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, 2019    OR
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22957

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
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class   Trading Symbol(s)    Name of each exchange on which registered 
         
Common Stock , Par Value $0.01 per share
 
RVSB  
The NASDAQ Stock Market LLC
 
Securities 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 every Interactive Data File required to be submitted 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 such files). Yes [X]   No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [   ]                                                         Accelerated filer  [X]                                                  Non-accelerated filer [   ]
Smaller reporting company [X]                                                 Emerging growth company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [   ]

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, 2018 was $199,772,614 (22,598,712 shares at $8.84 per share). As of June 14, 2019, there were issued and outstanding 22,622,712 shares of the registrant's common stock.

 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders (Part III).
1
Table of Contents
PART I
 
PAGE
Item 1.
Business
4
Item 1A.
Risk Factors
31
Item 1B.
Unresolved Staff Comments
43
Item 2.
Properties
43
Item 3.
Legal Proceedings
43
Item 4.
Mine Safety Disclosures
43
 
PART II
   
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
44
Item 6.
Selected Financial Data
46
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
48
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
59
Item 8.
Financial Statements and Supplementary Data
61
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
103
Item 9A.
Controls and Procedures
103
Item 9B.
Other Information
104
 
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance
105
Item 11.
Executive Compensation
105
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
106
Item 13.
Certain Relationships and Related Transactions, and Director Independence
106
Item 14.
Principal Accounting Fees and Services
106
 
PART IV
   
Item 15.
Exhibits and Financial Statement Schedules
107
Item 16.
Form 10-K Summary
108
     
Signatures
 
109
   




2
Forward-Looking Statements

As used in this Form 10-K, the terms "we," "our," "us," "Riverview" and "Company" refer to Riverview Bancorp, Inc. and its consolidated subsidiaries, including its wholly-owned subsidiary, Riverview Community Bank, unless the context indicates otherwise.

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-K, 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 expressions 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 known 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 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 originate loans for sale and sell loans in the secondary market; results of examinations of our bank subsidiary, Riverview Community Bank, by the Office of the Comptroller of the Currency and of the Company by the Board of Governors of the Federal Reserve System, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the Company to increase its allowance for loan losses, write-down assets, reclassify its 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; 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, including as a result of Basel III; the Company's ability to attract and retain deposits; 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 consolidated 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; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; 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; 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 standards; 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 and specifically disclaims any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or 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 2020 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 consolidated financial condition and consolidated results of operations as well as its stock price performance.
3
PART I

Item 1.  Business

General

Riverview Bancorp, Inc., a Washington corporation, is the savings and loan holding company of Riverview Community Bank (the "Bank"). At March 31, 2019, the Company had total assets of $1.2 billion, total deposits of $925.1 million and shareholders' equity of $133.1 million. The Company's executive offices are located in Vancouver, Washington. The Bank's subsidiary, Riverview Trust Company (the "Trust Company"), is a trust and financial services company located in downtown Vancouver, Washington, and provides full-service brokerage activities, trust and asset management services.

The Company is subject to regulation by the Board of Governors of the Federal Reserve Systems ("Federal Reserve"). Substantially all of the Company's business is conducted through the Bank which is regulated by the Office of the Comptroller of the Currency ("OCC"), 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 is a member of the Federal Home Loan Bank of Des Moines ("FHLB") which is one of the 11 regional banks in the Federal Home Loan Bank System ("FHLB System").

As a progressive, community-oriented financial services company, the Company emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Klickitat and Skamania counties of Washington, and Multnomah, Washington 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 business, commercial real estate, multi-family real estate, land, real estate construction, residential real estate and other consumer loans. The Company's loans receivable, net, totaled $864.7 million at March 31, 2019 compared to $800.6 million a year ago.

The Company's strategic plan includes targeting the commercial banking customer base in its primary market area for loan originations and deposit growth, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will seek to increase the loan portfolio consistent with its strategic plan and asset/liability and regulatory capital objectives, which includes maintaining a significant amount of commercial business and commercial real estate loans in its loan portfolio. Significant portions of our new loan originations – which are mainly concentrated in commercial business and commercial real estate loans – carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate consumer real estate one-to-four family mortgages.

Our strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management through the Trust Company 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. We believe we are well positioned to attract new customers and to increase our market share through our 18 branches, including, among others, ten in Clark County, four in the Portland metropolitan area and three lending centers.

On February 17, 2017, the Company completed the purchase and assumption transaction in which the Company purchased certain assets and assumed certain liabilities of MBank, the wholly-owned subsidiary of Merchants Bancorp, including $115.3 million in loans and $130.6 million of deposits (the "MBank transaction"). In addition, as part of the MBank transaction, Riverview Bancorp, Inc. assumed the obligations of Merchant Bancorp's trust preferred securities.

4
Market Area

The Company conducts operations from its home office in Vancouver, Washington and 18 branch offices located in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, and Vancouver, Washington (seven branch offices) and Portland (two branch offices), Gresham, Tualatin and Aumsville, Oregon. The Trust Company has two locations, one in downtown Vancouver, Washington and one in Lake Oswego, Oregon, and provides full-service brokerage activities, trust and asset management services. 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 Bank's Business and Professional Banking Division, with two lending offices located in Vancouver and one in Portland, offers commercial and business banking services. The Bank also operates a lending office for mortgage banking activities in Vancouver.

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, WaferTech, Nautilus, Barrett Business Services, PeaceHealth, Fisher Investments and Banfield Pet Hospitals, as well as several support industries. In addition to this industry base, the Columbia River Gorge Scenic Area and the Portland metropolitan area are sources of tourism, which has helped to transform the area from its past dependence on the timber industry.

Economic conditions in the Company's market areas continue to be better than those in the past recessionary downturn. According to the Washington State Employment Security Department, unemployment in Clark County decreased to 5.3% at March 31, 2019 compared to 5.4% at March 31, 2018. According to the Oregon Employment Department, unemployment in Portland increased to 3.9% at March 31, 2019 compared to 3.7% at March 31, 2018. According to the Regional Multiple Listing Services ("RMLS"), residential home inventory levels in Portland, Oregon have increased to 2.2 months at March 31, 2019 compared to 1.6 months at March 31, 2018. Residential home inventory levels in Clark County have increased to 2.4 months at March 31, 2019 compared to 1.6 months March 31, 2018. According to the RMLS, closed home sales in March 2019 in Clark County decreased 4.8% compared to March 2018. Closed home sales during March 2019 in Portland decreased 7.9% compared to March 2018.

