10-Q 1 q93010.htm RIVERVIEW BANCORP, INC. FORM 10-Q q93010.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

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

For the quarterly period ended September 30, 2010

OR

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

 
For the transition period from _____ to _____
 
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) 693-6650 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions 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 Exchange Act Rule 12b-2).  Yes          No     X    

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, $.01 par value per share, 22,471,890 shares outstanding as of November 3, 2010.

 
 

 


Form 10-Q

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX
 
Part I.
Financial Information
 Page
     
Item 1:   Financial Statements (Unaudited)   
     
  Consolidated Balance Sheets   
  as of September 30, 2010 and March 31, 2010       2 
     
  Consolidated Statements of Income for the   
  Three and Six Months Ended September 30, 2010 and 2009       3 
     
  Consolidated Statements of Equity for the       4 
  Six Months Ended September 30, 2010 and 2009    
     
  Consolidated Statements of Cash Flows for the   
  Six Months Ended September 30, 2010 and 2009       5 
     
  Notes to Consolidated Financial Statements  6-16 
     
 Item 2:  Management's Discussion and Analysis of   
  Financial Condition and Results of Operations  17-34 
     
Item 3:  Quantitative and Qualitative Disclosures About Market Risk       34 
     
Item 4:  Controls and Procedures       34 
     
Part II. Other Information 36-37 
     
Item 1:  Legal Proceedings   
     
Item 1A:  Risk Factors   
     
Item 2:   
Unregistered Sale of Equity Securities and Use of Proceeds
 
     
Item 3:  Defaults Upon Senior Securities   
     
Item 4:  [Removed and reserved]   
     
Item 5:   Other Information   
     
Item 6:  Exhibits   
     
SIGNATURES       38 
Certifications   
                                         Exhibit 31.1  
                                         Exhibit 31.2  
                                         Exhibit 32  

  

 
 

 

Forward Looking Statements

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-Q the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” or similar expression are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance.  These forward-looking statements are subject to know and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to:  the Company’s ability to raise equity capital, the amount of capital it intends to raise and its intended use of that capital; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in the Company’s allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in the Company’s market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, the Company’s net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in the Company’s market areas;  secondary market conditions for loans and the Company’s ability to sell loans in the secondary market; results of examinations of us by the Office of Thrift Supervision (“OTS”) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the Company to increase its reserve for loan losses, write-down assets, change Riverview Community Bank’s regulatory capital position or affect the Company’s ability to borrow funds or maintain or increase deposits, which could adversely affect its  liquidity and earnings; the Company’s compliance with  regulatory enforcement actions entered into with the OTS and the possibility that noncompliance could result in the imposition of additional enforcement actions and additional requirements or restrictions on its operations; legislative or regulatory changes that adversely affect the Company’s business including changes in regulatory policies and principles, or  the interpretation of regulatory capital or other rules; the Company’s ability to attract and retain deposits; further increases in premiums for deposit insurance; the Company’s ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company’s assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on the Company’s balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the Company’s workforce and potential associated charges; computer systems on which the Company depends could fail or experience a security breach; the Company’s ability to retain key members of its senior management team; costs and effects of litigation, including settlements and judgments; the Company’s ability to implement its business strategies; the Company’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel it may acquire into its operations and the Company’s ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the Company’s ability to pay dividends on its common stock and interest or principal payments on its junior subordinated debentures; 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, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services and the other risks described from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. 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. The Company does not undertake to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2011 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company’s operating and stock price performance.

 
1

 

Part I. Financial Information
Item 1. Financial Statements (Unaudited)

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND MARCH 31, 2010
(In thousands, except share and per share data) (Unaudited)
 
September 30,
2010
   
March 31,
2010
 
ASSETS
           
Cash (including interest-earning accounts of $36,002 and $3,384)
$
48,505
 
$
13,587
 
Certificates of deposit held for investment
 
14,951
   
-
 
Loans held for sale
 
417
   
255
 
Investment securities held to maturity, at amortized cost
(fair value of $562 and $573)
 
512
   
517
 
Investment securities available for sale, at fair value
(amortized cost of $8,691 and $8,706)
 
6,688
   
6,802
 
Mortgage-backed securities held to maturity, at amortized
cost (fair value of $207 and $265)
 
199
   
259
 
Mortgage-backed securities available for sale, at fair value
(amortized cost of $2,219 and $2,746)
 
2,306
   
2,828
 
Loans receivable (net of allowance for loan losses of $19,029 and $21,642)
 
