            
            137
            
            
            
            142
            
            
            
            163Interest
      on mortgage-backed securities
            
            211
            
            
            
            323
            
            
            
            421Other
      interest and dividends
            
            212
            
            
            
            982
            
            
            
            366Total
      interest and dividend income
            
            52,850
            
            
            
            60,682
            
            
            
            61,300INTEREST
      EXPENSE:Interest
      on deposits
            
            15,279
            
            
            
            22,143
            
            
            
            20,507Interest
      on borrowings
            
            3,904
            
            
            
            3,587
            
            
            
            4,275Total
      interest expense
            
            19,183
            
            
            
            25,730
            
            
            
            24,782Net
      interest income
            
            33,667
            
            
            
            34,952
            
            
            
            36,518Less
      provision for loan losses
            
            16,150
            
            
            
            2,900
            
            
            
            1,425Net
      interest income after provision for loan losses
            
            17,517
            
            
            
            32,052
            
            
            
            35,093NON-INTEREST
      INCOME:Fees
      and service charges
            
            4,669
            
            
            
            5,346
            
            
            
            5,747Asset
      management fees
            
            2,077
            
            
            
            2,145
            
            
            
            1,874Net
      gain on sale of loans held for sale
            
            729
            
            
            
            368
            
            
            
            434Impairment
      on investment security
            
            (3,414
            )
            
            
            -
            
            
            
            -Loan
      servicing income
            
            105
            
            
            
            126
            
            
            
            155Gain
      of sale of credit card portfolio
            
            -
            
            
            
            -
            
            
            
            133Bank
      owned life insurance
            
            573
            
            
            
            562
            
            
            
            522Other
            
            791
            
            
            
            335
            
            
            
            169Total
      non-interest income
            
            5,530
            
            
            
            8,882
            
            
            
            9,034NON-INTEREST
      EXPENSE:Salaries
      and employee benefits
            
            15,080
            
            
            
            16,249
            
            
            
            15,012Occupancy
      and depreciation
            
            5,064
            
            
            
            5,146
            
            
            
            4,687Data
      processing
            
            841
            
            
            
            786
            
            
            
            988Amortization
      of core deposit intangible
            
            131
            
            
            
            155
            
            
            
            184Advertising
      and marketing expense
            
            727
            
            
            
            1,054
            
            
            
            1,102FDIC
      insurance premium
            
            760
            
            
            
            210
            
            
            
            74State
      and local taxes
            
            668
            
            
            
            741
            
            
            
            644Telecommunications
            
            466
            
            
            
            406
            
            
            
            437Professional
      fees
            
            1,110
            
            
            
            826
            
            
            
            809Other
            
            2,412
            
            
            
            2,218
            
            
            
            2,416Total
      non-interest expense
            
            27,259
            
            
            
            27,791
            
            
            
            26,353INCOME
      (LOSS) BEFORE INCOME TAXES
            
            (4,212
            )
            
            
            13,143
            
            
            
            17,774PROVISION
      (BENEFIT) FOR INCOME TAXES
            
            (1,562
            )
            
            
            4,499
            
            
            
            6,168NET
      INCOME (LOSS)
            $
            (2,650
            )
            
            $
            8,644
            
            
            $
            11,606Earnings
      (loss) per common share:Basic
            $
            (0.25
            )
            
            $
            0.79
            
            
            $
            1.03Diluted
            
            (0.25
            )
            
            
            0.79
            
            
            
            1.01Weighted
      average number of shares outstanding:Basic
            
            10,693,795
            
            
            
            10,915,271
            
            
            
            11,312,847Diluted
            
            10,693,795
            
            
            
            11,006,673
            
            
            
            11,516,232





See notes to consolidated financial
statements.








64




RIVERVIEW
BANCORP, INC. AND SUBSIDIARY




CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


YEARS
ENDED MARCH 31, 2009, 2008 AND 2007




UnearnedSharesIssued toEmployee
            
            
            AccumulatedCommon Stock
            
            
            Additional
            
            
            
            
            
            Stock
            
            
            OtherPaid-In
            
            
            Retained
            
            
            Ownership
            
            
            Comprehensive(Dollars in thousands, exceptshare
      data)
            Shares
            
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Trust
            
            
            Loss
            
            
            TotalBalance
      April 1, 2006
            11,545,372
            
            
            $
            57
            
            $
            57,316
            
            $
            35,776
            
            $
            (1,186
            )
            $
            (276
            )
            $
            91,687Stock
      split
            -
            
            
            
            58
            
            
            -
            
            
            (58
            )
            
            -
            
            
            -
            
            
            -Cash
      dividends ($0.395 per
              share)
            -
            
            
            
            -
            
            
            -
            
            
            (4,476
            )
            
            -
            
            
            -
            
            
            (4,476
            )Exercise
      of stock options
            212,054
            
            
            
            2
            
            
            878
            
            
            -
            
            
            -
            
            
            -
            
            
            880Stock
      repurchased and retired
            (49,446
            )
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Earned
      ESOP shares
            -
            
            
            
            -
            
            
            196
            
            
            -
            
            
            78
            
            
            -
            
            
            274Tax
      benefit, stock options
            -
            
            
            
            -
            
            
            48
            
            
            -
            
            
            -
            
            
            -
            
            
            4811,707,980
            
            
            
            117
            
            
            58,438
            
            
            31,242
            
            
            (1,108
            )
            
            (276
            )
            
            88,413Comprehensive
      income:Net
      income
            -
            
            
            
            -
            
            
            -
            
            
            11,606
            
            
            -
            
            
            -
            
            
            11,606Other
      comprehensive income:Unrealized
      holding gain onsecurities
      of $190  (net of $99 tax effect)
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            190
            
            
            190Total
      comprehensive income
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11,796Balance
      March 31, 2007
            11,707,980
            
            
            
            117
            
            
            58,438
            
            
            42,848
            
            
            (1,108
            )
            
            (86
            )
            
            100,209Cash
      dividends ($0.42 per
              share)
            -
            
            
            
            -
            
            
            -
            
            
            (4,556
            )
            
            -
            
            
            -
            
            
            (4,556
            )Exercise
      of stock options
            95,620
            
            
            
            1
            
            
            707
            
            
            -
            
            
            -
            
            
            -
            
            
            708Stock
      repurchased and retired
            (889,827
            )
            
            
            (9
            )
            
            (12,634
            )
            
            -
            
            
            -
            
            
            -
            
            
            (12,643
            )FIN
      48 transition adjustment
            -
            
            
            
            -
            
            
            -
            
            
            (65
            )
            
            -
            
            
            -
            
            
            (65
            )Earned
      ESOP shares
            -
            
            
            
            -
            
            
            282
            
            
            -
            
            
            132
            
            
            -
            
            
            414Tax
      benefit, stock options
            -
            
            
            
            -
            
            
            6
            
            
            -
            
            
            -
            
            
            -
            
            
            610,913,773
            
            
            
            109
            
            
            46,799
            
            
            38,227
            
            
            (976
            )
            
            (86
            )
            
            84,073Comprehensive
      income:Net
      income
            -
            
            
            
            -
            
            
            -
            
            
            8,644
            
            
            -
            
            
            -
            
            
            8,644Other
      comprehensive income:Unrealized
      holding loss onsecurities
      of $132  (net of $69 tax effect)
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (132
            )
            
            (132
            )Total
      comprehensive income
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,512Balance
      March 31, 2008
            10,913,773
            
            
            
            109
            
            
            46,799
            
            
            46,871
            
            
            (976
            )
            
            (218
            )
            
            92,585Cash
      dividends ($0.135 per
              share)
            -
            
            
            
            -
            
            
            -
            
            
            (1,441
            )
            
            -
            
            
            -
            
            
            (1,441
            )Exercise
      of stock options
            10,000
            
            
            
            -
            
            
            96
            
            
            -
            
            
            -
            
            
            -
            
            
            96Earned
      ESOP shares
            -
            
            
            
            -
            
            
            (31
            )
            
            -
            
            
            74
            
            
            -
            
            
            43Cumulative
      effect of adopting
              FSP
      FAS 115-2
            -
            
            
            
            -
            
            
            -
            
            
            1,542
            
            
            
            
            
            (1,542
            )
            
            -Tax
      benefit, stock options
            -
            
            
            
            -
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            210,923,773
            
            
            
            109
            
            
            46,866
            
            
            46,972
            
            
            (902
            )
            
            (1,760
            )
            
            91,285Comprehensive
      loss:Net
      loss
            -
            
            
            
            -
            
            
            -
            
            
            (2,650
            )
            
            -
            
            
            -
            
            
            (2,650
            )Other
      comprehensive loss:Unrealized
      holding gain onsecurities
      of $2,225  (net of $1,146 tax effect) less reclassification
      adjustment for net losses included in net income of $2,253 (net of $1,161
      tax effect)
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            28
            
            
            28Total
      comprehensive loss
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,622
            )Balance
      March 31, 2009
            10,923,773
            
            
            $
            109
            
            $
            46,866
            
            $
            44,322
            
            $
            (902
            )
            $
            (1,732
            )
            $
            88,663


See
notes to consolidated financial statements.




65




RIVERVIEW
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED MARCH 31, 2009, 2008 AND 2007




(Dollars
      in thousands)
            
            2009
            
            
            
            2008
            
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            $
            (2,650)
            
            
            $
            8,644
            
            
            $
            11,606Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
            
            2,320
            
            
            
            2,193
            
            
            
            2,258Mortgage
      servicing rights valuation adjustment
            
            (6
            )
            
            
            (28
            )
            
            
            (25
            )Provision
      for loan losses
            
            16,150
            
            
            
            2,900
            
            
            
            1,425Benefit
      for deferred income taxes
            
            (3,653
            )
            
            
            (395
            )
            
            
            (436
            )Noncash
      expense related to ESOP
            
            43
            
            
            
            414
            
            
            
            274Increase
      (decrease) in deferred loan origination fees, net of
      amortization
            
            179
            
            
            
            51
            
            
            
            (407
            )Origination
      of loans held for sale
            
            (27,997
            )
            
            
            (14,829
            )
            
            
            (16,966
            )Proceeds
      from sales of loans held for sale
            
            26,782
            
            
            
            14,895
            
            
            
            17,116Excess
      tax benefit from stock based compensation
            
            (11
            )
            
            
            (14
            )
            
            
            (67
            )Writedown
      of real estate owned
            
            100
            
            
            
            9
            
            
            
            -Loss
      on impairment of security
            
            3,414
            
            
            
            -
            
            
            
            -Net
      gain on loans held for sale, sale of real estate owned,
      mortgage-backed
              securities,
      sale of investment securities and premises and equipment
            
            (618
            )
            
            
            (361
            )
            
            
            (422
            )Income
      from bank owned life insurance
            
            (573
            )
            
            
            (562
            )
            
            
            (522
            )Changes
      in assets and liabilities, net of acquisition:Prepaid
      expenses and other assets
            
            93
            
            
            
            206
            
            
            
            397Accrued
      interest receivable
            
            382
            
            
            
            386
            
            
            
            (764
            )Accrued
      expenses and other liabilities
            
            (573
            )
            
            
            (956
            )
            
            
            437Net
      cash provided by operating activities
            
            13,382
            
            
            
            12,553
            
            
            
            13,904CASH
      FLOWS FROM INVESTING ACTIVITIES:Loan
      originations, net
            
            (57,891
            )
            
            
            (76,838
            )
            
            
            (60,707
            )Proceeds
      from call, maturity, or sale of investment securities available for
      sale
            
            480
            
            
            
            11,360
            
            
            
            4,850Principal
      repayments on investment securities available for sale
            
            75
            
            
            
            75
            
            
            
            75Purchase
      of investment securities held to maturity
            
            (536
            )
            
            
            -
            
            
            
            -Purchase
      of investment securities available for sale
            
            (5,000
            )
            
            
            -
            
            
            
            -Principal
      repayments on mortgage-backed securities available for
sale
            
            1,341
            
            
            
            1,447
            
            
            
            1,658Principal
      repayments on mortgage-backed securities held to maturity
            
            315
            
            
            
            347
            
            
            
            572Principal
      repayments on investment securities held to maturity
            
            7
            
            
            
            -
            
            
            
            -Purchase
      of premises and equipment and capitalized software
            
            (545
            )
            
            
            (1,629
            )
            
            
            (4,334
            )Proceeds
      from sale of real estate owned and premises and equipment
            
            431
            
            
            
            6
            
            
            
            3Net
      cash used by investing activities
            
            (61,323
            )
            
            
            (65,232
            )
            
            
            (57,883
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      change in deposit accounts, net of deposits acquired
            
            3,066
            
            
            
            1,595
            
            
            
            58,441Dividends
      paid
            
            (2,402
            )
            
            
            (4,740
            )
            
            
            (4,289
            )Repurchase
      of common stock
            
            -
            
            
            
            (12,643
            )
            
            
            -Proceeds
      from issuance of subordinated debentures
            
            -
            
            
            
            15,000
            
            
            
            -Proceeds
      from borrowings
            
            1,321,510
            
            
            
            366,500
            
            
            
            559,350Repayment
      of borrowings
            
            (1,291,510
            )
            
            
            (308,700
            )
            
            
            (570,400
            )Principal
      payments under capital lease obligation
            
            (37
            )
            
            
            (35
            )
            
            
            (32
            )Net
      increase (decrease) in advance payments by borrowers
            
            (33
            )
            
            
            (4
            )
            
            
            39Excess
      tax benefit from stock based compensation
            
            11
            
            
            
            14
            
            
            
            67Proceeds
      from exercise of stock options
            
            96
            
            
            
            708
            
            
            
            880Net
      cash provided by financing activities
            
            30,701
            
            
            
            57,695
            
            
            
            44,056NET
      INCREASE (DECREASE) IN CASH
            
            (17,240
            )
            
            
            5,016
            
            
            
            77CASH,
      BEGINNING OF YEAR
            
            36,439
            
            
            
            31,423
            
            
            
            31,346CASH,
      END OF YEAR
            $
            19,199
            
            
            $
            36,439
            
            
            $
            31,423SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the year for:Interest
            $
            19,372
            
            
            $
            25,511
            
            
            $
            24,347Income
      taxes
            
            1,538
            
            
            
            4,639
            
            
            
            7,025NONCASH
      INVESTING AND FINANCING ACTIVITIES:Transfer
      of loans to real estate owned, net
            $
            14,306
            
            
            $
            503
            
            
            $
            -Dividends
      declared and accrued in other liabilities
            
            -
            
            
            
            960
            
            
            
            1,144Fair
      value adjustment to securities available for sale
            
            43
            
            
            
            (201
            )
            
            
            289Income
      tax effect related to fair value adjustment
            
            (15
            )
            
            
            69
            
            
            
            (99
            )Premises
      and equipment purchases included in accounts payable
            
            3
            
            
            
            70
            
            
            
            64Capitalized
      software acquired under a service agreement
            
            130
            
            
            
            417
            
            
            
            -




See notes to consolidated financial
statements.