Lending Activities

General .  At March 31, 2019, the Company's net loans receivable totaled $864.7 million, or 74.7% of total assets at that date. The principal lending activity of the Company is the origination of loans collateralized by commercial properties and commercial business 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. The Company's lending activities are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Bank's Board of Directors ("Board") and management. The customary sources of loan originations are realtors, walk-in customers, referrals and existing customers. The Bank also uses commissioned loan brokers and print advertising to market its products and services.   Loans are approved at various levels of management, depending upon the amount of the loan.

5


Loan Portfolio Analysis .  The following table sets forth the composition of the Company's loan portfolio, excluding loans held for sale, by type of loan at the dates indicated (dollars in thousands):

   
At March 31,
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
       
Commercial and construction:
                                                           
Commercial business
 
$
162,796
     
18.58
%
 
$
137,672
     
16.97
%
 
$
107,371
     
13.78
%
 
$
69,397
     
11.11
%
 
$
77,186
     
13.31
%
Other real estate mortgage (1)
   
530,029
     
60.50
     
529,014
     
65.20
     
506,661
     
65.00
     
399,527
     
63.94
     
345,506
     
59.60
 
Real estate construction
   
90,882
     
10.37
     
39,584
     
4.88
     
46,157
     
5.92
     
26,731
     
4.28
     
30,498
     
5.26
 
Total commercial and
  construction
   
783,707
     
89.45
     
706,270
     
87.05
     
660,189
     
84.70
     
495,655
     
79.33
     
453,190
     
78.17
 
Consumer:
                                                                               
Real estate one-to-four family
   
84,053
     
9.60
     
90,109
     
11.10
     
92,865
     
11.91
     
88,780
     
14.21
     
89,801
     
15.49
 
Other installment
   
8,356
     
0.95
     
14,997
     
1.85
     
26,378
     
3.39
     
40,384
     
6.46
     
36,781
     
6.34
 
Total consumer
   
92,409
     
10.55
     
105,106
     
12.95
     
119,243
     
15.30
     
129,164
     
20.67
     
126,582
     
21.83
 
Total loans
   
876,116
     
100.00
%
   
811,376
     
100.00
%
   
779,432
     
100.00
%
   
624,819
     
100.00
%
   
579,772
     
100.00
%
Less:
                                                                               
Allowance for loan losses
   
11,457
             
10,766
             
10,528
             
9,885
             
10,762
         
Total loans receivable, net
 
$
864,659
           
$
800,610
           
$
768,904
           
$
614,934
           
$
569,010
         
   
(1) Other real estate mortgage consists of commercial real estate, land and multi-family loans.
 
6
Loan Portfolio Composition. The following tables set forth the composition of the Company's commercial and construction loan portfolio based on loan purpose at the dates indicated (in thousands):
 
   
Commercial
Business
   
Other
Real Estate
Mortgage
   
Real Estate
Construction
   
Commercial &
Construction
Total
 
March 31, 2019
     
                         
Commercial business
 
$
162,796
   
$
-
   
$
-
   
$
162,796
 
Commercial construction
   
-
     
-
     
70,533
     
70,533
 
Office buildings
   
-
     
118,722
     
-
     
118,722
 
Warehouse/industrial
   
-
     
91,787
     
-
     
91,787
 
Retail/shopping centers/strip malls
   
-
     
64,934
     
-
     
64,934
 
Assisted living facilities
   
-
     
2,740
     
-
     
2,740
 
Single purpose facilities
   
-
     
183,249
     
-
     
183,249
 
Land acquisition and development
   
-
     
17,027
     
-
     
17,027
 
Multi-family
   
-
     
51,570
     
-
     
51,570
 
One-to-four family construction
   
-
     
-
     
20,349
     
20,349
 
Total
 
$
162,796
   
$
530,029
   
$
90,882
   
$
783,707
 
 
March 31, 2018
     
                         
Commercial business
 
$
137,672
   
$
-
   
$
-
   
$
137,672
 
Commercial construction
   
-
     
-
     
23,158
     
23,158
 
Office buildings
   
-
     
124,000
     
-
     
124,000
 
Warehouse/industrial
   
-
     
89,442
     
-
     
89,442
 
Retail/shopping centers/strip malls
   
-
     
68,932
     
-
     
68,932
 
Assisted living facilities
   
-
     
2,934
     
-
     
2,934
 
Single purpose facilities
   
-
     
165,289
     
-
     
165,289
 
Land acquisition and development
   
-
     
15,337
     
-
     
15,337
 
Multi-family
   
-
     
63,080
     
-
     
63,080
 
One-to-four family construction
   
-
     
-
     
16,426
     
16,426
 
Total
 
$
137,672
   
$
529,014
   
$
39,584
   
$
706,270
 

Commercial Business Lending. At March 31, 2019, the commercial business loan portfolio totaled $162.8 million, or 18.6% of total loans. Commercial business loans are typically secured by business equipment, accounts receivable, inventory or other property. The Company's commercial business 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 business lending involves risks that are different from those associated with residential and commercial real estate lending. 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. Additionally, the borrower's cash flow may be unpredictable and collateral securing these loans may fluctuate in value.

Other Real Estate Mortgage Lending.  At March 31, 2019, the other real estate mortgage loan portfolio totaled $530.0 million, or 60.5% of total loans. The Company originates other real estate mortgage loans secured by office buildings, warehouse/industrial, retail, assisted living facilities and single-purpose facilities (collectively "commercial real estate loans" or "CRE"); as well as land and multi-family loans primarily located in its market area. At March 31, 2019, owner occupied properties accounted for 34.4% and non-owner occupied properties accounted for 65.6% of the Company's commercial real estate loan portfolio.

7
Commercial real estate and multi-family loans typically 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. As a result, commercial real estate and multi-family loans are generally priced at a higher rate of interest than residential one-to-four family 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. 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. The Company 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. Loans are secured by first mortgages and often require specified debt service coverage ("DSC") ratios depending on the characteristics of the collateral. The Company generally imposes a minimum DSC ratio of 1.20 for loans secured by income producing properties. Rates and other terms on such loans generally depend on our assessment of credit risk after considering such factors as the borrower's financial condition and credit history, loan-to-value ratio, DSC ratio and other factors.

The Company actively pursues commercial real estate loans. Loan demand within the Company's market area was competitive in fiscal year 2019 as economic conditions and competition for strong credit-worthy borrowers remained high. At March 31, 2019 and 2018, the Company had the same two commercial real estate loans totaling $1.1 million and $1.2 million, respectively, on non-accrual status. For more information concerning risks related to commercial real estate loans, see Item 1A. "Risk Factors – Our emphasis on commercial real estate lending may expose us to increased lending risks."