679,925
   
712,837
 
Real estate and other personal property owned
 
19,766
   
13,325
 
Prepaid expenses and other assets
 
6,541
   
7,934
 
Accrued interest receivable
 
2,644
   
2,849
 
Federal Home Loan Bank stock, at cost
 
7,350
   
7,350
 
Premises and equipment, net
 
15,893
   
16,487
 
Deferred income taxes, net
 
11,209
   
11,177
 
Mortgage servicing rights, net
 
470
   
509
 
Goodwill
 
25,572
   
25,572
 
Core deposit intangible, net
 
265
   
314
 
Bank owned life insurance
 
15,652
   
15,351
 
TOTAL ASSETS
$
858,865
 
$
837,953
 
             
LIABILITIES AND EQUITY
           
             
LIABILITIES:
           
Deposit accounts
$
718,028
 
$
688,048
 
Accrued expenses and other liabilities
 
8,898
   
6,833
 
Advanced payments by borrowers for taxes and insurance
 
507
   
427
 
Federal Home Loan Bank advances
 
-
   
23,000
 
Federal Reserve Bank advances
 
-
   
10,000
 
Junior subordinated debentures
 
22,681
   
22,681
 
Capital lease obligations
 
2,589
   
2,610
 
Total liabilities
 
752,703
   
753,599
 
 
COMMITMENTS AND CONTINGENCIES (See Note 16)
 
           
EQUITY:
           
Shareholders’ equity
           
Serial preferred stock, $.01 par value; 250,000 authorized, issued and outstanding: none
 
-
   
-
 
Common stock, $.01 par value; 50,000,000 authorized
           
September 30, 2010 – 22,471,890 issued and outstanding
 
225
   
109
 
March 31, 2010 – 10,923,773 issued and outstanding
           
Additional paid-in capital
 
65,746
   
46,948
 
Retained earnings
 
41,760
   
38,878
 
Unearned shares issued to employee stock ownership trust
 
(748
)
 
(799
)
Accumulated other comprehensive loss
 
(1,264
)
 
(1,202
)
Total shareholders’ equity
 
105,719
   
83,934
 
             
Noncontrolling interest
 
443
   
420
 
Total equity
 
106,162
   
84,354
 
TOTAL LIABILITIES AND EQUITY
$
858,865
 
$
837,953
 

See notes to consolidated financial statements.
 
 
2

 
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009
   
Three Months Ended
September 30,
     
Six Months Ended
September 30,
 
(In thousands, except share and per share data) (Unaudited)
   
2010
     
2009
     
2010
     
2009
 
INTEREST INCOME:
                               
                                 
Interest and fees on loans receivable
  $ 10,672     $ 11,639     $ 21,865     $ 23,349  
Interest on investment securities – taxable
    32       66       87       164  
Interest on investment securities – non-taxable
    14       31       29       63  
Interest on mortgage-backed securities
    23       35       49       75  
Other interest and dividends
    48       26       63       40  
Total interest and dividend income
    10,789       11,797       22,093       23,691  
                                 
INTEREST EXPENSE:
                               
Interest on deposits
    1,764       2,448       3,665       5,142  
Interest on borrowings
    375       436       760       956  
Total interest expense
    2,139       2,884       4,425       6,098  
Net interest income
    8,650       8,913       17,668       17,593  
Less provision for loan losses
    1,675       3,200       2,975       5,550  
Net interest income after provision for loan losses
    6,975       5,713       14,693       12,043  
                                 
NON-INTEREST INCOME:
                               
Fees and service charges
    1,077       1,151       2,176       2,395  
Asset management fees
    492       465       1,013       974  
Net gain on sale of loans held for sale
    124       159       243       560  
Impairment of investment security
    -       (201 )     -       (459 )
Bank owned life insurance
    150       151       300       302  
Other
    207       70       554       126  
Total non-interest income
    2,050       1,795       4,286       3,898  
                                 
NON-INTEREST EXPENSE:
                               
Salaries and employee benefits
    4,085       3,689       8,025       7,564  
Occupancy and depreciation
    1,148       1,217       2,289       2,450  
Data processing
    248       237       500       477  
Amortization of core deposit intangible
    23       28       49       58  
Advertising and marketing expense
    255       151       390       310  
FDIC insurance premium
    417       445       838       1,140  
State and local taxes
    147       151       318       300  
Telecommunications
    105       113       212       229  
Professional fees
    321       330       647       634  
Real estate owned expenses
    120       353       286       962  
Other
    543       553       1,123       1,131  
Total non-interest expense
    7,412       7,267       14,677       15,255  
                                 
INCOME BEFORE INCOME TAXES
    1,613       241       4,302       686  
PROVISION FOR INCOME TAXES
    496       39       1,420       141  
NET INCOME
  $ 1,117     $ 202     $ 2,882     $ 545  
                                 
Earnings per common share:
                               
Basic
  $ 0.06     $ 0.02     $ 0.20     $ 0.05  
Diluted
    0.06       0.02       0.20       0.05  
    Weighted average number of shares outstanding:                                 
Basic
    18,033,354       10,717,471       14,404,588       10,714,409  
Diluted
    18,033,354       10,717,471       14,404,588       10,714,409  
 
See notes to consolidated financial statements.