66




RIVERVIEW
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS ENDED
MARCH 31, 2009 AND 2008







1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation – The accompanying consolidated financial statements
include the accounts of Riverview Bancorp, Inc. (the “Company”); its
wholly-owned subsidiary, Riverview Community Bank (the “Bank”); the Bank’s
wholly-owned subsidiary, Riverview Services, Inc.; and the Bank’s majority owned
subsidiary, Riverview Asset Management Corp. (“RAMCorp”). All inter-company
transactions and balances have been eliminated in consolidation.





The
Company has also established two subsidiary grantor trusts in connection with
the issuance of trust preferred securities (see Note 13). In accordance with the
requirements of Financial Accounting Standards Board Interpretation No. 46
(revised), Consolidation of
Variable Interest Entities (as amended), the accounts and transactions of
the trusts are not included in the accompanying consolidated financial
statements.





Nature of
Operations – The Bank is an eighteen branch community-oriented financial
institution operating in rural and suburban communities in southwest Washington
State and Multnomah, Clackamas and Marion counties of Oregon. The Bank is
engaged primarily in the business of attracting deposits from the general public
and using such funds, together with other borrowings, to invest in various
commercial, commercial real estate, multi-family real estate, real estate
construction, residential real estate and consumer loans.





Use of Estimates
in the Preparation of Financial Statements – The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America (“generally accepted accounting principles” or “GAAP”),
requires management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of related revenue and expense during the reporting period. Actual results could
differ from those estimates.





Cash and Cash
Flows – Cash includes amounts on hand, due from banks and
interest-earning deposits in other banks.





Loans Held for
Sale – The Company identifies loans held for sale at the time of
origination and such loans are carried at the lower of aggregate cost or net
realizable value. Market values are derived from available market quotations for
comparable pools of mortgage loans. Adjustments for unrealized losses, if any,
are charged to income.





Gains or
losses on sales of loans held for sale are recognized at the time of sale and
are determined by the difference between the net sales proceeds and the
allocated basis of the loans sold. The Company capitalizes mortgage servicing
rights (“MSRs”) acquired through either the purchase of MSRs, the sale of
originated mortgage loans or the securitization of mortgage loans with servicing
rights retained. Upon sale of mortgage loans held for sale, the total cost of
the loans designated for sale is allocated to mortgage loans with and without
MSRs based on their relative fair values. The MSRs are included as a component
of gain on sale of loans. The MSRs are amortized in proportion to and over the
estimated period of the net servicing income, such amortization is reflected as
a component of loan servicing income.





Securities– In accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 115, Accounting for
Certain Investments in Debt and Equity Securities, investment securities
are classified as held to maturity when the Company has the ability and positive
intent to hold such securities to maturity. Investment securities held to
maturity are carried at amortized cost. Unrealized losses due to fluctuations in
fair value are recognized when it is determined that a credit related other than
temporary decline in value has occurred. Investment securities bought and held
principally for the purpose of sale in the near term are classified as trading
securities. Securities that the Company intends to hold for an indefinite
period, but not necessarily to maturity are classified as available for
sale.  Such securities may be sold to implement the Bank’s
asset/liability management strategies and in response to changes in interest
rates and similar factors.  Securities available for sale are reported
at fair value. Unrealized gains and losses, net of the related deferred tax
effect, are reported as a net amount in a separate component of shareholders’
equity entitled “accumulated other comprehensive income
(loss).”  Realized gains and losses on securities available for sale,
determined using the specific identification method, are included in
earnings.  Amortization of premiums and accretion of discounts are
recognized in interest income over the period to maturity or expected call, if
sooner.





The
Company analyzes investment securities for other than temporary impairment
(“OTTI”) on a periodic basis. In accordance with FASB Staff Position (“FSP”)
115-2, OTTI is separated into a credit and noncredit
component.  Noncredit component losses are recorded in other
comprehensive income (loss) when the Company a) does not intend to








67




sell the
security or b) is not more likely than not to have to sell the security prior to
the security’s anticipated recovery.  Credit component losses are
reported in non-interest income.





Loans –
Loans are stated at the amount of unpaid principal, reduced by deferred loan
origination fees and an allowance for loan losses. Interest on loans is accrued
daily based on the principal amount outstanding.





Generally,
the accrual of interest on loans is discontinued when, in management’s opinion,
the borrower may be unable to meet payments as they become due or when they are
past due 90 days as to either principal or interest, unless they are well
secured and in the process of collection. When interest accrual is discontinued,
all unpaid accrued interest is reversed against current income. If management
determines that the ultimate collectibility of principal is in doubt, cash
receipts on non-accrual loans are applied to reduce the principal balance on a
cash-basis method until the loans qualify for return to accrual status. Loans
are returned to accrual status when all principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.





Loan
origination and commitment fees and certain direct loan origination costs are
deferred and amortized as an adjustment of the yield of the related
loan.





Allowance for
Loan Losses – The allowance for loan losses is maintained at a level
sufficient to provide for probable loan losses based on evaluating known and
inherent risks in the loan portfolio. The allowance is provided based upon
management’s ongoing quarterly assessment of the pertinent factors underlying
the quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, delinquency levels, actual loan loss
experience, current economic conditions, and detailed analysis of individual
loans for which full collectibility may not be assured.  The detailed
analysis includes techniques to estimate the fair value of loan collateral and
the existence of potential alternative sources of repayment. The allowance
consists of specific, general and unallocated components. The specific component
relates to loans that are considered impaired. For such loans that are
classified as impaired, an allowance is established when the net realizable
value of the impaired loan is lower than the carrying value of that loan. The
general component covers non-impaired loans and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management’s estimate of
probable losses. Such factors include uncertainties in economic conditions,
uncertainties in identifying triggering events that directly correlate to
subsequent loss rates, changes in appraised value of underlying collateral, risk
factors that have not yet manifested themselves in loss allocation factors and
historical loss experience data that may not precisely correspond to the current
portfolio or economic conditions.  The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio. The appropriate allowance level is estimated based upon
factors and trends identified by management at the time the consolidated
financial statements are prepared.





When
available information confirms that specific loans or portions thereof are
uncollectible, identified amounts are charged against the allowance for loan
losses. The existence of some or all of the following criteria will generally
confirm that a loss has been incurred: the loan is significantly delinquent and
the borrower has not demonstrated the ability or intent to bring the loan
current; the Bank has no recourse to the borrower, or if it does, the borrower
has insufficient assets to pay the debt; the estimated fair value of the loan
collateral is significantly below the current loan balance, and there is little
or no near-term prospect for improvement.





In
accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, An Amendment of SFAS No. 114,
a loan is considered impaired when it is probable that a creditor will be unable
to collect all amounts (principal and interest) due according to the contractual
terms of the loan agreement. Large groups of smaller balance homogenous loans
such as consumer secured loans, residential mortgage loans and consumer
unsecured loans are collectively evaluated for potential loss. Impaired loans
are generally carried at the lower of cost or fair value, which may be
determined based upon recent independent appraisals which are further reduced
for estimated selling costs or as a practical expedient by estimating the
present value of expected future cash flows, discounted at the loan’s effective
interest rate.  When the measurement of the impaired loan is less than
the recorded investment in the loan (including accrued interest, net deferred
loan fees or costs, and unamortized premium or discount), impairment is
recognized by creating or adjusting an allocation of the allowance for loan
losses.





A
provision for loan losses is charged against income and is added to the
allowance for loan losses based on regular assessments of the loan portfolio.
The allowance for loan losses is allocated to certain loan categories based on
the relative risk characteristics, asset classifications and actual loss
experience of the loan portfolio. While management has allocated the allowance
for loan losses to various loan portfolio segments, the allowance is general in
nature and is available for the loan portfolio in its entirety.








68









The
ultimate recovery of all loans is susceptible to future market factors beyond
the Bank’s control. There can be no assurance that the Company will not be
required to make future adjustments to the allowance in response to changing
economic conditions, particularly in the Company’s primary market, since the
majority of the Company’s loans are collateralized by real estate. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses, and may require the
Bank to make additions to the allowance based on their judgment about
information available to them at the time of their examinations.





Allowance for
Unfunded Loan Commitments– The allowance for unfunded loan commitments
is maintained at a level believed by management to be sufficient to absorb
estimated probable losses related to these unfunded credit facilities. The
determination of the adequacy of the allowance is based on periodic evaluations
of the unfunded credit facilities including an assessment of the probability of
commitment usage, credit risk factors for loans outstanding to these same
customers, and the terms and expiration dates of the unfunded credit facilities.
The allowance for unfunded loan commitments is included in other liabilities on
the consolidated balance sheets, with changes to the balance charged against
non-interest expense.





Real Estate Owned
(“REO”) – REO consists of properties acquired through foreclosure.
Specific charge-offs are taken based upon detailed analysis of the fair value of
collateral on the underlying loans on which the Company is in the process of
foreclosing. Such collateral is transferred into REO at the lower of recorded
cost or fair value less estimated costs of disposal. Subsequently, the Company
performs an evaluation of the properties and writes down the REO directly and
charges operations for any declines in value. The amounts the Company will
ultimately recover from REO may differ from the amounts used in arriving at the
net carrying value of these assets because of future market factors beyond the
Company’s control or because of changes in the Company’s strategy for the sale
of the property.





Federal Home Bank
Loan Bank Stock – The Bank, as a member of Federal Home Loan Bank of
Seattle (“FHLB”), is required to maintain an investment in capital stock of the
FHLB in an amount equal to the greater of 1% of its outstanding home loans or 5%
of advances from the FHLB.  The Company views its investment in FHLB
stock as a long-term investment.  Accordingly, when evaluating for
impairment, the value is determined based on the ultimate recovery of the par
value rather than recognizing temporary declines in value.  The
determination of whether a decline affects the ultimate recovery is influenced
by criteria such as: 1) the significance of the decline in net assets of the
FHLB as compared to the capital stock amount and length of time a decline has
persisted; 2) impact of legislative and regulatory changes on the FHLB and 3)
the liquidity position of the FHLB.  The FHLB of Seattle reported a
risk-based capital deficiency as of March 31, 2009, and therefore did not pay a
dividend for the first quarter of 2009 and will not repurchase capital stock in
the near term.  The FHLB noted its primary concern with meeting the
risk-based capital requirements relates to the potential impact of OTTI charges
that they may be required to record on their private label mortgage backed
securities. While the FHLB of Seattle reported a capital deficiency as of March
31, 2009, the Company does not believe that its investment in the FHLB is
impaired.  However, this estimate could change in the near term if: 1)
significant other-than-temporary losses are incurred on the mortgage backed
securities causing a significant decline in their regulatory capital status; 2)
the economic losses resulting from credit deterioration on the mortgage backed
securities increases significantly and 3) capital preservation strategies being
utilized by the FHLB become ineffective.





Premises and
Equipment – Premises and equipment are stated at cost less accumulated
depreciation. Leasehold improvements are amortized over the term of the lease or
the estimated useful life of the improvements, whichever is less. Gains or
losses on dispositions are reflected in earnings. Depreciation is generally
computed on the straight-line method over the following estimated useful lives:
building and improvements – up to 45 years; furniture and equipment – three to
twenty years; and leasehold improvements – fifteen to twenty-five years. The
cost of maintenance and repairs is charged to expense as
incurred.  Assets are reviewed for impairment when events indicate
their carrying value may not be recoverable.  If management determines
impairment exists the asset is reduced by an offsetting charge to
expense.





The
capitalized lease, less accumulated amortization is included in premises and
equipment. The capitalized lease is amortized on a straight-line basis over the
lease term and the amortization is included in depreciation
expense.





Mortgage
Servicing Rights – Fees earned for servicing loans for the Federal Home
Loan Mortgage Corporation (“FHLMC”) are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.





MSRs are
the rights to service loans. Loan servicing includes collecting payments,
remitting funds to investors, insurance companies and tax authorities,
collecting delinquent payments, and foreclosing on properties when
necessary.








69







The
Company records its originated MSRs at fair value in accordance with SFAS No.
140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities,
which requires the Company to allocate the total cost of all mortgage loans sold
to the MSRs and the loans (without the MSRs) based on their relative fair values
if it is practicable to estimate those fair values. The Company stratifies its
MSRs based on the predominant characteristics of the underlying financial assets
including coupon interest rate and contractual maturity of the mortgage. An
estimated fair value of MSRs is determined quarterly using a discounted cash
flow model.  The model estimates the present value of the future net
cash flows of the servicing portfolio based on various factors, such as
servicing costs, servicing income, expected prepayment speeds, discount rate,
loan maturity and interest rate. The effect of changes in market interest rates
on estimated rates of loan prepayments represents the predominant risk
characteristic underlying the MSRs portfolio. The Company is amortizing the MSR
in proportion to and over the period of estimated net servicing
income.





MSRs are
periodically reviewed for impairment based on their fair value. The fair value
of the MSRs, for the purposes of impairment, is measured using a discounted cash
flow analysis based on market adjusted discount rates, anticipated prepayment
speeds, mortgage loan term and coupon rate.  Market sources are used
to determine prepayment speeds, ancillary income, servicing cost and pre-tax
required yield.  Impairment losses are recognized through a valuation
allowance for each impaired stratum, with any associated provision recorded as a
component of loan servicing income.





Goodwill –
Goodwill is initially recorded when the purchase price paid for an acquisition
exceeds the estimated fair value of the net identified tangible and intangible
assets acquired.  Goodwill is presumed to have an indefinite useful
life and is tested, at least annually, for impairment at the reporting unit
level.  The Company performs an annual review in the third quarter of
each year, or more frequently if indicators of potential impairment exist, to
determine if the recorded goodwill is impaired.  The impairment test
is performed in two phases.  The first step of the goodwill impairment
test compares the fair value of the reporting unit with its carrying amount,
including goodwill.  If the fair value of the reporting unit exceeds
its carrying amount, goodwill is considered not impaired; however, if the
carrying amount of the reporting unit exceeds its fair value, a second phase
step must be performed.  In the second step the implied fair value of
the reporting unit is calculated. The implied fair value of goodwill is then
compared to the carrying amount of goodwill on the Company’s balance
sheet.  If the carrying amount of the goodwill is greater than the
implied fair value of that goodwill, an impairment loss must be recognized in an
amount equal to that excess.  As of March 31, 2009, the Company has
not recognized any impairment loss on the recorded goodwill.