Land acquisition and development loans are included in the other real estate mortgage loan 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 purchases and infrastructure development of properties (e.g. roads, utilities, etc.) with the aim of making improved lots ready for subsequent sales 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, which may provide an additional measure of security for such loans. At March 31, 2019, land acquisition and development loans totaled $17.0 million, or 1.94% of total loans compared to $15.3 million, or 1.89% of total loans at March 31, 2018. The largest land acquisition and development loan had an outstanding balance at March 31, 2019 of $2.8 million and was performing according to its original payment terms. At March 31, 2019, all of the land acquisition and development loans were secured by properties located in Washington and Oregon. At March 31, 2019, the Company had no land acquisition and development loans on non-accrual status.  At March 31, 2018, the Company had one land acquisition and development loan totaling $763,000 on non-accrual status.

Real Estate Construction.  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 undisbursed funds, was as follows at the dates indicated (dollars in thousands):
 
   
At March 31,
 
   
2019
   
2018
 
   
Amount (1)
   
Percent
   
Amount (1)
   
Percent
 
       
Speculative construction
 
$
12,315
     
8.01
%
 
$
7,589
     
6.80
%
Commercial/multi-family construction
   
116,815
     
76.01
     
80,357
     
72.04
 
Custom/presold construction
   
19,643
     
12.78
     
18,029
     
16.16
 
Construction/permanent
   
4,923
     
3.20
     
5,573
     
5.00
 
Total
 
$
153,696
     
100.00
%
 
$
111,548
     
100.00
%


(1)   Includes undisbursed funds of $62.8 million and $72.0 million at March 31, 2019 and 2018, respectively.

At March 31, 2019, the balance of the Company's construction loan portfolio, including undisbursed funds, was $153.7 million compared to $111.5 million at March 31, 2018. The $42.1 million increase was primarily due to a $36.5 million increase in commercial/multi-family construction loans along with an increase of $4.7 million in speculative construction loans. The Company plans to continue to proactively manage and control the growth in its construction loan portfolio in fiscal year 2020 but will continue to originate new construction loans to selected customers.
 
8

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 service the speculative construction loan and finance real estate taxes and other carrying costs of the completed home for a significant period of time after the completion of construction until a home buyer is identified. The largest speculative construction loan at March 31, 2019 was a loan to finance the construction of a single family home totaling $929,000. This loan is to a single borrower that is secured by a property located in the Company's market area. The average balance of loans in the speculative construction loan portfolio at March 31, 2019 was $275,000. At March 31, 2019 and 2018, the Company had no speculative construction loans on non-accrual status.

The composition of speculative construction and land acquisition and development loans by geographical area is as follows at the dates indicated (in thousands):
 
   
Northwest
Oregon
   
Other
Oregon
   
Southwest
Washington
   
Total
 
March 31, 2019
                 
                         
Land acquisition and development
 
$
2,184
   
$
1,908
   
$
12,935
   
$
17,027
 
Speculative and custom/presold construction
   
1,680
     
104
     
15,284
     
17,068
 
Total
 
$
3,864
   
$
2,012
   
$
28,219
   
$
34,095
 

March 31, 2018
                       
                         
Land acquisition and development
 
$
482
   
$
881
   
$
13,974
   
$
15,337
 
Speculative and custom/presold construction
   
400
     
421
     
12,596
     
13,417
 
Total
 
$
882
   
$
1,302
   
$
26,570
   
$
28,754
 

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. Presold construction loans are generally originated for a term of 12 months. At March 31, 2019 and 2018, presold construction loans totaled $8.5 million and $9.0 million, respectively.

Unlike speculative and presold construction loans, custom construction loans are made directly to the homeowner. At March 31, 2019 and 2018, the Company had no custom construction loans. 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. For adjustable rate loans, the interest rates adjust on their first adjustment date. See "Mortgage Brokerage" and "Mortgage Loan Servicing" below for more information. At March 31, 2019, construction/permanent loans totaled $3.3 million, the largest of which had an outstanding balance of $1.4 million and was performing according to its original repayment terms. The average balance of loans in the construction/permanent loan portfolio at March 31, 2019 was $410,000.

The Company provides construction financing for non-residential business properties and multi-family dwellings. At March 31, 2019, such loans totaled $70.5   million, or 77.6% of total real estate construction loans and 8.05% of total loans. Borrowers may be the business owner/occupier of the building who intends to operate their 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, 2019, the largest commercial construction loan had a balance of $11.4 million and was performing according to its original repayment terms. The average balance of loans in the commercial construction loan portfolio at March 31, 2019 was $3.1 million . At March 31, 2019 and 2018, the Company had no commercial construction loans on non-accrual status.

9
The Company has originated construction and land acquisition and 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 in 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. For additional information concerning the risks related to construction lending, see Item 1A. "Risk Factors – Our real estate construction and land acquisition and development loans expose us to risk."

Consumer Lending. Consumer loans totaled $92.4 million at March 31, 2019 and were comprised of $65.3 million of one-to-four family mortgage loans, $17.2 million of home equity lines of credit, $1.5 million of land loans to consumers for the future construction of one-to-four family homes and $8.4 million of other secured and unsecured consumer loans, which primarily consisted of $5.8 million of purchased automobile loans.

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% (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 the one-year constant maturity U.S. Treasury index or other index. At March 31, 2019, the Company had three residential real estate loans totaling $169,000 on non-accrual status compared to four loans totaling $206,000 at March 31, 2018. All of these loans were secured by properties located in Oregon and Washington.

The Company also purchases, from time to time, pools of automobile loans from another financial institution as a way to further diversify its loan portfolio and to earn a higher yield than on its cash or short-term investments. These indirect automobile loans are originated through a single dealership group located outside the Company's primary market area. Unlike a direct loan where the borrower makes an application directly to the lender, in these loans the dealer, who has a direct financial interest in the loan transaction, assists the borrower in preparing the loan application. Indirect automobile loans we purchased are underwritten by us using substantially similar guidelines to our internal guidelines. However, because these loans are originated through a third-party and not directly by us, we do not have direct contact with the borrower and therefore these loans may be more susceptible to a material misstatement on the loan application and present greater risks than other types of lending activities. The collateral for these loans is comprised of a mix of used automobiles. These loans are purchased with servicing retained by the seller. The Company did not purchase any automobile loans during fiscal years 2019 and 2018. At March 31, 2019, twelve of the purchased automobile loans were on non-accrual status totaling $41,000. At March 31, 2018, eight of the purchased automobile loans were on non-accrual status totaling $71,000.