 
3

 

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands, except share data)
(Unaudited)
Common Stock
   
Additional Paid-In Capital
   
Retained
Earnings
   
Unearned
Shares
Issued to
Employee
Stock Ownership
Trust
   
Accumulated
Other
Comprehensive
Loss
   
Noncontrolling Interest
   
Total
 
 
Shares
   
Amount
                           
                                                   
Balance April 1, 2009
 
10,923,773
 
$
109
 
$
46,866
 
$
44,322
 
$
(902
)
$
(1,732
)
$
364
 
$
89,027
   
                                                   
  Stock based compensation expense
 
-
   
-
   
33
   
-
   
-
   
-
   
-
   
33
   
  Earned ESOP shares
 
-
   
-
   
(10
)
 
-
   
51
   
-
   
-
   
41
   
   
10,923,773
   
109
   
46,889
   
44,322
   
(851
)
 
(1,732
)
 
364
   
89,101
   
Comprehensive income:
                                                 
Net income
 
-
   
-
   
-
   
545
   
-
   
-
   
-
   
545
   
Other comprehensive income, net of tax:
                                                 
Unrealized holding gain on securities
available for sale
 
-
   
-
   
-
   
-
   
-
   
285
   
-
   
285
   
Noncontrolling interest
 
-
   
-
   
-
   
-
   
-
   
-
   
31
   
31
   
Total comprehensive income
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
861
   
                                                   
Balance September 30, 2009
 
10,923,773
 
$
109
 
$
46,889
 
$
44,867
 
$
(851
)
$
(1,447
)
$
395
 
$
89,962
   
                                                   
Balance April 1, 2010
 
10,923,773
 
$
109
 
$
46,948
 
$
38,878
 
$
(799
)
$
(1,202
)
$
420
 
$
84,354
   
                                                   
Issuance of common stock (net)
 
11,548,117
   
116
   
18,752
   
-
   
-
   
-
   
-
   
18,868
   
Stock based compensation expense
 
-
   
-
   
67
   
-
   
-
   
-
   
-
   
67
   
Earned ESOP shares
 
-
   
-
   
(21
)
 
-
   
51
   
-
   
-
   
30
   
   
22,471,890
   
225
   
65,746
   
38,878
   
(748
)
 
(1,202
)
 
420
   
103,319
   
Comprehensive income:
                                                 
Net income
 
-
   
-
   
-
   
2,882
   
-
   
-
   
-
   
2,882
   
Other comprehensive income, net of tax:
                                                 
    Unrealized holding loss on securities
    available for sale
 
-
   
-
   
-
   
-
   
-
   
(62
)
 
-
   
(62
)
 
Noncontrolling interest
 
-
   
-
   
-
   
-
   
-
   
-
   
23
   
23
   
Total comprehensive income
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
2,843
   
                                                   
Balance September 30, 2010
 
22,471,890
 
$
225
 
$
65,746
 
$
41,760
 
$
(748
)
$
(1,264
)
$
443
 
$
106,162
   
                                                   

See notes to consolidated financial statements.

 
4

 

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands) (Unaudited)
 
2010
   
2009
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
$
2,882
 
$
545
 
Adjustments to reconcile net income to cash provided by operating activities:
           
Depreciation and amortization
 
681
   
1,158
 
Provision for loan losses
 
2,975
   
5,550
 
Noncash expense related to ESOP
 
30
   
41
 
Decrease in deferred loan origination fees, net of amortization
 
(261
)
 
(82
)
Origination of loans held for sale
 
(7,232
)
 
(19,595
)
Proceeds from sales of loans held for sale
 
7,168
   
20,895
 
Stock based compensation expense
 
67
   
33
 
Writedown of real estate owned, net
 
46
   
305
 
Net (gain) loss on loans held for sale, sale of real estate owned,
mortgage-backed securities, investment securities and premises and equipment
 
(553
)
 
271
 
Income from bank owned life insurance
 
(300
)
 
(302
)
Changes in assets and liabilities:
           
Prepaid expenses and other assets
 
1,611
   
(445
)
Accrued interest receivable
 
205
   
163
 
Accrued expenses and other liabilities
 
2,197
   
(1,172
)
Net cash provided by operating activities
 
9,516
   
7,365
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
           
Loan repayments, net
 
21,164
   
38,497
 
Proceeds from call, maturity, or sale of investment securities available for sale
 
4,990
   
5,000
 
Principal repayments on investment securities available for sale
 
26
   
37
 
Principal repayments on investment securities held to maturity
 
5
   
6
 
Purchase of investment securities available for sale
 
(5,000
)
 