Core Deposit
Intangible – Core deposit intangibles are amortized to non-interest
expense using an accelerated method (based on expected attrition and cash flows
of core deposit accounts purchased) over ten years.





Advertising and
Marketing Expense – Costs incurred for advertising, merchandising, market
research, community investment, travel and business development are classified
as marketing expense and are expensed as incurred.





Income
Taxes – Income taxes are accounted for using the asset and liability
method. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates which will be in effect when the differences between
the financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in the Company’s income tax returns. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established to
reduce the net carrying amount of deferred tax assets if it is determined to be
more likely than not, that all or some portion of the potential deferred tax
asset will not be realized. The Company files a consolidated federal income tax
return. The Bank provides for income taxes separately and remits to the Company
amounts currently due.





Trust
Assets – Assets held by RAMCorp. in a fiduciary or agency capacity for
Trust customers are not included in the consolidated financial statements
because such items are not assets of the Company.  Assets totaling
$276.6 million and $330.5 million were held in trust as of March 31, 2009 and
2008, respectively.





Earnings Per
Share– The Company accounts for earnings per share in accordance with
SFAS No. 128, Earnings Per Share, which requires all
companies whose capital structure includes dilutive potential common shares to
make a dual presentation of basic and diluted earnings per share for all periods
presented.  Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period, excluding restricted stock and unallocated shares
owned by the Company’s Employee Stock Ownership Plan
(“ESOP”).  Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and has been computed after giving consideration to the weighted
average diluted effect of the Company’s stock options.  As of March
31, 2009, all outstanding stock options were excluded from the calculation of
diluted earnings per share because they were antidilutive.








70







Stock-Based
Compensation– Prior to April 1, 2006, the Company accounted for
stock-based compensation arrangements under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.  Under this method, no
compensation expense was recognized for the year ended March 31, 2006, as the
exercise price of each stock option which the Company granted was equal to the
market value of the underlying common stock on the date of grant.





Effective
April 1, 2006, the Company adopted SFAS No. 123 (Revised)(SFAS 123R), Share-Based
Payment.  SFAS 123R requires the measurement of compensation
cost for all stock-based awards to be based on the grant-date fair value and
recognition of compensation cost over the service period of stock-based awards,
which is generally the same as the vesting period.  The fair value of
stock options is determined using the Black-Scholes valuation model, which is
consistent with the Company’s valuation methodology previously utilized for
stock options in the footnote disclosures required under SFAS No. 123 Accounting for Stock-Based
Compensation.





The
Company has adopted SFAS 123R using a modified version of prospective
application (modified prospective application). Under modified prospective
application, as it is applicable to the Company, SFAS 123R applies to new awards
and to awards modified, repurchased or cancelled after April 1,
2006.  Additionally, compensation cost for the portion of awards for
which the requisite service has not been rendered that are outstanding as of
April 1, 2006, must be recognized as the remaining requisite service is rendered
during the period of and/or the periods after the adoption of SFAS
123R.  The attribution of compensation cost for those earlier awards
will be based on the same method and on the same grant-date fair values
previously determined for the proforma disclosures required for companies that
did not adopt the fair value accounting method for stock-based employee
compensation.  Modified prospective application provides for no
retroactive application to prior periods and no cumulative adjustment to equity
accounts.





Employee Stock
Ownership Plan– The Company sponsors a leveraged ESOP which is accounted
for in accordance with the AICPA Statement of Position ("SOP") 93-6, Employer's Accounting for Employee
Stock Ownership Plans. As shares are released, compensation expense is
recorded equal to the then current market price of the shares and the shares
become available for earnings per share calculations. The Company records cash
dividends on unallocated shares as a reduction of debt and accrued
interest.





Business
segments – The Company operates a single business segment.  The
financial information that is used by the chief operating decision maker in
allocating resources and assessing performance is only provided for one
reportable segment for years ended March 31, 2009, 2008 and 2007.





Acquisitions -
Acquisitionsare
accounted for in accordance with SFAS 141, Business Combinations under
the purchase method of accounting, which allocates costs to assets purchased and
liabilities assumed at their estimated fair market values.  The
results of operations subsequent to the date of acquisition are included in the
consolidated financial statements of the Company.





New Accounting
Pronouncements -
In December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations.  SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and the
goodwill acquired.  The standard also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination.  SFAS No. 141(R) is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Management is currently evaluating the potential impact on the
Company’s financial position, results of operations and cash flows of SFAS No.
141(R).





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment to ARB No.
51.  SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  The standard also requires
additional disclosures that clearly identify and distinguish between the
interests of the parent’s owners and the interest of the noncontrolling owners
of the subsidiary.   SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008.  Management is currently evaluating
the potential impact on the Company’s financial position, results of operations
and cash flows of SFAS No. 160.





In
October 2008, the FASB issued FASB Staff Position 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP
157-3”).  FSP 157-3 clarifies the application of SFAS No. 157 “Fair
Value measurements”, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active.  FSP 157-3 was








71






effective
on October 10, 2008.  The Company has adopted FSP 157-3 and
incorporated the guidance in determining fair value of its trust preferred
security as of March 31, 2009.





In
January 2009, the FASB issued FASB Staff Position 99-20-1, Amendments to the Impairment
Guidance of Emerging Issues Task Force (“EITF”) Issue No. 99-20 (“FSP
99-20-1”).  FSP 99-20-1 amends the impairment guidance in EITF Issue
No. 99-20 “Recognition of Interest Income and Impairment on Purchased Beneficial
Interest and Beneficial Interest That Continue to Be Held by a Transferor in
Securitized Financial Assets,” to achieve more consistent determination of
whether an OTTI has occurred.  The FSP also retains and emphasizes the
objective of an OTTI assessment and the related disclosure requirements in SFAS
No. 115.  The Company has adopted FSP 99-20-1 and incorporated the
guidance in determining the fair value of certain investment securities as of
March 31, 2009.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends current OTTI guidance
in GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of OTTI on debt and equity securities in the
financial statements.  This FSP does not amend existing recognition
and measurement guidance related to OTTI of equity securities.  FAS
115-2 provides for the bifurcation of OTTI into (i) amounts related to credit
losses, which are recognized through earnings, and (ii) amounts related to all
other factors that are recognized as a component of other comprehensive
income.  The provisions of FSP FAS 115-2 and FAS 124-2 are effective
for the Company’s interim period ending on June 30, 2009, with earlier adoption
permitted for periods ending after March 15, 2009.  The Company
elected to early adopt this FSP effective January 1, 2009 which resulted in an
adjustment, net of taxes, to decrease accumulated other comprehensive income
with a corresponding adjustment to increase retained earnings totaling $1.5
million after taxes of $900,000 ($2.4 million pretax).





In April
2009, the FASB issued FSP 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.  This FSP provides additional guidance for fair value
measures under FAS 157 in determining if the market for an asset or liability is
inactive and accordingly, if quoted market prices may not be indicative of fair
value and also re-emphasizes that the objective of a fair value measurement
remains an exit price. FSP 157-4 is effective for periods ending after June 15,
2009, with earlier adoption permitted for periods ending after March 15, 2009.
The Company elected to early adopt FSP 157-4 for the year ended March 31,
2009.  The adoption of FSP 157-4 did not have a material affect on the
financial position or results of operations.





In April
2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments.  The FSP is designed to enhance
consistency in financial reporting by increasing the frequency of fair value
disclosures. This FSP is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009.  The Company elected to early adopt this FSP for the year ended
March 31, 2009.  The adoption of the FSP did not have a material
affect on the financial position or results of operations.





In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Base Payment Transactions Are Participating
Securities.  Under this FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends will be
considered to be a separate class of common stock and will be included in the
basic EPS calculation using the two-class method that is described in FASB
Statement No. 128, Earnings
per Share.  FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those
years.  The adoption of this FSB EITF 03-6-1 is not expected to have a
material impact on the Company’s financial position or results of
operations.





2.
            RESTRICTED
      ASSETS





Federal
Reserve Board regulations require that the Bank maintain minimum reserve
balances either on hand or on deposit with the Federal Reserve Bank (“FRB”),
based on a percentage of deposits. The amounts of such balances as of March 31,
2009 and 2008 were $604,000 and $476,000, respectively.








72







3.
            INVESTMENT
      SECURITIES




The
amortized cost and approximate fair value of investment securities held to
maturity consisted of the following (in thousands):




Amortized
              Cost
            
            Gross
      Unrealized Gains
            
            Gross
      Unrealized Losses
            
            Estimated
              Fair
      ValueMarch 31,
      2009Municipal
      bonds
            $
            529
            
            $
            23
            
            $
            -
            
            $
            552




The
contractual maturities of investment securities held to maturity are as follows
(in thousands):




March 31,
      2009
            
            Amortized
              Cost
            
            
            Estimated
              Fair
      ValueDue
      in one year or less
            $
            -
            
            $
            -Due
      after one year through five years
            
            -
            
            
            -Due
      after five years through ten years
            
            529
            
            
            552Due
      after ten years
            
            -
            
            
            -Total
            $
            529
            
            $
            552




The
amortized cost and approximate fair value of investment securities available for
sale consisted of the following (in thousands):




Amortized
              Cost
            
            Gross
      Unrealized Gains
            
            Gross
      Unrealized Losses
            
            Estimated
              Fair
      ValueMarch 31,
      2009Trust
      preferred
            $
            3,977
            
            $
            -
            
            $
            (2,833
            )
            $
            1,144Agency
      securities
            
            5,000
            
            
            54
            
            
            -
            
            
            5,054Municipal
      bonds
            
            2,267
            
            
            25
            
            
            -
            
            
            2,292Total
            $
            11,244
            
            $
            79
            
            $
            (2,833
            )
            $
            8,490March 31,
      2008Trust
      preferred
            $
            5,000
            
            $
            -
            
            $
            (388
            )
            $
            4,612Municipal
      bonds
            
            2,825
            
            
            50
            
            
            -
            
            
            2,875Total
            $
            7,825
            
            $
            50
            
            $
            (388
            )
            $
            7,487




The fair
value of temporarily impaired securities, the amount of unrealized losses and
the length of time these unrealized losses existed as of March 31, 2009 are as
follows (in thousands):





Less
      than 12 months
            
            12
      months or longer
            
            TotalDescription
      of Securities
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesTrust
      Preferred
            $
            -
            
            $
            -
            
            $
            1,144
            
            $
            (2,833
            )
            $
            1,144
            
            $
            (2,833
            )





The fair
value of temporarily impaired securities, the amount of unrealized losses and
the length of time these unrealized losses existed as of March 31, 2008 are as
follows (in thousands):





Less
      than 12 months
            
            12
      months or longer
            
            TotalDescription
      of Securities
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesTrust
      Preferred
            $
            4,612
            
            $
            (388
            )
            $
            -
            
            $
            -
            
            $
            4,612
            
            $
            (388
            )




In the
second quarter of fiscal 2009, the Company recognized a $3.4 million non-cash
OTTI charge on the above investment security.  Based on a number of
factors, including the magnitude of the decline in the estimated fair value
below the Company’s cost and a decline in the investment rating of the security,
management concluded that the decline in value was other than
temporary.  Accordingly, a non-cash impairment charge of $3.4 million
was realized on the accompanying Consolidated Statements of
Operations.  Subsequent to this OTTI charge, the fair value of the
security declined an additional $442,000 to $1.1 million at March 31,
2009.In April 2009, the FASB issued FSP FAS 115-2 – see Note
1, New Accounting Pronouncements.  The Company adopted these new
standards as of January 1, 2009,








73
 
  resulting
in a cumulative effect adjustment of $1.5 million, net of taxes, that increased
both the retained earnings and accumulated other comprehensive loss components
of shareholder’s equity.  The Company determined the remaining decline
in value was related the noncredit component of OTTI.  The Company
does not intend to sell this security and it is not more likely than not that
the Company will be required to sell the security before the anticipated
recovery of the remaining amortized cost basis.




To
determine the component of gross OTTI related to credit losses, the Company
compared the amortized cost basis of the OTTI security to the present value of
the revised expected cash flows, discounted using the current pre-impairment
yield.  The revised expected cash flow estimates are based primarily
on an analysis of default rates, prepayment speeds and third-party analytical
reports.  Significant judgment of management is required in this
analysis that includes, but is not limited to, assumptions regarding the
ultimate collectibility of principal and interest on the underlying
collateral.




The
contractual maturities of investment securities available for sale are as
follows (in thousands):




March 31,
      2009
            
            Amortized
              Cost
            
            
            Estimated
              Fair
      ValueDue
      in one year or less
            $
            530
            
            $
            540Due
      after one year through five years
            
            5,000
            
            
            5,054Due
      after five years through ten years
            
            619
            
            
            635Due
      after ten years
            
            5,095
            
            
            2,261Total
            $
            11,244
            
            $
            8,490





Investment
securities with an amortized cost of $1.1 million and a fair value of $1.2
million at March 31, 2009 and 2008, respectively, were pledged as collateral for
treasury tax and loan funds held by the Bank. Investment securities with an
amortized cost of $1.8 million and $484,000 and a fair value of $1.8 million and
$491,000 at March 31, 2009 and 2008, respectively, were pledged as collateral
for government public funds held by the Bank. The Company realized no gains or
losses on sales of investment securities in the years ended March 31, 2009, 2008
and 2007.





4.
            MORTGAGE-BACKED
      SECURITIES




Mortgage-backed
securities held to maturity consisted of the following (in
thousands):




March 31,
      2009
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair
              ValueReal
      estate mortgage investment conduits
            $
            348
            
            $
            -
            
            $
            -
            
            $
            348FHLMC
      mortgage-backed securities
            
            94
            
            
            1
            
            
            -
            
            
            95FNMA
      mortgage-backed securities
            
            128
            
            
            1
            
            
            -
            
            
            129Total
            $
            570
            
            $
            2
            
            $
            -
            
            $
            572March 31,
      2008Real
      estate mortgage investment conduits
            $
            624
            
            $
            2
            
            $
            -
            
            $
            626FHLMC
      mortgage-backed securities
            
            104
            
            
            1
            
            
            -
            
            
            105FNMA
      mortgage-backed securities
            
            157
            
            
            4
            
            
            -
            
            
            161Total
            $
            885
            
            $
            7
            
            $
            -
            
            $
            892




Mortgage-backed
securities held to maturity with an amortized cost of $438,000 and $631,000 and
a fair value of $439,000 and $633,000 at March 31, 2009 and 2008, respectively,
were pledged as collateral for governmental public funds. Mortgage-backed
securities held to maturity with an amortized cost of $110,000 and $138,000 and
a fair value of $111,000 and $141,000 at March 31, 2009 and 2008, respectively,
were pledged as collateral for treasury tax and loan funds held by the Bank. The
real estate mortgage investment conduits consist of FHLMC and FNMA
securities.