The Company originates a variety of installment loans, including loans for debt consolidation and other purposes, automobile loans, boat loans and savings account loans. At March 31, 2019 and 2018, excluding the purchased automobile loans noted above, the Company had no installment loans on non-accrual status.

Installment 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. In these cases, we face the risk that any collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Thus, the recovery and sale of such property could be insufficient to compensate us for the principal outstanding on these loans. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans. Finally, because indirect automobile loan applications are originated by automobile dealerships, we underwrite the loans and we assume the risks associated with unsatisfactory origination procedures, including compliance with federal, state and local laws. In addition, since a third-party services these loans for us, any failure of our third-party servicer to timely pursue repossession action may adversely affect our ability to limit our credit losses. As a result of these factors, it may become necessary to increase our provision for loan losses in the event our losses on these loans increase, which could negatively affect our results of operations.

10
Loan Maturity. The following table sets forth certain information at March 31, 2019 regarding the dollar amount of loans maturing in the Company's total loan portfolio based on their contractual terms to maturity but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments or stated maturity and overdrafts are reported as due in one year or less. Loan balances are reported net of deferred fees (in thousands):
 
   
Within 1
Year
   
1 – 3 Years
   
After 3 – 5
Years
   
After 5 – 10
Years
   
Beyond 10
Years
   
Total
 
Commercial and construction:
     
   Commercial business
 
$
17,501
   
$
19,920
   
$
15,369
   
$
50,117
   
$
59,889
   
$
162,796
 
   Other real estate mortgage
   
14,680
     
20,939
     
68,037
     
336,189
     
90,184
     
530,029
 
   Real estate construction
   
15,085
     
1,555
     
-
     
62,567
     
11,675
     
90,882
 
 Total commercial and construction
   
47,266
     
42,414
     
83,406
     
448,873
     
161,748
     
783,707
 
Consumer:
                                               
   Real estate one-to-four family
   
326
     
501
     
931
     
4,363
     
77,932
     
84,053
 
   Other installment
   
1,047
     
5,536
     
1,184
     
263
     
326
     
8,356
 
Total consumer
   
1,373
     
6,037
     
2,115
     
4,626
     
78,258
     
92,409
 
Total loans
 
$
48,639
   
$
48,451
   
$
85,521
   
$
453,499
   
$
240,006
   
$
876,116
 

The following table sets forth the dollar amount of loans due after one year from March 31, 2019, which have fixed and adjustable interest rates (in thousands)    :
 
   
Fixed
Rate
   
Adjustable
Rate
   
Total
 
       
Commercial and construction:
                 
   Commercial business
 
$
89,199
   
$
56,096
   
$
145,295
 
   Other real estate mortgage
   
180,845
     
334,504
     
515,349
 
   Real estate construction
   
27,701
     
48,096
     
75,797
 
      Total commercial and construction
   
297,745
     
438,696
     
736,441
 
Consumer:
                       
   Real estate one-to-four family
   
63,082
     
20,645
     
83,727
 
   Other installment
   
6,769
     
540
     
7,309
 
      Total consumer
   
69,851
     
21,185
     
91,036
 
Total loans
 
$
367,596
   
$
459,881
   
$
827,477
 

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, 2019, the Company had outstanding commitments to originate loans of $40.7 million compared to $35.1 million at March 31, 2018.

Mortgage Brokerage. In addition to originating mortgage loans for retention in its loan portfolio, the Company employs 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 1.5% to 2.0% 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 portion of the origination fee. During the year ended March 31, 2019, brokered loans totaled $35.0 million (including $10.4 million brokered to the Company) compared to $43.4 million (including $11.9 million brokered to the Company) of brokered loans in fiscal year 2018. Gross fees of $504,000 and $746,000, which includes brokered loan fees and fees for loans sold to the Federal Home Loan Mortgage Company ("FHLMC"), were earned for the years ended March 31, 2019 and 2018, respectively. 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.

11
Mortgage Loan Servicing.   The Company is a qualified servicer for the FHLMC. The Company generally sells fixed-rate residential one-to-four family 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 the FHLMC on a non-recourse basis whereby foreclosure losses are the responsibility of the FHLMC and not the Company. The Company's general policy is to close its residential loans on FHLMC modified loan documents to facilitate future sales to the FHLMC. Upon sale, the Company continues to collect payments on the loans, supervise foreclosure proceedings, and otherwise service the loans. At March 31, 2019, total loans serviced for others were $149.4 million, of which $111.4 million were serviced for the FHLMC.

Nonperforming Assets.   Nonperforming assets were $1.5 million or 0.13% of total assets at March 31, 2019 compared with $2.7 million or 0.24% of total assets at March 31, 2018. The Company had net loan recoveries totaling $641,000 during fiscal 2019 compared to $238,000 during fiscal 2018. Credit quality metrics continued to improve in the past fiscal year and the real estate market in our primary market area has improved steadily. Although it appears the economic conditions have stabilized, an economic downturn in our market area could result in increases in nonperforming assets, increases in the provision for loan losses and charge-offs in the future.

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. In general, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cash-basis method.

The Company continues to proactively manage its residential construction and land acquisition and development loan portfolios. At March 31, 2019, the Company's residential construction and land acquisition and development loan portfolios were $20.3 million and $17.0 million, respectively, as compared to $16.4 million and $15.3 million, respectively, at March 31, 2018. At March 31, 2019 and 2018, there were no nonperforming loans in the residential construction loan portfolio. At March 31, 2019, there were no non-performing loans in the land acquisition and development portfolio. At March 31, 2018, the percentage of nonperforming loans in the land acquisition and development portfolio was 4.97%. For the year ended March 31, 2019, there were no charge-offs or recoveries in the residential construction and land acquisition and development loan portfolios. For the year ended March 31, 2018, the charge-off (recovery) ratio in the residential construction and land acquisition and development portfolio was 0.00% and (1.87)%, respectively.