(4,988
)
Principal repayments on mortgage-backed securities available for sale
 
527
   
686
 
Principal repayments on mortgage-backed securities held to maturity
 
60
   
165
 
Purchase of certificates of deposit held for investment
 
(14,951
)
 
-
 
Purchase of premises and equipment and capitalized software
 
(277
)
 
(296
)
Capitalized improvements related to real estate owned
 
(29
)
 
(13
)
Proceeds from sale of real estate owned and premises and equipment
 
2,980
   
3,221
 
Net cash provided by investing activities
 
9,495
   
42,315
 
             
CASH FLOWS FROM FINANCING ACTIVITIES
           
Net increase (decrease) in deposit accounts
 
29,980
   
(7,572
)
Proceeds from issuance of common stock, net
 
18,868
   
-
 
Proceeds from borrowings
 
121,200
   
619,000
 
Repayment of borrowings
 
(154,200
)
 
(661,850
)
Principal payments under capital lease obligation
 
(21
)
 
(19
)
Net increase in advance payments by borrowers
 
80
   
75
 
Net cash provided by (used in) financing activities
 
15,907
   
(50,366
)
 
NET INCREASE (DECREASE) IN CASH
 
34,918
   
(686
)
CASH, BEGINNING OF PERIOD
 
13,587
   
19,199
 
CASH, END OF PERIOD
$
48,505
 
$
18,513
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
    Cash paid during the year for:
           
    Interest
$
3,745
 
$
6,056
 
Income taxes
 
5
   
1,297
 
             
NONCASH INVESTING AND FINANCING ACTIVITIES:
           
Transfer of loans to real estate owned, net
$
9,128
 
$
10,183
 
Fair value adjustment to securities available for sale
 
(94
)
 
486
 
Income tax effect related to fair value adjustment
 
32
   
(201
)

See notes to consolidated financial statements.



 
5

 

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

1.  
BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Quarterly Reports on Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim unaudited financial statements have been included. All such adjustments are of a normal recurring nature.

The unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Riverview Bancorp, Inc. Annual Report on Form 10-K for the year ended March 31, 2010 (“2010 Form 10-K”). The results of operations for the six months ended September 30, 2010 are not necessarily indicative of the results, which may be expected for the fiscal year ending March 31, 2011. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

2.  
PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Riverview Bancorp, Inc. (“Bancorp” or the “Company”); its wholly-owned subsidiary, Riverview Community Bank (“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.

3.  
STOCK PLANS AND STOCK-BASED COMPENSATION

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 expired 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.

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 Company’s Board of Directors (“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 September 30, 2010, there were options for 76,154 shares of the Company’s common stock available for future grant under the 2003 Plan.

The following table presents information on stock options outstanding for the periods shown.

   
Six Months Ended
September 30, 2010
   
Year Ended
March 31, 2010
 
   
Number
of Shares
   
Weighted
Average
Exercise
Price
   
Number
of Shares
   
Weighted
Average
Exercise
Price
 
Balance, beginning of period
    465,700     $ 9.35       371,696     $ 10.99  
Grants
    8,000       1.97       122,000       3.82  
Options exercised
    -       -       -       -  
Forfeited
    (6,000 )     10.58       (8,000 )     10.82  
Expired
    -       -       (19,996 )     5.50  
Balance, end of period
    467,700     $ 9.21       465,700     $ 9.35  


 
6

 

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

 
Six Months
Ended
September 30,
2010
 
Year Ended
March 31, 2010
Stock options fully vested and expected to vest:
             
Number
 
465,675
     
458,475
 
Weighted average exercise price
$
9.21
   
$
9.42
 
Aggregate intrinsic value (1)
$
-
   
$
-
 
Weighted average contractual term of options (years)
 
6.14
     
6.69
 
Stock options fully vested and currently exercisable:
             
Number
 
445,300
     
334,200
 
Weighted average exercise price
$
9.40
   
$
11.28
 
Aggregate intrinsic value (1)
$
-
   
$
-
 
Weighted average contractual term of options (years)
 
6.18
     
5.70
 
               
(1)  The aggregate intrinsic value of a stock options 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 common stock.

Stock-based compensation expense related to stock options for the six months ended September 30, 2010 and 2009 was approximately $67,000 and $33,000, respectively.  As of September 30, 2010, there was approximately $13,000 of unrecognized compensation expense related to unvested stock options, which will be recognized over the remaining vesting periods of the underlying stock options through September 2014.