The
contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):





March 31,
      2009
            
            Amortized
              Cost
            
            
            Estimated
              Fair
      ValueDue
      in one year or less
            $
            -
            
            $
            -Due
      after one year through five years
            
            4
            
            
            4Due
      after five years through ten years
            
            6
            
            
            7Due
      after ten years
            
            560
            
            
            561Total
            $
            570
            
            $
            572










74




Mortgage-backed
securities available for sale consisted of the following (in
thousands):




March 31,
      2009
            
            Amortized
              Cost
            
            
            Gross
      Unrealized
              Gains
            
            
            Gross
      Unrealized
              Losses
            
            
            Estimated
              Fair
              ValueReal
      estate mortgage investment conduits
            $
            673
            
            $
            12
            
            $
            -
            
            $
            685FHLMC
      mortgage-backed securities
            
            3,249
            
            
            61
            
            
            -
            
            
            3,310FNMA
      mortgage-backed securities
            
            69
            
            
            2
            
            
            -
            
            
            71Total
            $
            3,991
            
            $
            75
            
            $
            -
            
            $
            4,066March 31,
      2008Real
      estate mortgage investment conduits
            $
            851
            
            $
            8
            
            $
            (1
            )
            $
            858FHLMC
      mortgage-backed securities
            
            4,393
            
            
            1
            
            
            (4
            )
            
            4,390FNMA
      mortgage-backed securities
            
            87
            
            
            3
            
            
            -
            
            
            90Total
            $
            5,331
            
            $
            12
            
            $
            (5
            )
            $
            5,338




The fair
value of temporarily impaired mortgage-backed securities, the amount of
unrealized losses and the length of time these unrealized losses existed as of
March 31, 2008 are as follows (in thousands):




Less
      than 12 months
            
            12
      months or longer
            
            TotalDescription
      of Securities
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesReal
      estate mortgage investment conduits
            $
            501
            
            $
            (1
            )
            $
            -
            
            $
            -
            
            $
            501
            
            $
            (1
            )FHLMC
      mortgage-backed securities
            
            -
            
            
            -
            
            
            2,393
            
            
            (4
            )
            
            2,393
            
            
            (4
            )Total
      temporarily impaired securities
            $
            501
            
            $
            (1
            )
            $
            2,393
            
            $
            (4
            )
            $
            2,894
            
            $
            (5
            )




The
Company evaluated these securities and determined that the decline in the value
is temporary. The decline in value is not related to any company or industry
specific event. The value of most of the Company’s securities fluctuates as
market interest rates change. The Company anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a
more favorable market interest rate environment. The Company does not intend to
sell these securities and it is not more likely than not that the Company will
be required to sell the securities before the anticipated recovery of the
remaining amortized cost basis. The Company realized no gains or losses on sale
of mortgage-backed securities available for sale in fiscal years 2009, 2008 and
2007.  The Company does not believe that it has any exposure to
sub-prime lending in its mortgage-backed security portfolio.




The
contractual maturities of mortgage-backed securities available for sale are as
follows (in thousands):




March 31,
      2009
            
            Amortized
              Cost
            
            
            Estimated
              Fair
      ValueDue
      in one year or less
            $
            -
            
            $
            -Due
      after one year through five years
            
            1,460
            
            
            1,483Due
      after five years through ten years
            
            2,084
            
            
            2,135Due
      after ten years
            
            447
            
            
            448Total
            $
            3,991
            
            $
            4,066




Expected
maturities of mortgage-backed securities held to maturity and available for sale
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.




Mortgage-backed
securities available for sale with an amortized cost of $3.9 million and $5.2
million and a fair value of $4.0 million and $5.2 million at March 31, 2009 and
2008, respectively, were pledged as collateral for advances at the
FHLB.  Mortgage-backed securities available for sale with an amortized
cost of $66,000 and $62,000 and a fair value of $68,000 and $64,000 at March 31,
2009 and 2008, respectively, were pledged as collateral for government public
funds held by the Bank.








75







5.
            LOANS
      RECEIVABLE




Loans
receivable at March 31, 2009 and 2008 are reported net of deferred loan fees
totaling $3.4 million and $3.5 million, respectively. Loans receivable,
excluding loans held for sale, consisted of the following (in
thousands):








March
      31,
              2009
            
            
            March
      31,
              2008Commercial
      and constructionCommercial
            $
            127,150
            
            $
            109,585Other
      real estate mortgage
            
            447,652
            
            
            429,422Real
      estate construction
            
            139,476
            
            
            148,631Total
      commercial and construction
            
            714,278
            
            
            687,638ConsumerReal
      estate one-to-four family
            
            83,762
            
            
            75,922Other
      installment
            
            3,051
            
            
            3,665Total
      consumer
            
            86,813
            
            
            79,587Total
      loans
            
            801,091
            
            
            767,225Less:Allowance
      for loan losses
            
            16,974
            
            
            10,687Loans
      receivable, net
            $
            784,117
            
            $
            756,538




The
Company originates commercial, commercial real estate, multi-family real estate,
real estate construction, residential real estate and consumer
loans.  Substantially all of the mortgage loans in the Company’s
portfolio are secured by properties located in Washington and Oregon, and,
accordingly, the ultimate collectibility of a substantial portion of the
Company’s loan portfolio is susceptible to changes in the local economic
conditions in these markets. The Company considers its loan portfolio to have
very little exposure to sub-prime mortgage loans since the Company has not
historically engaged in this type of lending.




Aggregate
loans to officers and directors, all of which are current, consist of the
following (in thousands):








Year
      Ended March 31,2009
            
            2008
            
            2007Beginning
      balance
            $
            418
            
            $
            185
            
            $
            7Originations
            
            681
            
            
            360
            
            
            192Principal
      repayments
            
            (78
            )
            
            (127
            )
            
            (14
            )Ending
      balance
            $
            1,021
            
            $
            418
            
            $
            185





6.
            ALLOWANCE
      FOR LOAN LOSSES




A
reconciliation of the allowance for loan losses is as follows (in
thousands):





Year
      Ended March 31,2009
            
            2008
            
            2007Beginning
      balance
            $
            10,687
            
            $
            8,653
            
            $
            7,221Provision
      for loan losses
            
            16,150
            
            
            2,900
            
            
            1,425Charge-offs
            
            (9,890
            )
            
            (905
            )
            
            (186
            )Recoveries
            
            27
            
            
            39
            
            
            193Ending
      balance
            $
            16,974
            
            $
            10,687
            
            $
            8,653





Changes
in the allowance for unfunded loan commitments were as follows (in
thousands):





Year
      Ended March 31,2009
            
            2008
            
            2007Beginning
      balance
            $
            337
            
            $
            380
            
            $
            362Net
      change in allowance for unfunded loan commitments
            
            (41
            )
            
            (43
            )
            
            18Ending
      balance
            $
            296
            
            $
            337
            
            $
            380








76






Loans on
which the accrual of interest has been discontinued were $27.4 million, $7.6
million and $226,000 at March 31, 2009, 2008 and 2007, respectively. Interest
income foregone on non-accrual loans was $2.0 million, $199,000 and $12,000
during the years ended March 31, 2009, 2008, and 2007, respectively.At March 31, 2009 and
2008, nonperforming assets were $41.7 million and $8.2 million,
respectively.




At March
31, 2009, 2008 and 2007, the Company’s recorded investment in certain loans that
were considered to be impaired was $28.7 million, $7.2 million, and $426,000
respectively. At March 31, 2009, $25.0 million of the impaired loans had a
specific related valuation allowance of $4.3 million, while $3.7 million did not
require a specific valuation allowance.  At March 31, 2008, all of the
impaired loans had specific valuation allowances totaling
$902,000.  At March 31, 2007, $294,000 of the impaired loans had a
specific related valuation allowance of $30,000, while $132,000 did not require
a specific valuation allowance. The balance of the allowance for loan losses in
excess of these specific reserves is available to absorb the inherent losses
from all loans in the portfolio.  The average investment in impaired
loans was $24.3 million, $2.0 million and $959,000 during the years ended March
31, 2009, 2008 and 2007, respectively. The related amount of interest income
recognized on loans that were impaired was $373,000, $65,000 and $85,000 during
the years ended March 31, 2009, 2008 and 2007, respectively.  At March
31, 2009 and 2008, loans past due 90 days or more and still accruing interest
totaled $187,000 and $115,000, respectively.  There were no loans past
due 90 days or more and still accruing interest at March 31, 2007.





7.
            PREMISES
      AND EQUIPMENT




Premises
and equipment consisted of the following (in thousands):





March
      31,2009
            
            
            
            2008Land
            $
            3,890
            
            
            $
            3,878Buildings
      and improvements
            
            13,074
            
            
            
            13,067Leasehold
      improvements
            
            1,994
            
            
            
            1,996Furniture
      and equipment
            
            10,275
            
            
            
            10,151Buildings
      under capitalized leases
            
            2,715
            
            
            
            2,715Construction
      in progress
            
            -
            
            
            
            2Total
            
            31,948
            
            
            
            31,809Less
      accumulated depreciation and amortization
            
            (12,434
            )
            
            
            (10,783
            )Premises
      and equipment, net
            $
            19,514
            
            
            $
            21,026




For the
years ended March 31, 2009, 2008 and 2007 the Company has recorded $1.8 million
in depreciation expense.  The Company is obligated under various
noncancellable lease agreements for land and buildings that require future
minimum rental payments, exclusive of taxes and other charges.




During
fiscal year 2006, the Company entered into a capital lease for the shell of the
building constructed as the Company’s new operations center. The lease period is
for twelve years with two six-year lease renewal options. For the years ended
March 31, 2009, 2008 and 2007, the Company recorded $113,000 in amortization
expense. At March 31, 2009 and 2008, accumulated amortization for the capital
lease totaled $376,000 and $263,000, respectively.




The
following is a schedule of future minimum lease payments under capital leases
together with the present value of net minimum lease payments and the future
minimum rental payments required under operating leases that have initial or
noncancellable lease terms in excess of one year as of March 31, 2009 (in
thousands):





Year
      Ending March 31:
            
            Operating
              Lease
            
            
            
            Capital
              Lease2010
            $
            1,632
            
            
            $
            2282011
            
            1,046
            
            
            
            2282012
            
            817
            
            
            
            2362013
            
            820
            
            
            
            2512014
            
            766
            
            
            
            251Thereafter
            
            2,927
            
            
            
            3,934Total
      minimum lease payments
            $
            8,008
            
            
            
            5,128Less
      amount representing interest
            
            
            
            
            
            (2,479
            )Present
      value of net minimum lease
            
            
            
            
            $
            2,649




Rent
expense was $1.8 million, $1.9 million and $1.5 million for the years ended
March 31, 2009, 2008 and 2007, respectively.








77







8.
            MORTGAGE
      SERVICING RIGHTS




The
following table is a summary of the activity in MSRs and the related valuation
allowance for the periods indicated and other related financial data (in
thousands):


Year
      Ended March 31,2009
            
            2008
            
            2007Balance
      at beginning of year, net
            $
            302
            
            $
            351
            
            $
            384Additions
            
            344
            
            
            139
            
            
            148Amortization
            
            (184
            )
            
            (216
            )
            
            (206)Change
      in valuation allowance
            
            6
            
            
            28
            
            
            25Balance
      end of year, net
            $
            468
            
            $
            302
            
            $
            351Valuation
      allowance at beginning of year
            $
            7
            
            $
            35
            
            $
            60Change
      in valuation allowance
            
            (6
            )
            
            (28
            )
            
            (25)Valuation
      allowance balance at end of year
            $
            1
            
            $
            7
            
            $
            35




The
Company evaluates MSRs for impairment by stratifying MSRs based on the
predominant risk characteristics of the underlying financial
assets.  At March 31, 2009 and 2008, the MSRs estimated fair value
totaled $929,000 and $1.0 million, respectively.  The 2009 fair value
was estimated using a discount rate and a range of PSA values (The Bond Market
Association’s standard prepayment values) that ranged from 160 to
716.  Total loans serviced for others were $126.8 million, $123.8
million and $130.6 million at March 31, 2009, 2008 and 2007,
respectively.





9.
            REAL
      ESTATE OWNED




The
following table is a summary of the activity in REO for the periods indicated
(in thousands):





Year
      Ended March 31,2009
            
            2008
            
            2007Balance
      at beginning of year, net
            $
            494
            
            $
            -
            
            $
            -Additions
            
            14,666
            
            
            503
            
            
            -Dispositions
            
            (889
            )
            
            -
            
            
            -Valuation
      adjustments
            
            (100
            )
            
            (9
            )
            
            -Balance
      end or year, net
            $
            14,171
            
            $
            494
            
            $
            -Valuation
      allowance at beginning of year
            $
            9
            
            $
            -
            
            $
            -Additions
      to the valuation allowance
            
            100
            
            
            9
            
            
            -Reductions
      due to sales of REO
            
            -
            
            
            -
            
            
            -Valuation
      allowance balance at end of year
            $
            109
            
            $
            9
            
            $
            -




REO
expenses for the year ended March 31, 2009 primarily consisted of operating
expenses of $114,000 and losses on dispositions of REO of
$104,000.  REO expenses for the years ended March 31, 2008 and 2007
were insignificant.





10.
            DEPOSIT
      ACCOUNTS




Deposit
accounts consisted of the following (dollars in thousands):





Account Type
            Weighted
              Average
      Rate
            
            
            
            March
      31,
              2009
            
            Weighted
              Average
      Rate
            
            
            
            March
      31,
              2008Non-interest-bearing
            0.00
            %
            
            $
            88,528
            
            0.00
            %
            
            $
            82,121Interest
      checking
            0.53
            
            
            
            96,629
            
            1.32
            
            
            
            102,489Money
      market
            1.55
            
            
            
            178,479
            
            2.39
            
            
            
            189,309Savings
      accounts
            0.55
            
            
            
            28,753
            
            0.55
            
            
            
            27,401Certificate
      of deposit
            3.08
            
            
            
            277,677
            
            4.29
            
            
            
            265,680Total
            1.79
            %
            
            $
            670,066
            
            2.61
            %
            
            $
            667,000




The
weighted average rate is based on interest rates at the end of the
period.




Certificates
of deposit in amounts of $100,000 or more totaled $142.5 million and $127.8
million at March 31, 2009 and 2008, respectively.