The following table sets forth information regarding the Company's nonperforming loans at the dates indicated (dollars in thousands):
 
   
March 31, 2019
   
March 31, 2018
 
   
Number
of Loans
   
Balance
   
Number
of Loans
   
Balance
 
                         
Commercial business
   
2
   
$
225
     
1
   
$
178
 
Commercial real estate
   
2
     
1,081
     
2
     
1,200
 
Land
   
-
     
-
     
1
     
763
 
Consumer
   
16
     
213
     
12
     
277
 
Total
   
20
   
$
1,519
     
16
   
$
2,418
 

Nonperforming loans decreased compared to the prior fiscal year. The Company continues its efforts to work out problem loans, seek full repayment or pursue foreclosure proceedings. All of these loans are to borrowers with properties located in Oregon and Washington, with the exception of thirteen automobile loans totaling $44,000. At March 31, 2019, 81.70% of the Company's nonperforming loans, totaling $1.2 million, were measured for impairment. These loans have been charged down to the estimated fair market value of the collateral less selling costs or carry a specific reserve to reduce the net carrying value. There were no reserves associated with these nonperforming loans that were measured for impairment at March 31, 2019. At March 31, 2019, the largest single nonperforming loan was a commercial real estate loan totaling $896,000. This loan was measured for impairment during fiscal year 2019 and management determined that a specific reserve was not required.
 
 

12
The following table sets forth information regarding the Company's nonperforming assets at the dates indicated (in thousands):
 
   
At March 31,
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
       
Loans accounted for on a non-accrual basis:
                             
Commercial business
 
$
225
   
$
178
   
$
294
   
$
-
   
$
-
 
Other real estate mortgage
   
1,081
     
1,963
     
2,143
     
2,360
     
4,092
 
Consumer
   
210
     
277
     
278
     
334
     
1,226
 
Total
   
1,516
     
2,418
     
2,715
     
2,694
     
5,318
 
Accruing loans which are contractually
past due 90 days or more
   
3
     
-
     
34
     
20
     
-
 
Total nonperforming loans
   
1,519
     
2,418
     
2,749
     
2,714
     
5,318
 
Real estate owned ("REO")
   
-
     
298
     
298
     
595
     
1,603
 
Total nonperforming assets
 
$
1,519
   
$
2,716
   
$
3,047
   
$
3,309
   
$
6,921
 
                                         
Foregone interest on non-accrual loans
 
$
94
   
$
102
   
$
81
   
$
112
   
$
433
 

The following tables set forth information regarding the Company's nonperforming assets by loan type and geographical area at the dates indicated (in thousands):
 
   
Northwest
Oregon
   
Other
Oregon
   
Southwest
Washington
   
Other
Washington
   
Other
   
Total
 
March 31, 2019
                                   
                                     
Commercial business
 
$
65
   
$
-
   
$
160
   
$
-
   
$
-
   
$
225
 
Commercial real estate
   
-
     
896
     
185
     
-
     
-
     
1,081
 
Land
   
-
     
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
169
     
-
     
44
     
213
 
Total nonperforming loans
   
65
     
896
     
514
     
-
     
44
     
1,519
 
REO
   
-
     
-
     
-
     
-
     
-
     
-
 
Total nonperforming assets
 
$
65
   
$
896
   
$
514
   
$
-
   
$
44
   
$
1,519
 
 

 
March 31, 2018
                                   
                                     
Commercial business
 
$
-
   
$
-
   
$
178
   
$
-
   
$
-
   
$
178
 
Commercial real estate
   
-
     
997
     
203
     
-
     
-
     
1,200
 
Land
   
-
     
763
     
-
     
-
     
-
     
763
 
Consumer
   
-
     
-
     
206
     
-
     
71
     
277
 
Total nonperforming loans
   
-
     
1,760
     
587
     
-
     
71
     
2,418
 
REO
   
-
     
-
     
-
     
298
     
-
     
298
 
Total nonperforming assets
 
$
-
   
$
1,760
   
$
587
   
$
298
   
$
71
   
$
2,716
 

Other loans of concern, which are classified as substandard loans and are not presently included in the non-accrual category, 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.

The following table sets forth information regarding the Company's other loans of concern at the dates indicated (dollars in thousands):
 
   
March 31, 2019
   
March 31, 2018
 
   
Number
of Loans
   
Balance
   
Number
of Loans
   
Balance
 
                         
Commercial business
   
9
   
$
1,734
     
11
   
$
3,209
 
Commercial real estate
   
3
     
2,308
     
2
     
1,785
 
Land
   
1
     
728
     
-
     
-
 
Multi-family
   
2
     
20
     
1
     
11
 
Total
   
15
   
$
4,790
     
14
   
$
5,005
 

At March 31, 2019, loans delinquent 30 – 89 days were 0.04% of total loans compared to 0.06% at March 31, 2018. There were no delinquent loans 30 – 89 days past due in our commercial real estate ("CRE") loan portfolio at March 31, 2019 or
 
13
2018. At March 31, 2019, there were no loans 30-89 days past due in our commercial business portfolio.  At March 31, 2018, the 30 – 89 days delinquency rate in our commercial business loan portfolio was 0.01% of commercial business loans. CRE loans represent the largest portion of our loan portfolio at 52.67% of total loans and commercial business loans represent 18.58% of total loans.

Troubled debt restructurings ("TDRs") are loans for which the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, and/or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk.

TDRs are considered impaired loans and as such, when a loan is deemed to be impaired, the amount of the impairment is measured using discounted cash flows and the original note rate, except when the loan is collateral dependent. In these cases, the estimated fair value of the collateral (less any selling costs, if applicable) is used. Impairment is recognized as a specific component within the allowance for loan losses if the estimated value of the impaired loan is less than the recorded investment in the loan. When the amount of the impairment represents a confirmed loss, it is charged off against the allowance for loan losses. At March 31, 2019, the Company had TDRs totaling $5.7 million, of which $4.4 million were on accrual status. The $1.3 million of TDRs accounted for on a non-accrual basis at March 31, 2019 are included as nonperforming loans in the nonperforming asset table above. All of the Company's TDRs were paying as agreed at March 31, 2019.  The related amount of interest income recognized on these TDR loans was $204,000 for the year ended March 31, 2019.

The Company has determined that, in certain circumstances, it is appropriate to split a loan into multiple notes. This typically includes a nonperforming charged-off loan that is not supported by the cash flow of the relationship and a performing loan that is supported by the cash flow. These may also be split into multiple notes to align portions of the loan balance with the various sources of repayment when more than one exists. Generally, the new loans are restructured based on customary underwriting standards. In situations where they are not, the policy exception qualifies as a concession, and if the borrower is experiencing financial difficulties, the loans are accounted for as TDRs.