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 for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.  During the six months ended September 30, 2010 and 2009, the Company granted 8,000 and 112,000 stock options, respectively.  The weighted average fair value of stock options granted during the six months ended September 30, 2010 and 2009 was $0.71 and $1.23 per option, respectively


   
Risk Free
Interest Rate
   
Expected
Life (years)
   
Expected
Volatility
   
Expected
Dividends
 
Fiscal 2011
    1.96 %     6.25       44.76 %     2.36 %
Fiscal 2010
    3.09 %     6.25       37.55 %     2.45 %

4.  
EARNINGS PER SHARE

Basic earnings 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. Shares owned by the Company’s Employee Stock Ownership Plan (“ESOP”) that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share.  For the three and six months ended September 30, 2010, stock options for 460,000 and 463,000 shares, respectively, of common stock were excluded in computing diluted EPS because they were antidilutive.  For the three and six months ended September 30, 2009, stock options for 358,000 and 363,000 shares, respectively, of common stock were excluded in computing diluted EPS because they were antidilutive.

 
7

 


 
 
Three Months Ended
 September 30,
 
 
Six Months Ended
 September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Basic EPS computation:
                       
Numerator-net income
$
1,117,000
 
$
202,000
 
$
2,882,000
 
$
545,000
 
Denominator-weighted average common
      shares outstanding
 
18,033,354
   
10,717,471
   
14,404,588
   
10,714,409
 
Basic EPS
$
0.06
 
$
0.02
 
$
0.20
 
$
0.05
 
Diluted EPS computation:
                       
Numerator-net income
$
1,117,000
 
$
202,000
 
$
2,882,000
 
$
545,000
 
Denominator-weighted average common
       shares outstanding
 
18,033,354
   
10,717,471
   
14,404,588
   
10,714,409
 
Effect of dilutive stock options
 
-
   
-
   
-
   
-
 
Weighted average common shares
                       
and common stock equivalents
 
18,033,354
   
10,717,471
   
14,404,588
   
10,714,409
 
Diluted EPS
$
0.06
 
$
0.02
 
$
0.20
 
$
0.05
 

5.  
INVESTMENT SECURITIES

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

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2010
                     
Municipal bonds
$
512
 
$
50
 
$
-
 
$
562
                       
March 31, 2010
                     
Municipal bonds
$
517
 
$
56
 
$
-
 
$
573
                       

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

 
September 30, 2010
 
Amortized
Cost
   
Estimated
Fair Value
 
Due in one year or less
$
-
 
$
-
 
Due after one year through five years
 
-
   
-
 
Due after five years through ten years
 
512
   
562
 
Due after ten years
 
-
   
-
 
Total
$
512
 
$
562
 

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

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
Estimated
Fair Value
September 30, 2010
                     
Trust preferred
$
2,974
 
$
-
 
$
(2,009
)
$
965
Agency securities
 
5,000
   
6
   
-
   
5,006
Municipal bonds
 
717
   
-
   
-
   
717
Total
$
8,691
 
$
6
 
$
(2,009
)
$
6,688
                       
March 31, 2010
                     
Trust preferred
$
2,974
 
$
-
 
$
(1,932
)
$
1,042
Agency securities
 
4,989
   
28
   
-
   
5,017
Municipal bonds
 
743
   
-
   
-
   
743
Total
$
8,706
 
$
28
 
$
(1,932
)
$
6,802
                       

 
8

 

The contractual maturities of investment securities available for sale are as follows (in thousands):
 
September 30, 2010
 
Amortized
Cost
   
Estimated
Fair Value
 
Due in one year or less
$
-
 
$
-
 
Due after one year through five years
 
5,000
   
5,006
 
Due after five years through ten years
 
-
   
-
 
Due after ten years
 
3,691
   
1,682
 
Total
$
8,691
 
$
6,688
 

Investment securities with an amortized cost of $500,000 and $499,000 and a fair value of $501,000 and $502,000 at September 30, 2010 and March 31, 2010, respectively, were pledged as collateral for treasury tax and loan funds held by the Bank.  Investment securities with an amortized cost of $850,000 and $2.8 million and a fair value of $851,000 and $2.9 million at September 30, 2010 and March 31, 2010, respectively, were pledged as collateral for governmental public funds held by the Bank.

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

   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
September 30, 2010
                                   
Trust preferred
  $ -     $ -     $ 965     $ (2,009 )   $ 965     $ (2,009 )

March 31, 2010
                                   
Trust preferred
  $ -     $ -     $ 1,042     $ (1,932 )   $ 1,042     $ (1,932 )

During the three and six months ended September 30, 2010, the Company determined that there was no additional other than temporary impairment (“OTTI”) charge on the above trust preferred investment security. 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.