78








Interest
expense by deposit type was as follows (in thousands):





Year
      Ended March 31,2009
            
            2008
            
            2007Interest
      checking
            $
            983
            
            $
            3,906
            
            $
            4,364Money
      market
            
            3,810
            
            
            8,882
            
            
            6,971Savings
      accounts
            
            149
            
            
            151
            
            
            179Certificate
      of deposit
            
            10,337
            
            
            9,204
            
            
            8,993Total
            $
            15,279
            
            $
            22,143
            
            $
            20,507





11.
            FEDERAL
      HOME LOAN BANK ADVANCES




At March
31, 2009 and 2008, advances from the FHLB totaled $37.9 million and $92.9
million with a weighted average interest rate of 2.02% and 3.35%,
respectively.  The FHLB borrowings at March 31, 2009 consisted of a
single $25.0 million fixed rate advance and a Cash Management Advance (CMA) with
a rate set daily by the FHLB.  The weighted average interest rate for
fixed and adjustable rate advances was 1.99%, 4.32%, and 5.26% for the years
ended March 31, 2009, 2008 and 2007, respectively.




The Bank
has a credit line with the FHLB equal to 30% of total assets, limited by
available collateral. At March 31, 2009, based on collateral values, the Bank
had additional borrowing capacity of $204.2 million from the FHLB.




FHLB
advances are collateralized as provided for in the Advance, Pledge and Security
Agreements with the FHLB by certain investment and mortgage-backed securities,
FHLB stock owned by the Bank, deposits with the FHLB, and certain mortgages on
deeds of trust securing such properties as provided in the agreements with the
FHLB. At March 31, 2009, loans carried at $383.7 million and investments and
mortgage-backed securities carried at $4.0 million were pledged as collateral to
the FHLB.  At March 31, 2009, all of the Bank’s FHLB advances were
scheduled to mature during the fiscal year 2010.





12.
            FEDERAL
      RESERVE BANK ADVANCES




The
Company has a borrowing arrangement with the FRB under the Borrower-In-Custody
program.  Under this program, the Bank has an available credit
facility of $182.5 million, subject to pledged collateral.  As of
March 31, 2009, the Company had outstanding borrowings of $85.0 million with the
FRB.  The weighted average interest rate for these advances was
0.25%.  All of the Bank’s FRB advances were scheduled to mature during
fiscal year 2010.  At March 31, 2009, loans carried at $291.5 million
were pledged as collateral to the FRB.




In
addition, the Bank has a Fed Funds borrowing facility with Pacific Coast
Bankers’ Bank with a guideline limit of $10.0 million through June 30,
2009.  The facility may be reduced or withdrawn at any
time.  As of March 31, 2009, the Bank did not have any outstanding
advances on this facility.





13.
            JUNIOR
      SUBORDINATED DEBENTURES




At March
31, 2009, the Company had two wholly-owned subsidiary grantor trusts that were
established for the purpose of issuing trust preferred securities and common
securities.  The trust preferred securities accrue and pay
distributions periodically at specified annual rates as provided in each
indenture.  The trusts used the net proceeds from each of the
offerings to purchase a like amount of junior subordinated debentures (the
“Debentures”) of the Company.  The Debentures are the sole assets of
the trusts.  The Company’s obligations under the Debentures and
related documents, taken together, constitute a full and unconditional guarantee
by the Company of the obligations of the trusts.  The trust preferred
securities are mandatorily redeemable upon maturity of the Debentures, or upon
earlier redemption as provided in the indentures.  The Company has the
right to redeem the Debentures in whole or in part on or after specific dates,
at a redemption price specified in the indentures plus any accrued but unpaid
interest to the redemption date.




The
Debentures issued by the Company to the grantor trusts, totaling $22.7 million,
are reflected in the consolidated balance sheets in the liabilities section,
under the caption “junior subordinated debentures.”  The common securities
issued by the grantor trusts were purchased by the Company, and the Company’s
investment in the common securities of $681,000 at March 31, 2009 and 2008, is
included in prepaid expenses and other assets in the consolidated balance
sheets.  The Company records interest expense on the Debentures in the
Consolidated Statements of Operations.







79




The
following table is a summary of the terms of the current Debentures at March 31,
2009:




Issuance
      Trust
            Issuance
              Date
            Amount
              Outstanding
            Rate
      Type
            Initial
              Rate
            Rate
            Maturing
              Date(Dollars
      in thousands)Riverview
      Bancorp Statutory Trust I
            12/2005
            $    7,217
            Variable
      (1)
            5.88%
            2.68%
            3/2036Riverview
      Bancorp Statutory Trust II
            6/2007
            15,464
            Fixed
      (2)
            7.03%
            7.03%
            9/2037$  22,681(1)The
      trust preferred securities reprice quarterly based on the three-month
      LIBOR plus 1.36%
              
              (2)The
      trust preferred securities bear a fixed quarterly interest rate for 60
      months, at which time the rate begins to float on a quarterly
              basis
      based onthe
      three-month LIBOR plus 1.35% until maturity.





14.
            INCOME
      TAXES




Income
tax provision (benefit) for the years ended March 31 consisted of the following
(in thousands):





2009
            
            2008
            
            2007Current
            $
            2,091
            
            $
            4,894
            
            $
            6,604Deferred
            
            (3,653
            )
            
            (395
            )
            
            (436
            )Total
            $
            (1,562
            )
            $
            4,499
            
            $
            6,168




The tax
effect of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities at March 31, 2009 and 2008 are
as follows (in thousands):





2009
            
            2008Deferred
      tax assets:Deferred
      compensation
            $
            593
            
            $
            660Loan
      loss reserve
            
            6,131
            
            
            4,014Core
      deposit intangible
            
            10
            
            
            90Accrued
      expenses
            
            190
            
            
            215Accumulated
      depreciation
            
            368
            
            
            446Net
      unrealized loss on securities available for sale
            
            98
            
            
            112Impairment
      on investment security
            
            1,212
            
            
            -Capital
      loss carry forward
            
            684
            
            
            699REO
      expense
            
            796
            
            
            186Non-compete
            
            146
            
            
            164Other
            
            117
            
            
            159Total
      deferred tax asset
            
            10,345
            
            
            6,745Deferred
      tax liabilities:FHLB
      stock dividend
            
            (1,063
            )
            
            (1,093
            )Deferred
      gain on sale
            
            (210
            )
            
            (170
            )Tax
      qualified loan loss reserve
            
            -
            
            
            (27
            )Purchase
      accounting
            
            (151
            )
            
            (203
            )Prepaid
      expense
            
            (125
            )
            
            (97
            )Loan
      fees/costs
            
            (587
            )
            
            (584
            )Total
      deferred tax liability
            
            (2,136
            )
            
            (2,174
            )Deferred
      tax asset, net
            $
            8,209
            
            $
            4,571




A
reconciliation of the Company’s effective income tax rate with the federal
statutory tax rate for the years ended March 31 is as follows:





2009
            
            
            2008
            
            
            
            2007Statutory
      federal income tax rate
            
            (34.0
            )%
            
            35.0
            %
            
            
            35.0
            %State
      and local income tax rate
            
            (1.5
            )
            
            1.2
            
            
            
            0.9ESOP
      market value adjustment
            
            0.3
            
            
            0.8
            
            
            
            0.5Interest
      income on municipal securities
            
            (1.2
            )
            
            (0.4
            )
            
            
            (0.3
            )Bank
      owned life insurance
            
            (4.8
            )
            
            (1.5
            )
            
            
            (1.1
            )Other,
      net
            
            4.1
            
            
            (0.9
            )
            
            
            (0.4
            )Effective
      federal income tax rate
            
            (37.1
            )%
            
            34.2
            %
            
            
            34.6
            %








80






There
were no taxes related to the gains on sales of securities for the years ended
March 31, 2009, 2008 and 2007.




The
Bank’s retained earnings at March 31, 2009 and 2008 include base year bad debt
reserves, which amounted to $2.2 million, for which no federal income tax
liability has been recognized.  The amount of unrecognized deferred
tax liability at March 31, 2009 and 2008 was $781,000 and $800,000,
respectively.  This represents the balance of bad debt reserves
created for tax purposes as of December 31, 1987.  These amounts are
subject to recapture in the unlikely event that the Company’s banking
subsidiaries (1) make distributions in excess of current and accumulated
earnings and profits, as calculated for federal tax purposes, (2) redeem their
stock, or (3) liquidate.  Management does not expect this temporary
difference to reverse in the foreseeable future.




The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) at the beginning of fiscal year 2008.  At the
date of adoption, the Company had unrecognized tax benefits related to its state
filing positions of $90,000 that, if recognized, would affect the Company’s
effective tax rate by $65,000.  The Company recorded an adjustment to
retained earnings (net of federal benefits) for these uncertain tax positions
totaling $65,000, inclusive of interest and penalties.  The Company’s
policy is to recognize potential accrued interest and penalties related to
unrecognized tax benefits as income tax expense.  The Company recorded
$13,000 and $11,000 of possible interest and penalties for the years ended March
31, 2009 and 2008, respectively.  The tax years 2004 to 2007 remain
open to examination by the major taxing jurisdictions to which the Company is
subject.




A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):





March
      31,2009
            
            2008Balance
      at beginning of year
            $
            90
            
            $
            90Additions
      based on tax positions related to the current year
            
            -
            
            
            -Additions
      for tax positions of prior years
            
            -
            
            
            -Reductions
      for tax positions of prior years
            
            (21
            )
            
            -Settlements
            
            (69
            )
            
            -Balance
      end or year
            $
            -
            
            $
            90




The
Company has a capital loss carry forward of $2.0 million, which expires in
2010.  Utilization of this loss is subject to certain limitations of
the Internal Revenue Code.  Management expects to utilize this capital
loss carry forward prior to expiration. The tax effects of certain tax benefits
related to stock options are recorded directly to shareholders’ equity. No
valuation allowance for deferred tax assets was deemed necessary at March 31,
2009 or 2008 based upon the Company’s anticipated future ability to generate
taxable income from operations.





15.
            EMPLOYEE
      BENEFITS PLANS




Retirement
Plan - The Riverview Bancorp, Inc. Employees’ Savings and Profit Sharing
Plan (the “Plan”) is a defined contribution profit-sharing plan incorporating
the provisions of Section 401(k) of the Internal Revenue Code.  The
Plan covers all employees with at least six months and 500 hours of service who
are over the age of 18. The Company matches the employee’s elective
contribution up to 4% of the employee’s compensation. Company expenses related
to the Plan for the years ended March 31, 2009, 2008 and 2007 were $432,000,
$455,000 and $409,000, respectively.




Directors
Deferred Compensation Plan - Directors may elect to defer their monthly
directors’ fees until retirement with no income tax payable by the director
until retirement benefits are received.  Chairman, President,
Executive and Senior Vice Presidents of the Company may also defer salary into
this plan. This alternative is made available to them through a nonqualified
deferred compensation plan. The Company accrues annual interest on the unfunded
liability under the Directors Deferred Compensation Plan based upon a formula
relating to gross revenues, which amounted to 6.19%, 7.57% and 7.51% for the
years ended March 31, 2009, 2008 and 2007, respectively. The estimated liability
under the plan is accrued as earned by the participant. At March 31, 2009 and
2008, the Company’s aggregate liability under the plan was $1.7 million and $1.8
million, respectively.




Stock Option
Plans - In July
1998, shareholders of the Company approved the adoption of the 1998 Stock Option
Plan (“1998 Plan”). The 1998 Plan was effective October 1, 1998 and terminated
on October 1, 2008.  Accordingly, no further option awards may be
granted under the 1998 Plan; however, any awards granted prior to its expiration
remain outstanding subject to their terms.  Under the 1998 Plan, the
Company had the ability to grant both incentive and non-qualified stock options
to purchase up to 714,150 shares of its common stock to officers, directors and
employees. Each option granted under the 1998 Plan has an exercise price equal
to the fair market value of the Company’s common stock on the date of the grant,
a maximum term of ten years and a vesting period from zero to five
years.










81
 
  In July
2003, shareholders of the Company approved the adoption of the 2003 Stock Option
Plan (“2003 Plan”).  The 2003 Plan was effective July 2003 and will
expire on the tenth anniversary of the effective date, unless terminated sooner
by the Board.  Under the 2003 Plan, the Company may grant both
incentive and non-qualified stock options to purchase up to 458,554 shares of
its common stock to officers, directors and employees.  Each option
granted under the 2003 Plan has an exercise price equal to the fair market value
of the Company’s common stock on the date of grant, a maximum term of ten years
and a vesting period from zero to five years. At March 31, 2009, there were
options for 198,154 shares of the Company’s common stock available for future
grant under the 2003 Plan.




The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes based stock option valuation model. The fair value of all awards
is amortized on a straight-line basis over the requisite service periods, which
are generally the vesting periods. The Black-Scholes model uses the assumptions
listed in the table below.  The expected life of options granted
represents the period of time that they are expected to be outstanding. The
expected life is determined based on historical experience with similar options,
giving consideration to the contractual terms and vesting schedules. Expected
volatility was estimated at the date of grant based on the historical volatility
of the Company's common stock. Expected dividends are based on dividend trends
and the market value of the Company's common stock at the time of grant. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant. The Company granted 38,500 and 20,000 stock options during
the years ended March 31, 2009 and 2008, respectively. No options were granted
during the year ended March 31, 2007.





Risk
      Free
              Interest
      Rate
            Expected
              Life
      (yrs)
            Expected
              Volatility
            Expected
              DividendsFiscal
      2009
            
            2.99%
            6.25
            20.20%
            2.77%Fiscal
      2008
            
            4.32%
            6.25
            15.13%
            3.06%




The
weighted average grant-date fair value of fiscal years 2009 and 2008 awards were
$1.09 and $2.07, respectively.  As of March 31, 2009, unrecognized
compensation cost related to nonvested stock options totaled
$38,000.  The Company recognized pre-tax compensation expense related
to stock options of $38,000, $34,000 and $39,000 for the years ended March 31,
2009, 2008 and 2007, respectively.




The
following table presents the activity related to options under all plans for the
periods indicated.