The accrual status of a loan may change after it has been classified as a TDR. The Company's general policy related to TDRs is to perform a credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. This evaluation includes consideration of the borrower's sustained historical repayment performance for a reasonable period of time. A sustained period of repayment performance generally would be a minimum of six months and may include repayments made prior to the restructuring date. If repayment of principal and interest appears doubtful, it is placed on non-accrual status.

In accordance with the Company's policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. Consumer installment loans delinquent six months or more that have not received at least 75% of their required monthly payment in the last 90 days are charged-off. In addition, loans discharged in bankruptcy proceedings are charged-off. Loans under bankruptcy protection with no payments received for four consecutive months are charged-off. The outstanding balance of a secured loan that is in excess of the net realizable value is generally charged-off if no payments are received for four to five consecutive months. However, charge-offs are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential sources of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is promptly charged off.

Asset Classification. The OCC 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, OCC examiners have authority to identify problem assets and, if appropriate, require them to be classified as such. There are three classifications for problem assets:  substandard, doubtful and loss (collectively "classified loans"). 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.
 
14

When the Company classifies problem assets as either substandard or doubtful, we may determine that the loan is impaired and establish a specific allowance in an amount we deem prudent to address the risk specifically or we may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When a problem asset is classified by us as a loss, we are required to charge off the asset in the period in which it is deemed uncollectible.

The aggregate amount of the Company's classified loans (comprised entirely of substandard loans), general loss allowances, specific loss allowances and net recoveries were as follows at the dates indicated (in thousands):

   
At or For the Year
 
   
Ended March 31,
 
   
2019
   
2018
 
       
Classified loans
 
$
6,306
   
$
7,423
 
                 
General loss allowances
   
11,435
     
10,697
 
Specific loss allowances
   
22
     
69
 
Net recoveries
   
(641
)
   
(238
)

All of the loans on non-accrual status as of March 31, 2019 were categorized as classified loans. Classified loans at March 31, 2019 were comprised of eleven commercial business loans totaling $2.0 million, five commercial real estate loans totaling $3.4 million (the largest of which was $1.6 million), two multi-family loans totaling $20,000, one land development loan totaling $728,000, three one-to-four family real estate loans totaling $169,000 and twelve purchased automobile loans totaling $41,000.

Allowance for Loan Losses. The Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio consistent with accounting principles generally accepted in the United States of America (U.S.) ("GAAP") guidelines. The adequacy of the allowance is evaluated monthly to maintain the allowance at levels sufficient to provide for inherent losses existing at the balance sheet date. The key components to the evaluation are the Company's internal loan review function by its credit administration, which reviews and monitors the risk and quality of the loan portfolio; as well as the Company's external loan reviews and its loan classification systems. Credit officers are expected to monitor their loan 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."

In accordance with GAAP, loans acquired from MBank were recorded at their estimated fair value, which resulted in a net discount to the loans' contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. However, we believe it should be considered when comparing certain financial ratios of the Company calculated in periods after the MBank transaction, compared to the same financial ratios of the Company in periods prior to the MBank transaction. The net discount on these acquired loans was $1.5 million and $2.2 million at March 31, 2019 and 2018, respectively.

The Company recorded a provision for loan losses of $50,000 for the year ended March 31, 2019 compared to no provision for the year ended March 31, 2018. At March 31, 2019, the Company had an allowance for loan losses of $11.5 million, or 1.31% of total loans, compared to $10.8 million, or 1.33% at March 31, 2018. The increase in the balance of the allowance for loan losses at March 31, 2019 reflects the $64.7 million increase in loan balances from March 31, 2018 compared to March 31, 2019 and an increase in recoveries on previously charged-off loans. The Company is continuing to experience increasing real estate values in our market areas and improvement in the level of delinquent, nonperforming and classified loans. Net recoveries on previously charged-off loans increased to $641,000 for the fiscal year ended March 31, 2019 compared to $238,000 in the prior fiscal year. Nonperforming loans decreased $899,000 and 30-89 day delinquent loans decreased $175,000 during the fiscal year ended March 31, 2019. Classified loans were $6.3 million at March 31, 2019 compared to $7.4 million at March 31, 2018. The $1.1 million decrease is primarily attributed to the payoff of one commercial business loan with an unpaid principal balance of $779,000 during fiscal year 2019 along with other loan paydowns of $945,000, which was partially offset by $666,000 of newly classified loans.  The coverage ratio of allowance for loan losses to nonperforming loans was 754.25% at March 31, 2019 compared to 445.24% at March 31, 2018. The
 
15
Company's general valuation allowance to non-impaired loans was 1.31% and 1.33% at March 31, 2019 and 2018, respectively.

Management considers the allowance for loan losses to be adequate at March 31, 2019 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 GAAP. However, a 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 affect the Company's future 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 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 (dollars in thousands):
 

   
Year Ended March 31,
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
       
Balance at beginning of year
 
$
10,766
   
$
10,528
   
$
9,885
   
$
10,762
   
$
12,551
 
Provision for (recapture of) loan losses
   
50
     
-
     
-
     
(1,150
)
   
(1,800
)
Recoveries:
                                       
Commercial and construction
                                       
Commercial business
   
1
     
240
     
492
     
30
     
34
 
Other real estate mortgage
   
824
     
347
     
463
     
331
     
271
 
Real estate construction
   
-
     
-
     
-
     
6
     
-
 
Total commercial and construction
   
825
     
587
     
955
     
367
     
305
 
Consumer
                                       
 Real estate one-to-four family
   
80
     
11
     
89
     
153
     
158
 
 Other installment
   
27
     
48
     
57
     
27
     
12
 
Total consumer
   
107
     
59
     
146
     
180
     
170
 
Total recoveries
   
932
     
646
     
1,101
     
547
     
475
 
Charge-offs:
                                       
Commercial and construction
                                       
Commercial business
   
-
     
-
     
1
     
-
     
120
 
Other real estate mortgage
   
-
     
68
     
117
     
-
     
233
 
Real estate construction
   
-
     
-
     
-
     
-
     
-
 
Total commercial and construction
   
-
     
68
     
118
     
-
     
353
 
Consumer
                                       
 Real estate one-to-four family
   
30
     
12
     
-
     
8
     
53
 
 Other installment
   
261
     
328
     
340
     
266
     
58
 
Total consumer
   
291
     
340
     
340
     
274
     
111
 
                                         
Total charge-offs
   
291
     
408
     
458
     
274
     
464
 
                                         
Net recoveries
   
(641
)
   
(238
)
   