6.  
MORTGAGE-BACKED SECURITIES

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

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
September 30, 2010
                       
FHLMC mortgage-backed securities
$
83
 
$
3
 
$
-
 
$
86
 
FNMA mortgage-backed securities
 
116
   
5
   
-
   
121
 
Total
$
199
 
$
8
 
$
-
 
$
207
 
                         
March 31, 2010
                       
Real estate mortgage investment conduits
$
53
 
$
-
 
$
-
 
$
53
 
FHLMC mortgage-backed securities
 
86
   
3
   
-
   
89
 
FNMA mortgage-backed securities
 
120
   
3
   
-
   
123
 
Total
$
259
 
$
6
 
$
-
 
$
265
 

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

September 30, 2010
 
Amortized
Cost
   
Estimated
Fair Value
Due in one year or less
$
-
 
$
-
Due after one year through five years
 
7
   
7
Due after five years through ten years
 
-
   
-
Due after ten years
 
192
   
200
Total
$
199
 
$
207

Mortgage-backed securities held to maturity with an amortized cost of $80,000 and $136,000 and a fair value of $83,000 and $138,000 at September 30, 2010 and March 31, 2010, respectively, were pledged as collateral for governmental public
 
 
 
9

 
funds held by the Bank. Mortgage-backed securities held to maturity with an amortized cost of $102,000 and $105,000 and a fair value of $106,000 and $107,000 at September 30, 2010 and March 31, 2010, respectively, were pledged as collateral for treasury tax and loan funds held by the Bank.

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

September 30, 2010
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Real estate mortgage investment conduits
$
471
 
$
20
 
$
-
 
$
491
 
FHLMC mortgage-backed securities
 
1,705
   
64
 
-
   
1,769
 
FNMA mortgage-backed securities
 
43
   
3
   
-
   
46
 
Total
$
2,219
 
$
87
 
$
-
 
$
2,306
 
                         
March 31, 2010
                       
Real estate mortgage investment conduits
$
538
 
$
18
 
$
-
 
$
556
 
FHLMC mortgage-backed securities
 
2,158
   
61
   
-
   
2,219
 
FNMA mortgage-backed securities
 
50
   
3
   
-
   
53
 
Total
$
2,746
 
$
82
 
$
-
 
$
2,828
 

The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands):
September 30, 2010
 
Amortized
Cost
   
Estimated
Fair Value
Due in one year or less
$
-
 
$
-
Due after one year through five years
 
1,727
   
1,793
Due after five years through ten years
 
163
   
176
Due after ten years
 
329
   
337
Total
$
2,219
 
$
2,306

There were no mortgage-backed securities available for sale pledged as collateral for Federal Home Loan Bank of Seattle (“FHLB”) advances at September 30, 2010. Mortgage-backed securities available for sale with an amortized cost of $2.7 million and a fair value of $2.8 million at March 31, 2010, were pledged as collateral for FHLB advances.  Mortgage-backed securities available for sale with an amortized cost of $43,000 and $51,000 and a fair value of $46,000 and $53,000 at September 30, 2010 and March 31, 2010, respectively, were pledged as collateral for government public funds held by the Bank.

7.  
LOANS RECEIVABLE

Loans receivable, excluding loans held for sale, consisted of the following (in thousands):

   
September 30,
2010
   
March 31,
2010
Commercial and construction
         
 Commercial business
$
93,026
 
$
108,368
Other real estate mortgage
 
458,621
   
459,178
Real estate construction
 
52,262
   
75,456
Total commercial and construction
 
603,909
   
643,002
           
Consumer
         
Real estate one-to-four family
 
92,682
   
88,861
Other installment
 
2,363
   
2,616
Total consumer
 
95,045
   
91,477
           
Total loans
 
698,954
   
734,479
           
Less:  Allowance for loan losses
 
19,029
   
21,642
Loans receivable, net
$
679,925
 
$
712,837

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.

Most of the Bank’s business activity is with customers located in the states of Washington and Oregon. Loans and extensions of credit outstanding at one time to one borrower or a group of related borrowers are generally limited by federal regulation to 15% of the Bank’s shareholders’ equity, excluding accumulated other comprehensive loss. As of September 30, 2010 and March 31, 2010, the Bank had no loans to any one borrower in excess of the regulatory limit.



 
10

 

8.  
ALLOWANCE FOR LOAN LOSSES

A reconciliation of the allowance for loan losses is as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
 
2010
 
2009
 
2010
 
2009
 
Beginning balance
$
19,565
 
$
17,776
 
$
21,642
 
$
16,974
 
Provision for losses
 
1,675
   
3,200
   
2,975
   
5,550
 
Charge-offs
 
(2,216
)
 
(2,916
)
 
(5,608
)
 
(4,515
)
Recoveries
 
5
   
11
   
20
   
62
 
Ending balance
$
19,029
 
$
18,071
 
$
19,029
 
$
18,071
 

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

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2010
 
2009
 
2010
 
2009
 
                         
Beginning balance
$
190
 
$
276
 
$
185
 
$
296
 
Net change in allowance for unfunded loan commitments
 
(31
)
 
8
   
(26
)
 
(12
)
Ending balance
$
159
 
$
284
 
$
159
 
$
284
 

Loans on which the accrual of interest has been discontinued were $34.3 million and $36.0 million at September 30, 2010 and March 31, 2010, respectively. Interest income foregone on non-accrual loans was $1.3 million and $1.5 million during the six months ended September 30, 2010 and 2009, respectively.