Year
      Ended March 31,2009
            
            2008
            
            2007Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            Number
      of Shares
            
            
            Weighted
      Average Exercise PriceBalance,
      beginning of period
            424,972
            
            $
            11.02
            
            526,192
            
            $
            10.41
            
            755,846
            
            $
            9.68Grants
            38,500
            
            
            6.30
            
            20,000
            
            
            13.42
            
            -
            
            
            -Options
      exercised
            (10,000
            )
            
            4.70
            
            (95,620
            )
            
            7.68
            
            (212,054
            )
            
            7.79Forfeited
            (48,000
            )
            
            11.71
            
            (25,600
            )
            
            12.69
            
            (17,600
            )
            
            10.65Expired
            (33,776
            )
            
            6.88
            
            -
            
            
            -
            
            -
            
            
            -Balance,
      end of period
            371,696
            
            $
            10.99
            
            424,972
            
            $
            11.02
            
            526,192
            
            $
            10.41




Additional
information regarding options outstanding as of March 31, 2009 is as
follows:




Options
      Outstanding
            
            Options
      ExercisableWeighted
      Avg
            
            
            
            
            Weighted
            
            
            
            
            WeightedRemaining
            
            
            
            
            Average
            
            
            
            
            AverageRange
      of
            
            Contractual
            
            Number
            
            
            Exercise
            
            Number
            
            
            ExerciseExercise
      Price
            
            Life
      (years)
            
            Outstanding
            
            
            Price
            
            Exercisable
            
            
            Price$4.03
      - $6.16
            
            6.20
            
            55,996
            
            $
            5.93
            
            19,996
            
            $
            5.50$6.51
      - $6.88
            
            3.10
            
            20,000
            
            
            6.76
            
            20,000
            
            
            6.76$7.49
      - $9.51
            
            4.46
            
            33,700
            
            
            8.45
            
            31,700
            
            
            8.48$10.10
      - $10.83
            
            6.00
            
            33,000
            
            
            10.26
            
            27,200
            
            
            10.24$12.98
      - $14.52
            
            7.04
            
            229,000
            
            
            13.07
            
            220,000
            
            
            13.026.38
            
            371,696
            
            $
            10.99
            
            318,896
            
            $
            11.46











82





The
following table presents information on stock options outstanding for the
periods shown, less estimated forfeitures.





Year
      Ended
              March
      31, 2009
            
            Year
      Ended
              March
      31, 2008Stock
      options fully vested and expected to vest:Number
            
            368,271
            
            
            
            422,572Weighted
      average exercise price
            $
            11.01
            
            
            $
            11.02Aggregate
      intrinsic value (1)
            $
            -
            
            
            $
            (437,882
            )Weighted
      average contractual term of options (years)
            
            6.33
            
            
            
            6.82Stock
      options fully vested and currently exercisable:Number
            
            318,896
            
            
            
            397,372Weighted
      average exercise price
            $
            11.46
            
            
            $
            10.94Aggregate
      intrinsic value (1)
            $
            -
            
            
            $
            (382,675
            )Weighted
      average contractual term of options (years)
            
            5.93
            
            
            
            6.31(1)  The
      aggregate intrinsic value of a stock options in the table above represents
      the total pre-tax intrinsic value (the amount by which the current market
      value of the underlying stock exceeds the exercise price) that would have
      been received by the option holders had all option holders
      exercised.  This amount changes based on changes in the market
      value of the Company’s stock.




The total
intrinsic value of stock options exercised was $31,000, $613,000 and $1.7
million for the years ended March 31, 2009, 2008 and 2007,
respectively.





16.
            EMPLOYEE
      STOCK OWNERSHIP PLAN




The
Company sponsors an ESOP that covers all employees with at least one year and
1,000 hours of service who are over the age of 21.  Shares are
released and allocated to participant accounts on December 31 of each year until
2017. ESOP compensation expense included in salaries and employee benefits was
$43,000, $414,000 and $274,000 for years ended March 31, 2009, 2008 and 2007,
respectively.




ESOP
share activity is summarized in the following table:








Fair
      Value
              of
              Unreleased
              Shares
            
            Unreleased
              ESOP
              Shares
            
            Allocated
              and
              Released
              Shares
            
            TotalBalance,
      March 31, 2006
            $
            3,955,000
            
            295,596
            
            666,988
            
            962,584Allocation
      December 31, 2006
            
            
            
            (24,633
            )
            24,633
            
            -Balance,
      March 31, 2007
            $
            4,319,000
            
            270,963
            
            691,621
            
            962,584Allocation
      December 31, 2007
            
            
            
            (24,633
            )
            24,633
            
            -Balance,
      March 31, 2008
            $
            2,458,000
            
            246,330
            
            716,254
            
            962,584Allocation
      December 31, 2008
            
            
            
            (24,633
            )
            24,633
            
            -Balance,
      March 31, 2009
            $
            858,000
            
            221,697
            
            740,887
            
            962,584





17.
            SHAREHOLDERS’
      EQUITY AND REGULATORY CAPITAL
REQUIREMENTS




The
Company’s Board authorized 250,000 shares of serial preferred stock as part of
the Conversion and Reorganization completed on September 30, 1997.  No
preferred shares were issued or outstanding at March 31, 2009 or
2008.




The Bank
is subject to various regulatory capital requirements administered by the Office
of Thrift Supervision (“OTS”).Failure
to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect onthe Bank’sfinancial
statements.Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank’s assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices.  The
Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.




Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios of total and Tier I capital to
risk-weighted assets, core capital to total assets and tangible capital to
tangible assets (set forth in the table below).Management believes the Bank meets all capital adequacy requirements to
which it is subject as of March 31, 2009.








83




As of
March 31, 2009, the most recent notification from the OTS categorized the Bank
as “well capitalized” under the regulatory framework for prompt corrective
action.To be
categorized as “well capitalized,” the Bank must maintain minimum total capital
and Tier I capital to risk weighted assets, core capital to total assets and
tangible capital to tangible assets (set forth in the table below). In January 2009, the
Company entered into a Memorandum of Understanding (“MOU”) with the OTS which
requires, among other things, the Bank to develop a plan for achieving and
maintaining a minimum Tier 1 Capital (Leverage) ratio of 8% and a minimum Total
Risk-Based Capital ratio of 12%.  These higher capital requirements
will remain in effect until the MOU is terminated.  At March 31, 2009,
the Bank’s Leverage ratio was 9.50% and its Total Risk-Based Capital ratio was
11.46%.




The
Bank’s actual and required minimum capital amounts and ratios are as follows
(dollars in thousands):





Actual
            
            
            For
      Capital Adequacy Purposes
            
            
            “Well
      Capitalized” Under Prompt Corrective ActionAmount
            
            Ratio
            
            
            Amount
            
            Ratio
            
            
            Amount
            
            RatioMarch
      31, 2009Total
      Capital:(To
      Risk-Weighted Assets)
            $
            94,654
            
            11.46
            %
            $
            66,080
            
            8.0
            %
            $
            82,599
            
            10.0
            %Tier
      1 Capital:(To
      Risk-Weighted Assets)
            
            84,300
            
            10.21
            
            
            33,040
            
            4.0
            
            
            49,560
            
            6.0Tier
      1 Capital (Leverage):(To
      Adjusted Tangible Assets)
            
            84,300
            
            9.50
            
            
            35,502
            
            4.0
            
            
            44,377
            
            5.0Tangible
      Capital:(To
      Tangible Assets)
            
            84,300
            
            9.50
            
            
            13,313
            
            1.5
            
            
            N/A
            
            N/A





Actual
            
            
            For
      Capital Adequacy Purposes
            
            
            “Well
      Capitalized” Under Prompt Corrective ActionAmount
            
            Ratio
            
            
            Amount
            
            Ratio
            
            
            Amount
            
            RatioMarch
      31, 2008Total
      Capital:(To
      Risk-Weighted Assets)
            $
            88,806
            
            10.99
            %
            $
            64,627
            
            8.0
            %
            $
            80,784
            
            10.0
            %Tier
      1 Capital:(To
      Risk-Weighted Assets)
            
            79,021
            
            9.78
            
            
            32,314
            
            4.0
            
            
            48,470
            
            6.0Tier
      1 Capital (Leverage):(To Adjusted Tangible Assets)
            
            79,021
            
            9.29
            
            
            25,530
            
            3.0
            
            
            42,550
            
            5.0Tangible
      Capital:(To
      Tangible Assets)
            
            79,021
            
            9.29
            
            
            12,765
            
            1.5
            
            
            N/A
            
            N/A




At
periodic intervals, the OTS and the FDIC routinely examine the Company’s
Consolidated Financial Statements as part of their legally prescribed oversight
of the savings and loan industry. Based on their examinations, these regulators
can direct that the Company’s Consolidated Financial Statements be adjusted in
accordance with their findings. A future examination by the OTS or the FDIC
could include a review of certain transactions or other amounts reported in the
Company’s 2009 Consolidated Financial Statements.




At March
31, 2009, the Company had 125,000 shares of its outstanding common stock
available for repurchase under the June 21, 2007 Board approved stock repurchase
plan of 750,000 shares.  The following table summarizes the Company’s
common stock repurchased in each of the following periods (dollars in
thousands):







Shares
            
            
            Value2009
            -
            
            $
            -2008
            875,000
            
            $
            12,6432007
            -
            
            $
            -





18.
            EARNINGS
      PER SHARE




Basic
earning per share (“EPS”) is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding during
the period, without considering any dilutive items.  Diluted EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares and common stock equivalents for items that are
dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company’s common stock during the
period. Common stock equivalents arise from assumed conversion of outstanding
stock options. ESOP shares are not considered outstanding for EPS purposes








84






until
they are committed to be released.   For the years ended March
31, 2009 and 2008, stock options for 384,964 and 15,000 shares, respectively, of
common stock were excluded in computing diluted EPS because they were
antidilutive.





Years
      Ended March 31,2009
            
            
            2008
            
            
            2007Basic
      EPS computation:Numerator-net
      income (loss)
            $
            (2,650,000
            )
            $
            8,644,000
            
            $
            11,606,000Denominator-weighted
      average
              common
      shares outstanding
            
            10,693,795
            
            
            10,915,271
            
            
            11,312,847Basic
      EPS
            $
            (0.25
            )
            $
            0.79
            
            $
            1.03Diluted
      EPS computation:Numerator-net
      income (loss)
            $
            (2,650,000
            )
            $
            8,644,000
            
            $
            11,606,000Denominator-weighted
      average
              common
      shares outstanding
            
            10,693,795
            
            
            10,915,271
            
            
            11,312,847Effect
      of dilutive stock options
            
            -
            
            
            91,402
            
            
            203,385Weighted
      average common sharesand
      common stock equivalents
            
            10,693,795
            
            
            11,006,673
            
            
            11,516,232Diluted
      EPS
            $
            (0.25
            )
            $
            0.79
            
            $
            1.01





19.
            FAIR
      VALUE MEASUREMENT




SFAS No.
157, “Fair Value Measurements” defines fair value and establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements.  The following definitions describe the categories used
in the tables presented under fair value measurement.







Quoted
prices in active markets for identical assets (Level 1): Inputs that are quoted
unadjusted prices in active markets for identical assets that the Company has
the ability to access at the measurement date.  An active market for
the asset is a market in which transactions for the asset or liability occur
with sufficient frequency and volume to provide pricing information on an
ongoing basis.





Other
observable inputs (Level 2): Inputs that reflect the assumptions market
participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of the reporting entity including
quoted prices for similar assets, quoted prices for securities in inactive
markets and inputs derived principally from or corroborated by observable market
data by correlation or other means.





Significant
unobservable inputs (Level 3): Inputs that reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances.




Financial
instruments are broken down in the tables that follow by recurring or
nonrecurring measurement status.  Recurring assets are initially
measured at fair value and are required to be remeasured at fair value in the
financial statements at each reporting date.  Assets measured on a
nonrecurring basis are assets that, as a result of an event or circumstance,
were required to be remeasured at fair value after initial recognition in the
financial statements at some time during the reporting period.




The
following tables presents assets that are measured at fair value on a recurring
basis (in thousands).




Fair
      value measurements at March 31, 2009, usingQuoted
      prices in
              active
      markets for identical assets
            
            Other
      observable
              inputs
            
            Significant
              unobservable
              inputsFair
      value
              March
      31, 2009
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)Investment
      securities available for sale
            $
            8,490
            
            $
            -
            
            $
            7,346
            
            $
            1,144Mortgage-backed
      securities available for sale
            
            4,066
            
            
            -
            
            
            4,066
            
            
            -Total
      recurring assets measured at fair value
            $
            12,556
            
            $
            -
            
            $
            11,412
            
            $
            1,144












85






The
following table presents a reconciliation of assets that are measured at fair
value on a recurring basis using significant unobservable inputs (Level 3)
during the year ended March 31, 2009 (in thousands).




For
      the Year EndedMarch
      31, 2009Available
      for sale securitiesBalance
      at March 31, 2008
            $
            -Transfers
      in to Level 3
            
            4,612Included
      in earnings(1)
            
            (3,414
            )Included
      in other comprehensive income (2)
            
            (54
            )Balance
      at March 31, 2009
            $
            1,144(1)Included in other non-interest income(2)Includes the reversal of previously recorded OTTI




The
following method was used to estimate the fair value of each class of financial
instrument above:




Investments and Mortgage-Backed
Securities– Investment securities available-for-sale are included within
Level 1 of the hierarchy when quoted prices in an active market for identical
assets are available.  If quoted market prices for identical
securities are not available then fair values are estimated by independent
sources using pricing models and/or quoted prices of investment securities with
similar characteristics.  Our Level 3 assets consist of a single
pooled trust preferred security.  Due to the inactivity in the market
for these types of securities, the Company determined the security is classified
within Level 3 of the fair value hierarchy, and believes that significant
unobservable inputs are required to determine the security’s fair value at the
measurement date.  The Company determined that an income approach
valuation technique was most representative of the security’s fair
value.  Significant assumptions used by the Company as part of the
income approach include selecting an appropriate discount rate, expected default
rate and estimated repayment dates.  In selecting its assumptions, the
Company considered all available market information that could be obtained
without undue cost or effort, and considered the unique characteristics of the
trust preferred security by assessing the available market information and the
various risks associated with the security including: valuation estimates
provided by third party pricing services; relevant reports issued by analyst and
credit rating agencies; level of interest rates and any movement in pricing for
credit and other risks; information about the performance of the underlying
institutions that issued the debt instruments, such as net income, return on
equity, capital adequacy, nonperforming asset, etc; and other relevant
observable inputs.




The
following table presents assets that are measured at fair value on a
nonrecurring basis (in thousands).