(643
)
   
(273
)
   
(11
)
                                         
Balance at end of year
 
$
11,457
   
$
10,766
   
$
10,528
   
$
9,885
   
$
10,762
 
                                         
Ratio of allowance to total loans
outstanding at end of year
   
1.31
%
   
1.33
%
   
1.35
%
   
1.58
%
   
1.86
%
Ratio of net (recoveries) charge-offs to average net
    loans outstanding during year
   
(0.08
)
   
(0.03
)
   
(0.10
)
   
(0.05
)
   
(0.00
)
Ratio of allowance to total nonperforming loans
   
754.25
     
445.24
     
382.98
     
364.22
     
202.37
 


16
The following table sets forth the breakdown of the allowance for loan losses by loan category as of the dates indicated (dollars in thousands):

   
At March 31,
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
   
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
   
Amount
   
Loan
Category
as a
Percent
of Total
Loans
 
       
Commercial and construction:
                                                           
Commercial business
 
$
1,808
     
18.58
%
 
$
1,668
     
16.97
%
 
$
1,418
     
13.78
%
 
$
1,048
     
11.11
%
 
$
1,263
     
13.31
%
Other real estate mortgage
   
6,035
     
60.50
     
5,956
     
65.20
     
5,609
     
65.00
     
5,310
     
63.94
     
5,155
     
59.60
 
Real estate construction
   
1,457
     
10.37
     
618
     
4.88
     
714
     
5.92
     
416
     
4.28
     
769
     
5.26
 
                                                                                 
Consumer:
                                                                               
Real estate one-to-four family
   
1,208
     
9.60
     
1,400
     
11.10
     
1,525
     
11.91
     
1,652
     
14.21
     
1,881
     
15.49
 
Other installment
   
239
     
0.95
     
409
     
1.85
     
574
     
3.39
     
751
     
6.46
     
667
     
6.34
 
Unallocated
   
710
     
-
     
715
     
-
     
688
     
-
     
708
     
-
     
1,027
     
-
 
                                                                                 
Total allowance for loan losses
 
$
11,457
     
100.00
%
 
$
10,766
     
100.00
%
 
$
10,528
     
100.00
%
 
$
9,885
     
100.00
%
 
$
10,762
     
100.00
%





17
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 (generally debt securities) permissible under OCC 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, real estate mortgage investment conduits ("REMICS") and mortgage-backed securities ("MBS"), but does not permit investment in non-investment grade bonds. The policy also dictates the criteria for classifying investments in debt securities into one of three categories:  held to maturity, available for sale or trading. At March 31, 2019, no investment securities were held for trading purposes. See Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies."

The Company primarily purchases agency securities with maturities of five years or less and purchases a combination of MBS backed by government agencies (FHLMC, Fannie Mae ("FNMA"), U.S. Small Business Administration ("SBA") or Ginnie Mae ("GNMA")). FHLMC and FNMA securities are not backed by the full faith and credit of the U.S. government, while SBA and GNMA securities are backed by the full faith and credit of the U.S. government. At March 31, 2019, the Company owned no privately issued MBS. Our REMICS are MBS issued by FHLMC, FNMA and GNMA and our CRE MBS are issued by FNMA. The Company does not believe that it has any exposure to sub-prime lending in its investment securities portfolio. 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 (dollars in thousands):
 
   
At March 31,
 
   
2019
   
2018
   
2017
 
   
Carrying
Value
   
Percent of
Portfolio
   
Carrying
Value
   
Percent of
Portfolio
   
Carrying
Value
   
Percent of
Portfolio
 
       
Available for sale (at estimated fair value):
                                   
Municipal securities
 
$
8,881
     
4.98
%
 
$
8,732
     
4.09
%
 
$
2,819
     
1.41
%
Agency securities
   
12,341
     
6.92
     
22,102
     
10.36
     
16,808
     
8.39
 
REMICs
   
40,162
     
22.53
     
46,955
     
22.02
     
43,160
     
21.55
 
Residential MBS
   
75,821
     
42.54
     
89,074
     
41.77
     
96,611
     
48.24
 
Other MBS
   
41,021
     
23.01
     
46,358
     
21.74
     
40,816
     
20.38
 
     
178,226
     
99.98
     
213,221
     
99.98
     
200,214
     
99.97
 
                                                 
Held to maturity (at amortized cost):
                                               
Residential MBS
   
35
     
0.02
     
42
     
0.02
     
64
     
0.03
 
Total investment securities
 
$
178,261
     
100.00
%
 
$
213,263
     
100.00
%
 
$
200,278
     
100.00
%

The following table sets forth the maturities and weighted average yields in the securities portfolio at March 31, 2019 (dollars in thousands):

   
Less Than One Year
   
One to Five Years
   
More Than Five to
Ten Years
   
More Than
Ten Years
 
   
Amount
   
Weighted
Average
Yield (1)
   
Amount
   
Weighted
Average
Yield (1)
   
Amount
   
Weighted
Average
Yield (1)
   
Amount
   
Weighted
Average
Yield (1)
 
       
Municipal securities
 
$
-
     
-
%
 
$
-
     
-
%
 
$
3,339
     
2.40
%
 
$
5,542
     
2.46
%
Agency securities
   
2,994
     
1.30
     
3,018
     
2.76
     
6,329
     
2.22
     
-
     
-
 
REMICS
   
1,955
     
2.14
     
36
     
4.36
     
11,657
     
2.42
     
26,514
     
2.28
 
Residential MBS
   
-
     
-
     
1,083
     
1.86
     
17,896
     
2.05
     
56,877
     
2.39
 
Other MBS
   
-
     
-
     
4,400
     
2.11
     
8,152
     
2.24
     
28,469
     
2.27
 
Total
 
$
4,949
     
1.63
%
 
$
8,537
     
2.32
%
 
$
47,373
     
2.22
%
 
$
117,402
     
2.34
%

(1)    For available for sale securities carried at estimated fair value, the weighted average yield is computed using amortized cost without a tax equivalent
adjustment for tax-exempt obligations.
18
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 estimated 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 estimated fair value, which may be maturity, as well as other factors. The Company's trust preferred securities investment consisted of a single collateralized debt obligation ("CDO") secured by a pool of trust preferred securities issued by other bank holding companies which was liquidated during the year ended March 31, 2017, and the Company received $1.8 million in proceeds from the liquidation. During the year ended March 31, 2017, the Company recognized a $240,000 OTTI charge related to this CDO. There was no OTTI charge for investment securities for the years ended March 31, 2019 or 2018.