At September 30, 2010 and March 31, 2010, impaired loans were $53.0 million and $37.8 million, respectively. At September 30, 2010 and March 31, 2010, $40.0 million and $30.1 million, respectively, of impaired loans had specific valuation allowances of $6.2 million and $8.0 million, respectively. For these same dates, $13.0 million and $7.7 million, respectively, did not require a specific reserve. The balance of the allowance for loan losses in excess of these specific reserves is available to absorb the inherent losses from all other loans in the portfolio. At September 30, 2010, the Company had trouble debt restructurings totaling $10.0 million, which were on accrual status. There were no trouble debt restructurings at March 31, 2010.

The average balance in impaired loans was $44.4 million and $36.4 million during the six months ended September 30, 2010 and the year ended March 31, 2010, respectively. The related amount of interest income recognized on loans that were impaired was $562,000 and $88,000 during the six months ended September 30, 2010 and 2009, respectively. At September 30, 2010 loans past due 90 days or more and still accruing interest totaled $1.0 million.  At March 31, 2010, there were no loans 90 days past due and still accruing interest.

9.  
GOODWILL

Goodwill and intangibles generally arise from business combinations accounted for under the purchase method.  Goodwill and other intangibles deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually.  The Company has one reporting unit, the Bank, for purposes of computing goodwill.

During the third quarter of fiscal 2010, the Company performed its annual goodwill impairment test to determine whether an impairment of its goodwill asset exists. 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. If the reporting unit’s fair value is less than its carrying value, the Company would be required to progress to the second step. In the second step the Company calculates the implied fair value of goodwill. The GAAP standards with respect to goodwill require that the Company compare the implied fair value of goodwill 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.  The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination.  The estimated fair value of the Company is allocated to all of the Company’s individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment, as no assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. The results of the Company’s step one test indicated that the reporting unit’s fair value was less than its carrying value and therefore the Company performed a step two analysis.  After the step two analysis was completed, the Company determined the implied fair value of goodwill was greater than the carrying value on the Company’s balance sheet and no goodwill impairment existed; however, no assurance can be given that the Company’s goodwill will not be written down in future periods.
 
 
11


The Company did not perform an interim impairment test as of September 30, 2010. However, as a result of the sustained decline in the price of the Company’s common stock management believes that the results of the step one test would indicate that the reporting unit’s fair value was less than its carrying value. As of the date of this filing, we have not completed the step two analysis due to the complexities involved in determining the implied fair value of the goodwill for the reporting unit. We expect to finalize our goodwill impairment analysis during the third quarter of fiscal year 2011 and the results thereof will be disclosed in the third fiscal quarter financial statements. No assurance can be given that the Company will not record an impairment loss on goodwill in the future.

10.  
FEDERAL HOME LOAN BANK ADVANCES

FHLB borrowings are summarized as follows (dollars in thousands):

   
September 30,
2010
   
March 31,
2010
 
Federal Home Loan Bank advances
$
-
 
$
23,000
 
Weighted average interest rate:
 
-
%
 
0.64
%



11.  
FEDERAL RESERVE BANK ADVANCES

Federal Reserve Bank of San Francisco (“FRB”) borrowings are summarized as follows (dollars in thousands):

   
September 30,
2010
   
March 31,
2010
 
Federal Reserve Bank of San Francisco advances
$
-
 
$
10,000
 
Weighted average interest rate:
 
-
%
 
0.50
%

12.  
JUNIOR SUBORDINATED DEBENTURES

At September 30, 2010, the Company had two wholly-owned subsidiary grantor trusts which 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 at September 30, 2010 and March 31, 2010, 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 September 30, 2010 and March 31, 2010, 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.

The following table is a summary of the terms of the current Debentures at September 30, 2010 (in thousands):

Issuance Trust
 
Issuance Date
   
Amount Outstanding
 
Rate Type
 
Initial
Rate
 
Rate
 
Maturing Date
                           
Riverview Bancorp Statutory Trust I
 
12/2005
 
$
7,217
 
Variable (1)
 
5.88
%
1.65
%
3/2036
Riverview Bancorp Statutory Trust II
 
06/2007
   
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 on the three-month LIBOR plus 1.35% thereafter until maturity.

13.  
FAIR VALUE MEASUREMENT

Accounting guidance regarding 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.
 