Fair
      value measurements at March 31, 2009, usingQuoted
      prices in
              active
      markets for identical assets
            
            Other
      observable
              inputs
            
            Significant
              unobservable
              inputsFair
      value
              March
      31, 2009
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)Loans
      measured for impairment
            $
            24,389
            
            $
            -
            
            $
            -
            
            $
            24,389Real
      estate owned
            
            14,171
            
            
            -
            
            
            -
            
            
            14,171Total
      nonrecurring assets measured at fair value
            $
            38,560
            
            $
            -
            
            $
            -
            
            $
            38,560




The
following method was used to estimate the fair value of each class of financial
instrument above:




Impaired loans– A loan is
considered to be impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement.  Impairment was measured by management based on a number of
factors, including recent independent appraisals which were further reduced for
estimated selling costs or as a practical expedient by estimating the present
value of expected future cash flows, discounted at the loan’s effective interest
rate.  A significant portion of the Company’s impaired loans is
measured using the estimated fair market value of the collateral less estimated
costs to sell.  From time to time, non-recurring fair value
adjustments to collateral dependent loans are recorded to reflect partial
write-downs based on observable market price or current appraised value of
collateral.  The increase in loans identified








86






for
impairment is primarily due to the further deterioration of market conditions
and the resulting decline in real estate values, which has specifically impacted
many builder and developers.  As of March 31, 2009, the Company
evaluated $28.7 million of impaired loans.  The $24.4 million fair
market value of impaired loans represents the $28.7 million in impaired loan
balances, net of a $4.3 million specific allowance. The Company has categorized
its impaired loans as Level 3.  The impaired loans were comprised of
two commercial loans totaling $4.3 million, two land development loans totaling
$3.9 million and seven speculative construction loans totaling $20.5
million.




Real estate owned – The
Company’s REO is initially recorded at the lower of the carrying amount of the
loan or fair value less estimated costs to sell.  This amount becomes
the property’s new basis.  Fair value was generally determined by
management based on a number of factors, including third-party appraisals of
fair value in an orderly sale.  Estimated costs to sell REO were based
on standard market factors.  The valuation of REO is subject to
significant external and internal judgment.  Management periodically
reviews REO to determine whether the property continues to be carried at the
lower of its recorded book value or fair value, net of estimated costs to
sell.  The Company has categorized its REO as Level 3.  As a
result of the continued deterioration in the appraised values of its REO, as
evidenced by current market conditions, the Company took additional write-downs
of $100,000 through a charge to earnings for the year ended March 31,
2009.





20.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS




The
following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of
Financial Instruments. The Company, using available market information
and appropriate valuation methodologies, has determined the estimated fair value
amounts. However, considerable judgment is necessary to interpret market data in
the development of the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.




The
estimated fair value of financial instruments is as follows (in
thousands):





March
      31,2009
            
            
            2008Carrying
              Value
            
            
            Fair
              Value
            
            
            Carrying
              Value
            
            
            Fair
              ValueAssets:Cash
            $
            19,199
            
            $
            19,199
            
            $
            36,439
            
            $
            36,439Investment
      securities held to maturity
            
            529
            
            
            552
            
            
            -
            
            
            -Investment
      securities available for sale
            
            8,490
            
            
            8,490
            
            
            7,487
            
            
            7,487Mortgage-backed
      securities held to maturity
            
            570
            
            
            572
            
            
            885
            
            
            892Mortgage-backed
      securities available for sale
            
            4,066
            
            
            4,066
            
            
            5,338
            
            
            5,338Loans
      receivable, net
            
            784,117
            
            
            733,436
            
            
            756,538
            
            
            775,454Loans
      held for sale
            
            1,332
            
            
            1,332
            
            
            -
            
            
            -Mortgage
      servicing rights
            
            468
            
            
            929
            
            
            302
            
            
            973Liabilities:Demand
      – savings deposits
            
            392,389
            
            
            392,389
            
            
            401,320
            
            
            401,320Time
      deposits
            
            277,677
            
            
            281,120
            
            
            265,680
            
            
            268,747FHLB
      advances
            
            37,850
            
            
            37,869
            
            
            92,850
            
            
            92,745FRB
      advances
            
            85,000
            
            
            84,980
            
            
            -
            
            
            -Junior
      subordinated debentures
            
            22,681
            
            
            12,702
            
            
            22,681
            
            
            15,734




Fair
value estimates were based on existing financial instruments without attempting
to estimate the value of anticipated future business. The fair value has not
been estimated for assets and liabilities that were not considered financial
instruments.




Fair
value estimates, methods and assumptions are set forth below.




Cash- Fair value
approximates the carrying amount.




Investments and
Mortgage-Backed Securities - Fair values were based on quoted market
rates and dealer quotes.








87






Loans Receivable
and Loans Held for Sale – For the year ended March 31, 2009, due to the
illiquid market for loans sales, loans were priced using comparable market
statistics. The loan portfolio was segregated into various categories and a
weighted average valuation discount that approximated similar loan sales was
applied to each of these categories.




For the
year ended March 31, 2008, loans were priced using a discounted cash flow
method.  The discount rate used was the rate currently offered on
similar products, risk adjusted for credit concerns or dissimilar
characteristics.  For variable rate loans that reprice frequently and
have no significant change in credit, fair values were based on the carrying
values.




Mortgage
Servicing Rights -The fair value of MSRs
was determined using the Company’s model, which incorporates the expected life
of the loans, estimated cost to service the loans, servicing fees received and
other factors. The Company calculates MSRs fair value by stratifying MSRs based
on the predominant risk characteristics that include the underlying loan’s
interest rate, cash flows of the loan, origination date and term. Key economic
assumptions that vary due to changes in market interest rates are used to
determine the fair value of the MSRs and include expected prepayment speeds,
which impact the average life of the portfolio, annual service cost, annual
ancillary income and the discount rate used in valuing the cash flows. At March
31, 2009, the MSRs fair value totaled $929,000 which was estimated using a range
of prepayment speed assumptions values that ranged from 160 to 716.




Deposits -
The fair value of deposits with no stated maturity such as non-interest-bearing
demand deposits, interest checking, money market and savings accounts was equal
to the amount payable on demand. The fair value of time deposits with stated
maturity was based on the discounted value of contractual cash flows. The
discount rate was estimated using rates currently available in the local
market.




Federal Home Loan
Bank Advances - The fair value for FHLB advances was based on the
discounted cash flow method. The discount rate was estimated using rates
currently available from the FHLB.




Federal Reserve
Bank Advances - The fair value for FRB advances was based on the
discounted cash flow method. The discount rate was estimated using rates
currently available from the FRB.




Junior
Subordinated Debentures - The fair value of junior subordinated
debentures was based on the discounted cash flow method. The discount rate was
estimated using rates currently available for the junior subordinated
debentures.




Off-Balance Sheet
Financial Instruments - The estimated fair value of loan commitments
approximates fees recorded associated with such commitments as of March 31, 2009
and 2008. Since the majority of the Bank’s off-balance-sheet instruments consist
of non-fee producing, variable rate commitments, the Bank has determined they do
not have a distinguishable fair value.





21.
            COMMITMENTS
      AND CONTINGENCIES




The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers.  These financial instruments generally include commitments
to originate mortgage, commercial and consumer loans.  Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet.  The
Company’s maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Commitments to
originate loans are conditional, and are honored for up to 45 days subject to
the Company’s usual terms and conditions.  Collateral is not required
to support commitments.




At March
31, 2009, the Company had outstanding commitments to extend credit totaling $7.2
million, unused lines of credit totaling $93.8 million and undisbursed
construction loans totaling $22.2 million.




The
allowance for unfunded loan commitments was $296,000 at March 31,
2009.




Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are primarily
used to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies as specified
above, and is required in instances where the Bank deems necessary. At March 31,
2009 and 2008, standby letters of credit totaled $1.8 million and $2.3 million,
respectively.








88






At March
31, 2009, the Company had firm commitments to sell $1.3 million of residential
loans to FHLMC. Typically, these agreements are short term fixed rate
commitments and no material gain or loss is likely.




In
connection with certain asset sales, the Bank typically makes representation and
warranties about the underlying assets conforming to specified
guidelines.  If the underlying assets do not conform to the
specifications, the Bank may have an obligation to repurchase the assets or
indemnify the purchaser against loss.  As of March 31, 2009, loans
under warranty totaled $108.9 million, which substantially represents the unpaid
principal balance of the Bank’s loans serviced for FHLMC.  The Bank
believes that the potential for loss under these arrangements is
remote.  Accordingly, no contingent liability is recorded in the
Consolidated Financial Statements.




The Bank
is a public depository and, accordingly, accepts deposit and other public funds
belonging to, or held for the benefit of, Washington and Oregon states,
political subdivisions thereof and, municipal corporations.  In
accordance with applicable state law, in the event of default of a participating
bank, all other participating banks in the state collectively assure that no
loss of funds are suffered by any public depositor.  Generally, in the
event of default by a public depositary, the assessment attributable to all
public depositaries is allocated on a pro rata basis in proportion to the
maximum liability of each depository as it existed on the date of
loss.  The Company has not incurred any losses related to public
depository funds for the years ended March 31, 2009, 2008 and 2007.




The
Company is party to litigation arising in the ordinary course of
business.  In the opinion of management, these actions will not have a
material adverse effect, if any, on the Company’s financial position, results of
operations, or liquidity.




The Bank
has entered into employment contracts with certain key employees which provide
for contingent payment subject to future events.








89





22.
            RIVERVIEW
      BANCORP, INC. (PARENT COMPANY)








BALANCE
      SHEETSMARCH
      31, 2009 AND 2008(Dollars
      in thousands)
            
            2009
            
            
            2008ASSETSCash
      (including interest earning accounts of $1,073 and
      $8,269)
            $
            1,105
            
            $
            8,295Investment
      in the Bank
            
            108,967
            
            
            105,731Other
      assets
            
            1,352
            
            
            2,318TOTAL
      ASSETS
            $
            111,424
            
            $
            116,344LIABILITIES
      AND SHAREHOLDERS’ EQUITYAccrued
      expenses and other liabilities
            $
            68
            
            $
            106Deferred
      income taxes
            
            12
            
            
            12Borrowings
            
            22,681
            
            
            22,681Dividend
      payable
            
            -
            
            
            960Shareholders'
      equity
            
            88,663
            
            
            92,585TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
            $
            111,424
            
            $
            116,344








STATEMENTS
      OF OPERATIONSYEARS
      ENDED MARCH 31, 2009, 2008 AND 2007(Dollars
      in thousands)
            
            2009
            
            
            2008
            
            
            2007INCOME:Dividend
      income from Bank
            $
            -
            
            $
            6,386
            
            $
            7,907Interest
      on investment securities and other short-term investments
            
            114
            
            
            468
            
            
            172Interest
      on loan receivable from the Bank
            
            86
            
            
            94
            
            
            126Total
      income
            
            200
            
            
            6,948
            
            
            8,205EXPENSE:Management
      service fees paid to the Bank
            
            143
            
            
            143
            
            
            143Other
      expenses
            
            1,656
            
            
            1,636
            
            
            815Total
      expense
            
            1,799
            
            
            1,779
            
            
            958INCOME
      (LOSS) BEFORE INCOME TAXES AND EQUITYIN
      UNDISTRIBUTED INCOME OF THE BANK
            
            (1,599
            )
            
            5,169
            
            
            7,247BENEFIT
      FOR INCOME TAXES
            
            (544
            )
            
            (426
            )
            
            (231
            )INCOME
      (LOSS) OF PARENT COMPANY
            
            (1,055
            )
            
            5,595
            
            
            7,478EQUITY
      IN UNDISTRIBUTED INCOME (LOSS) OF THE BANK
            
            (1,595
            )
            
            3,049
            
            
            4,128NET
      INCOME (LOSS)
            $
            (2,650
            )
            $
            8,644
            
            $
            11,606








90








RIVERVIEW
BANCORP, INC. (PARENT COMPANY)





STATEMENTS
OF CASH FLOWS


YEARS
ENDED MARCH 31, 2009, 2008 AND 2007





(Dollars
      in thousands)
            
            2009
            
            
            2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            $
            (2,650
            )
            $
            8,644
            
            $
            11,606Adjustments
      to reconcile net income cash provided by operating
    activities:Equity
      in undistributed (earnings) loss of the Bank
            
            1,595
            
            
            (3,049
            )
            
            (4,128
            )Provision
      for deferred income taxes
            
            -
            
            
            34
            
            
            13Earned
      ESOP shares
            
            43
            
            
            414
            
            
            274Changes
      in assets and liabilities, net of acquisitionOther
      assets
            
            965
            
            
            (445
            )
            
            (724
            )Accrued
      expenses and other liabilities
            
            (87
            )
            
            (535
            )
            
            (376
            )Net
      cash provided (used) by operating activities
            
            (134
            )
            
            5,063
            
            
            6,665CASH
      FLOWS FROM INVESTING ACTIVITIES:Additional
      investment in subsidiary
            
            (4,750
            )
            
            -
            
            
            -Net
      cash used in investing activities
            
            (4,750
            )
            
            -
            
            
            -CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid
            
            (2,402
            )
            
            (4,740
            )
            
            (4,289
            )Proceeds
      from subordinated debentures
            
            -
            
            
            15,000
            
            
            -Repurchase
      of common stock
            
            -
            
            
            (12,643
            )
            
            -Proceeds
      from exercise of stock options
            
            96
            
            
            708
            
            
            880Net
      cash used by financing activities
            
            (2,306
            )
            
            (1,675
            )
            
            (3,409
            )NET
      INCREASE (DECREASE) IN CASH
            
            (7,190
            )
            
            3,388
            
            
            3,256CASH,
      BEGINNING OF YEAR
            
            8,295
            
            
            4,907
            
            
            1,651CASH,
      END OF YEAR
            $
            1,105
            
            $
            8,295
            
            $
            4,907












91





RIVERVIEW
BANCORP, INC.


SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED):





(Dollars in thousands, except
      share data)
            Three
      Months EndedMarch
      31
            
            
            
            December
      31
            
            
            
            September
      30
            
            
            
            June
      30Fiscal
      2009:Interest
      income
            $
            12,383
            
            
            $
            13,172
            
            
            $
            13,729
            
            
            $
            13,566Interest
      expense
            
            4,096
            
            
            
            4,801
            
            
            
            5,087
            
            
            
            5,199Net
      interest income
            
            8,287
            
            
            
            8,371
            
            
            
            8,642
            
            
            
            8,367Provision
      for loan losses
            
            5,000
            
            
            
            1,200
            
            
            
            7,200
            
            
            
            2,750Non-interest
      income
            
            2,759
            
            
            
            1,902
            
            
            
            (1,313
            )
            
            
            2,182Non-interest
      expense
            
            6,977
            
            
            
            6,907
            
            
            
            6,708
            
            
            
            6,667Income
      before income taxes
            
            (931
            )
            
            
            2,166
            
            
            
            (6,579
            )
            
            
            1,132Provision
      (benefit) for income taxes
            
            (211
            )
            
            
            691
            
            
            
            (2,381
            )
            
            
            339Net
      income (loss)
            $
            (720
            )
            
            $
            1,475
            
            
            $
            (4,198
            )
            
            $
            793Basic
      earnings (loss) per share (1)
            $
            (0.07
            )
            
            $
            0.14
            
            
            $
            (0.39
            )
            
            $
            0.07Diluted
      earnings (loss) per share
            $
            (0.07
            )
            
            $
            0.14
            
            
            $
            (0.39
            )
            
            $
            0.07Fiscal
      2008:Interest
      income
            $
            14,608
            
            
            $
            15,336
            
            
            $
            15,314
            
            
            $
            15,424Interest
      expense
            
            6,036
            
            
            
            6,478
            
            
            
            6,620
            
            
            
            6,596Net
      interest income
            
            8,572
            
            
            
            8,858
            
            
            
            8,694
            
            
            
            8,828Provision
      for loan losses
            
            1,800
            
            
            
            650
            
            
            
            400
            
            
            
            50Non-interest
      income
            
            2,214
            
            
            
            2,150
            
            
            
            2,216
            
            
            
            2,302Non-interest
      expense
            
            7,168
            
            
            
            7,011
            
            
            
            6,831
            
            
            
            6,781Income
      before income taxes
            
            1,818
            
            
            
            3,347
            
            
            
            3,679
            
            
            
            4,299Provision
      for income taxes
            
            656
            
            
            
            1,134
            
            
            
            1,249
            
            
            
            1,460Net
      income
            $
            1,162
            
            
            $
            2,213
            
            
            $
            2,430
            
            
            $
            2,839Basic
      earnings per share (1)
            $
            0.11
            
            
            $
            0.21
            
            
            $
            0.22
            
            
            $
            0.25Diluted
      earnings per share
            $
            0.11
            
            
            $
            0.21
            
            
            $
            0.22
            
            
            $
            0.25


(1)
            Quarterly earnings per share may
      vary from annual earnings per share due to
  rounding.





Item 9. Changes in and
Disagreements With Accountants on Accounting and Financial
Disclosure





Not
Applicable





Item 9A. Controls and
Procedures





(a) Evaluation of Disclosure
Controls and Procedures:  An evaluation of the Company’s
disclosure controls and procedures (as defined in Section 13(a)-15(e) of the
Securities Exchange Act of 1934) was carried out under the supervision and with
the participation of the Company’s Chief Executive Officer, Chief Financial
Officer and several other members of the Company’s senior management as of the
end of the period covered by this report.  The Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures as in effect on March 31, 2009, were
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Securities and Exchange Act
of 1934 is (i) accumulated and communicated to the Company’s management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms as of the end of the period
covered by this report.





The
Company does not expect that its disclosure controls and procedures and internal
control over financial reporting will prevent all error and all fraud. A control
procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud,








92






if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any control
procedure also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.





(b)  Changes in Internal
Controls:  There was no change in the Company’s internal
control over financial reporting during the Company’s most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





(c)  Management’s Annual Report
on Internal Control Over Financial Reporting:




The
management of Riverview Bancorp, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting.  This
internal control system has been designed to provide reasonable assurance to the
Company’s management and board of directors regarding the preparation and fair
presentation of the company’s published financial statements.




All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.




The
management of Riverview Bancorp, Inc. has assessed the effectiveness of the
Company’s internal control over financial reporting as of March 31,
2009.  To make the assessment, we used the criteria for effective
internal control over financial reporting described in Internal Control –
Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on our assessment, we believe that, as of
March 31, 2009, the Company’s internal control over financial reporting met
those criteria.





The
Company’s independent registered public accounting firm that audits the
Company’s consolidated financial statements has audited the Company’s internal
control over financial reporting as of March 31, 2009, as stated in their report
appearing below.
















93










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Shareholders of


Riverview
Bancorp, Inc.


Vancouver,
Washington






We have
audited the internal control over financial reporting of Riverview Bancorp, Inc.
and subsidiary (the "Company") as of March 31, 2009, based on criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.  The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting.  Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.





A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2009, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended March 31, 2009 of the Company and our report dated June 12,
2009 expressed an unqualified opinion on those financial
statements.





/s/Deloitte
& Touche LLP




Portland,
Oregon


June 12,
2009









94





Item 9B. Other
Information





There was
no information to be disclosed by the Company in a report on Form 8-K during the
fourth quarter of fiscal year 2009 that was not so disclosed.




PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance





The
information contained under the section captioned "Proposal I - Election of
Directors" contained in the Company's Proxy Statement for the 2009 Annual
Meeting of Stockholders, and "Part I -- Business -- Personnel -- Executive
Officers" of this Form 10-K, is incorporated herein by
reference.  Reference is made to the cover page of this Form 10-K for
information regarding compliance with Section 16(a) of the Exchange
Act.





Code of
Ethics





In
December 2003, the Board of Directors adopted the Officer and Director Code of
Ethics.  The code is applicable to each of the Company’s officers,
including the principal executive officer and senior financial officers, and
requires individuals to maintain the highest standards of professional
conduct.  A copy of the Code of Ethics is available on the Company’s
website at www.riverviewbank.com.





Audit Committee Matters and
Audit Committee Financial Expert





The
Company has a separately-designated standing Audit Committee, composed of
Directors Gary R. Douglass, Paul L. Runyan and Jerry C. Olson.  Each
member of the Audit Committee is “independent” as defined in the Nasdaq Stock
Market Listing Standards.  The Company’s Board of Directors has Mr.
Douglass, Audit Committee Chairman, as its financial expert, as defined in SEC’s
regulation S-K.





Nomination
Procedures





There
have been no material changes to the procedures by which shareholders may
recommend nominees to the Company’s Board of Directors.





Item
11.  Executive Compensation





The
information set forth under the sections captioned "Executive Compensation" and
"Directors' Compensation" under "Proposal I - Election of Directors" in the
Proxy Statement for the 2009 Annual Meeting of Stockholders is incorporated
herein by reference.





Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters





The
information set forth under the caption  "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement for the 2009
Annual Meeting of Stockholders is incorporated herein by reference.













95








Equity Compensation Plan
Information.  The following table summarizes share and exercise
price information about the Company’s equity compensation plan as of March 31,
2009.





Plan
      category
            
            Number
      of securities
              to
      be issued upon
              exercise
      of outstanding
              options
            
            Weighted-
              average
      price of outstanding
              options
            
            Number
      of securities remaining
              available
      for future issuance
              under
      equity compensation plans
              excluding
      securities reflected
              in
      column (A)Equity
      compensation plans approved by security holders:
            
            (A)
            
            (B)
            
            (C)2003
      Stock Option Plan
            
            214,000
            
            $12.98
            
            198,1541998
      Stock Option Plan
            
            157,696
            
            8.30
            
            -Equity
      compensation plans not approved by security holders:
            
            -
            
            -
            
            -Total
            
            371,696
            
            
            
            198,154





Item 13.  Certain
Relationships and Related Transactions; and Director
Independence





The
information set forth under the headings “Related Party Transactions” and
“Director Independence” in the Proxy Statement for the 2009 Annual Meeting of
Stockholders is incorporated herein by reference.





Item
14.  Principal Accounting Fees and Services





The
information set forth under the section captioned “Independent Auditor” in the
Proxy statement for the 2009 Annual Meeting of Stockholders is incorporated
herein by reference.















96





PART
IV


Item
15.  Exhibits, Financial Statement Schedules








(a)      1.
            Financial
      StatementsSee "Part II - Item
      8.  Financial Statements and Supplementary Data."2.
            Financial Statement
      SchedulesAll schedules are
      omitted because they are not required or applicable, or the required
      information is shown in the consolidated
              financial statements or the notes thereto.3.
            Exhibits3.1
            Articles
      of Incorporation of the Registrant (1)3.2
            Bylaws
      of the Registrant (1)4
            Form
      of Certificate of Common Stock of the Registrant (1)10.1
            Form
      of Employment Agreement between the Bank and Patrick Sheaffer, Ronald
      A. Wysaske, David A. Dahlstrom and John A. Karas (2)10.2
            Form of Change in Control Agreement between the Bank and Kevin J. Lycklama
      (2)10.3
            Employee
      Severance Compensation Plan (3)10.4
            Employee
      Stock Ownership Plan (4)10.5
            1998
      Stock Option Plan (5)10.6
            2003
      Stock Option Plan (6)10.7
            Form
      of Incentive Stock Option Award Pursuant to 2003 Stock Option Plan
      (7)10.8
            Form
      of Non-qualified Stock Option Award Pursuant to 2003 Stock Option Plan
      (7)10.9
            Deferred Compensation Plan11
            Statement
      of recomputation of per share earnings (See Note 18 of Notes to
      Consolidated Financial Statements contained herein.)21
            Subsidiaries
      of Registrant (8)23
            Consent
      of Independent Registered Public Accounting Firm31.1
            Certifications of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act31.2
            Certifications
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act32
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act









(1)
            Filed
      as an exhibit to the Registrant's Registration Statement on Form S-1
      (Registration No. 333-30203), and incorporated herein by
      reference.


(2)
            Filed
      as an exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on September 18, 2007, and incorporated herein by
      reference.


(3)
            Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 1997, and incorporated herein by
      reference.


(4)
            Filed
      as an exhibit to the Registrant's Annual Report on Form 10-K for the year
      ended March 31, 1998, and incorporated herein by
  reference.


(5)
            Filed
      as an exhibit to the Registrant’s Registration Statement on Form S-8
      (Registration No. 333-66049), and incorporated herein by
      reference.


(6)
            Filed
      as an exhibit to the Registrant’s Definitive Annual Meeting Proxy
      Statement (000-22957), filed with the Commission on June 5, 2003, and
      incorporated herein by reference.


(7)
            Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2005, and incorporated herein by
      reference.


(8)
            Filed
      as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
      ended March 31, 2007, and incorporated herein by
  reference.













97









SIGNATURES









Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.









RIVERVIEW
      BANCORP, INC.Date:  June
      9, 2009By:
            /s/ Patrick
      SheafferPatrick
      SheafferChairman of
      the Board andChief
      Executive Officer(Duly
      Authorized Representative)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.






By:
            /s/ Patrick
      Sheaffer
            By:
            /s/Ronald A.
      WysaskePatrick
      Sheaffer
            
            Ronald A.
      WysaskeChairman
      of the Board and
            
            President
      and Chief Operating OfficerChief
      Executive Officer
            
            Director(Principal
      Executive Officer)Date:
            June 9,
      2009
            Date:
            June 9,
      2009By:
            /s/ Kevin J.
      Lycklama
            By:
            /s/ Paul L.
      RunyanKevin J.
      Lycklama
            
            Paul L.
      RunyanSenior Vice
      President and
            
            Vice Chairman
      of the Board andChief
      Financial Officer
            
            Director(Principal
      Financial and Accounting Officer)Date:
            June 9,
      2009
            Date:
            June 9,
      2009By:
            /s/Gary R.
      Douglass
            By:
            /s/Edward R.
      GeigerGary R.
      Douglass
            
            Edward R.
      GeigerDirector
            
            DirectorDate:
            June 9,
      2009
            Date:
            June 9,
      2009By:
            /s/Michael D.
      Allen
            By:
            /s/Jerry C.
      OlsonMichael
      D. Allen
            
            Jerry
      C. OlsonDirector
            
            DirectorDate:
            June 9,
      2009
            Date:
            June 9,
      2009















98







EXHIBIT
INDEX




Exhibit
      10.9
                Deferred
      Compensation Plan
 Exhibit
      23
              Consent
      of Independent Registered Public Accounting
Firm
 Exhibit
      31.1
                Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
 Exhibit
      31.2
                  Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002


Exhibit
      32
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002





















99









Exhibit 23




Consent of Independent Registered
Public Accounting Firm



























100





Exhibit
31.1


Certification
Required


By
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934





I,
Patrick Sheaffer, certify that:





1.
            I
      have reviewed this Annual Report on Form 10-K of Riverview Bancorp,
      Inc.;





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;





4.
            The
      registrant’s other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:





a)
            designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;





b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





c)
            evaluated
      the effectiveness of the registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





d)
            disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fiscal fourth quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and





5.
            The
      registrant’s other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant’s auditors and the audit committee of registrant’s board of
      directors (or persons performing the equivalent
  functions):





a)
            all
      significant deficiencies and material weakness in the design or operation
      of internal control over financial reporting which are reasonably likely
      to adversely affect the registrant’s ability to record, process, summarize
      and report financial data information;
and





b)
            any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant’s internal control
      over financial reporting.





Date:  June
9,
2009                                                       /S/ Patrick
Sheaffer


Patrick Sheaffer


Chairman and Chief Executive Officer













101





Exhibit
31.2


Certification
Required


By
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934





I, Kevin
J. Lycklama, certify that:





1.
            I
      have reviewed this Annual Report on Form 10-K of Riverview Bancorp,
      Inc.;





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;





4.
            The
      registrant’s other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:




a)
              designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;


b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;




c)
            evaluated
      the effectiveness of the registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and




d)
              disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fiscal fourth quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and


5.
            The
      registrant’s other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant’s auditors and the audit committee of registrant’s board of
      directors (or persons performing the equivalent
  function):




a)
              all
      significant deficiencies and material weakness in the design or operation
      of internal control over financial reporting which are reasonably likely
      to adversely affect the registrant’s ability to record, process, summarize
      and report financial data information;
and


d)
            any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant’s internal control
      over financial reporting.





Date:  June 9,
2009                                                      /S/ Kevin J.
Lycklama


Kevin J. Lycklama


Chief Financial Officer









102








Exhibit
32





CERTIFICATION
PURSUANT TO





18 U.S.C.
1350,





AS
ADOPTED PURSUANT TO





SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002








The
undersigned herby certifies in his capacity as an officer of Riverview Bancorp,
Inc. (the “Company”) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley act of 2002 and in connection with this Annual
Report on Form 10-K that:





1.
            the
      report fully complies with the requirements of Sections 13(a) or 15(d) of
      the Securities Exchange Act of 1934, as amended,
  and





2.
            the
      information contained in the report fairly presents, in all material
      respects, the Company’s financial condition and results of operations as
      of the dates and for the periods presented in the financial statements
      included in such report.











/S/ Patrick Sheaffer
            /S/ Kevin J.
      Lycklama


Patrick
Sheaffer                                                                      
                  Kevin
J. Lycklama


Chief
Executive
Officer                                                                            Chief
Financial Officer








Dated:
June 9,
2009                                                                                   Dated:
June 9, 2009

















103