 
12


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 table presents assets that are measured at fair value on a recurring basis (in thousands).
     
    
Fair value measurements at September 30, 2010, using
       
Quoted prices in
active markets
for identical
assets
 
Other
observable
inputs
 
Significant
unobservable
inputs
 
Fair value
 September 30,
2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
Investment securities available for sale
                     
Trust preferred
$
965
 
$
-
 
$
-
 
$
965
Agency securities
 
5,006
   
-
   
5,006
   
-
Municipal bonds
 
717
   
-
   
717
   
-
Mortgage-backed securities available for sale
                     
Real estate mortgage investment conduits
 
491
   
-
   
491
   
-
FHLMC mortgage-backed securities
 
1,769
   
-
   
1,769
   
-
FNMA mortgage-backed securities
 
46
   
-
   
46
   
-
Total recurring assets measured at fair value
$
8,994
 
$
-
 
$
8,029
 
$
965

The following tables presents a reconciliation of assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and six months ended September 30, 2010 (in thousands).  There were no transfers of assets in to or out of Level 3 for the three and six months ended September 30, 2010.

   
For the Three
     
For the Six
 
   
Months Ended
     
Months Ended
 
   
September 30,
2010
     
September 30,
2010
 
   
Available for sale securities
     
Available for sale securities
 
               
Beginning balance
$
994
   
$
1,042
 
Transfers in to Level 3
 
-
     
-
 
Included in earnings (1)
 
-
     
-
 
Included in other comprehensive income
 
(29
)
   
(77
)
Balance at September 30, 2010
$
965
   
$
965
 
               
(1) Included in other non-interest income
             

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. The Company uses a third party pricing service to assist the Company in determining the fair value of its Level 2 securities, which incorporates pricing
 
 
13

 
models and/or quoted prices of investment securities with similar characteristics. Our Level 3 assets consist of a single pooled trust preferred security. The fair value for this security was estimated using an income approach valuation technique (using cash flows and present value techniques). Significant unobservable inputs used for this security included selecting an appropriate discount rate, default rate and repayment assumptions.

The following table represents certain loans and real estate owned (“REO”) which were marked down to their fair value using fair value measures for the six months ended September 30, 2010. The following are assets that are measured at fair value on a nonrecurring basis (in thousands).

     
    
Fair value measurements at September 30, 2010, using
     
Quoted prices in
active markets
for identical
assets
 
Other
observable
inputs
 
Significant unobservable
inputs
 
Fair value
September 30,
2010
 
(Level 1)
    
(Level 2)
    
(Level 3)
Impaired loans
$
23,004
 
$
-
 
$
-
 
$
23,004
Real estate owned
 
9,941
   
-
   
-
   
9,941
Total nonrecurring assets measured at fair value
$
32,945
 
$
-
 
$
-
 
$
32,945

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. Impaired loans are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or, as a practical expedient, at the loans’ observable market price or the fair market value of the collateral. A significant portion of the Bank’s impaired loans is measured using the fair market value of the collateral.

Real estate owned – REO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. REO is 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. Any write downs based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance for loan losses. Management periodically reviews REO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell.

14.  
NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued an accounting standards update on fair value measurements and disclosures, which focuses on improving disclosures about fair value measurement.  The standards update requires new disclosures about transfers in and out of Level 1 and Level 2 fair value measurements and the activity in Level 3 fair value measurements (i.e. purchases, sales, issuances, and settlements).  This accounting standards update also amended disclosure requirements related to the level of disaggregation of assets and liabilities, as well as disclosures about input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements.  The new guidance became effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this accounting standard is not expected to have a material impact on the Company’s financial position or results of operations.

In July 2010, the FASB issued an accounting standards update that improves the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. The adoption of this accounting standard is not expected to have a material impact on the Company’s financial position or results of operations

15.  
FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is made in accordance with accounting guidance on the requirements of 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. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.


 
14

 

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

   
September 30, 2010
   
March 31, 2010
   
Carrying Value
   
Fair value
   
Carrying Value
   
Fair Value
Assets:
                     
Cash
$
48,505
 
$
48,505
 
$
13,587
 
$
13,587
Certificates of deposit held for investment
 
14,951
   
15,069
   
-
   
-
Investment securities held to maturity
 
512
   
562
   
517
   
573
Investment securities available for sale
 
6,688
   
6,688
   
6,802
   
6,802
Mortgage-backed securities held to maturity
 
199
   
207
   
259
   
265
Mortgage-backed securities available for sale
 
2,306
   
2,306
   
2,828
   
2,828
Loans receivable, net
 
679,925
   
607,672
   
712,837
   
631,706
Loans held for sale
 
417
   
417
   
255
   
255
Mortgage servicing rights
 
470
   
877
   
509
   
1,015