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, savings accounts, certificates of deposit and retirement savings plans. The Company has focused on building customer relationship deposits which include both business and consumer depositors. Deposit account terms vary according to, among other factors, the minimum balance required, the time periods the funds must remain on deposit and the interest rate. 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 following table sets forth the average balances of deposit accounts held by the Company at the dates indicated (dollars in thousands):
 
   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
   
Average
Balance
   
Average
Rate
   
Average
Balance
   
Average
Rate
   
Average
Balance
   
Average
Rate
 
       
Non-interest-bearing demand
 
$
289,707
     
0.00
%
 
$
264,128
     
0.00
%
 
$
202,376
     
0.00
%
Interest-bearing checking
   
180,256
     
0.06
     
170,124
     
0.06
     
151,801
     
0.06
 
Savings accounts
   
136,720
     
0.11
     
132,376
     
0.10
     
106,324
     
0.10
 
Money market accounts
   
252,202
     
0.12
     
275,092
     
0.12
     
252,040
     
0.12
 
Certificates of deposit
   
105,049
     
0.43
     
136,370
     
0.47
     
118,769
     
0.53
 
Total
 
$
963,934
     
0.10
%
 
$
978,090
     
0.12
%
 
$
831,310
     
0.14
%

Deposit accounts totaled $925.1 million at March 31, 2019 compared to $995.7 million at March 31, 2018. The Company did not have any wholesale-brokered deposits at March 31, 2019 and 2018. The Company continues to focus on core deposits and growth generated by customer relationships as opposed to obtaining deposits through the wholesale markets. The Company has continued to experience increased competition for customer deposits within its market area. Core branch deposits (comprised of all demand, savings, interest checking accounts and all time deposits excluding wholesale-brokered deposits, trust account deposits, Interest on Lawyer Trust Accounts ("IOLTA"), public funds, and internet based deposits) decreased $71.1 million since March 31, 2018. At March 31, 2019, the Company had $14.5 million, or 1.6% of total deposits, in Certificate of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep ("ICS") deposits, which were gathered from customers within the Company's primary market-area. CDARS and ICS deposits allow customers access to FDIC insurance on deposits exceeding the $250,000 FDIC insurance limit.

At March 31, 2019 and 2018, the Company also had $3.2 million and $3.1 million, respectively, in deposits from public entities located in the States of Washington and Oregon, all of which were fully covered by FDIC insurance or secured by pledged collateral.
 

19
The Company is enrolled in an internet deposit listing service. Under this listing service, the Company may post certificates of deposit rates on an internet site where institutional investors have the ability to deposit funds with the Company. At March 31, 2019 and 2018, the Company did not have any deposits through this listing service as the Company chose not to utilize these internet based deposits. Although the Company did not originate any internet based deposits during the year ended March 31, 2019, the Company may do so in the future consistent with its asset/liability objectives.

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 future financial condition, results of operations and cash flows.

The following table presents the amount and weighted average rate of certificates of deposit equal to or greater than $100,000 at March 31, 2019 (dollars in thousands):
 
Maturity Period
 
Amount
   
Weighted
Average Rate
 
       
Three months or less
 
$
9,906
     
0.46
%
Over three through six months
   
7,299
     
0.41
 
Over six through 12 months
   
12,386
     
0.43
 
Over 12 months
   
13,466
     
0.95
 
Total
 
$
43,057
     
0.60
%

Borrowings. The Company relies upon advances from the FHLB and borrowings from 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 and borrowings from the FRB are typically secured by the Bank's commercial business loans, commercial real estate loans and first mortgage residential loans. At March 31, 2019, the Bank had FHLB advances totaling $56.6 million and no FRB borrowings.  At March 31, 2018, the Bank did not have any FHLB advances or FRB borrowings.

The FHLB functions as a central reserve bank providing credit for 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 (primarily securities which are obligations of, or guaranteed by, the U.S.) provided certain standards related to credit-worthiness have been met. The FHLB determines specific lines of credit for each member institution and the Bank has a line of credit with the FHLB equal to 45% of its total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At March 31, 2019, the Bank had an available credit capacity of $517.5 million, subject to sufficient collateral and stock investment.

The Bank also has a borrowing arrangement with the FRB with an available credit facility of $58.3 million, subject to pledged collateral, as of March 31, 2019. The following table sets forth certain information concerning the Company's borrowings for the periods indicated (dollars in thousands):

   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
       
Maximum amounts of FHLB advances outstanding at any month end
 
$
62,638
   
$
14,050
   
$
-
 
Average FHLB advances outstanding
   
15,400
     
787
     
239
 
Weighted average rate on FHLB advances
   
2.58
%
   
1.60
%
   
0.80
%
 
Maximum amounts of FRB borrowings outstanding at any month end
 
$
-
   
$
-
   
$
-
 
Average FRB borrowings outstanding
   
3
     
1
     
-
 
Weighted average rate on FRB borrowings
   
3.00
%
   
1.50
%
   
-
%

20
At March 31, 2019, the Company had three wholly-owned subsidiary grantor trusts totaling $26.6 million that were established for the purpose of issuing trust preferred securities and common securities including a $5.2 million trust acquired in the MBank transaction. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement. 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 governing the Debentures plus any accrued but unpaid interest to the redemption date. The Company also has the right to defer the payment of interest on each of the Debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity. During such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company may not pay cash dividends to the holders of shares of the Company's common stock. The common securities issued by the grantor trusts are held by the Company, and the Company's investment in the common securities of $836,000 at both March 31, 2019 and 2018 is included in prepaid expenses and other assets in the Consolidated Balance Sheets included in the Consolidated Financial Statements contained in Item 8 of this Form 10-K. For more information, see also Note 12 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Taxation

For details regarding the Company's taxes, see Note 13 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Personnel

As of March 31, 2019, the Company had 250 full‑time equivalent employees, none of whom are represented by a collective bargaining unit. The Company believes its relationship with its employees is good.

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 OCC regulations, the Bank is authorized to invest up to 3% of its assets in subsidiary corporations classified as service corporations, with amounts in excess of 2% only if primarily for community purposes, and unlimited amounts in operating subsidiaries. At March 31, 2019, the Bank's investments in its wholly-owned subsidiaries of $1.2 million in Riverview Services, Inc. ("Riverview Services") and $5.4 million in the Trust Company 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 $24,000 for the fiscal year ended March 31, 2019 and total assets of $1.2 million at March 31, 2019. Riverview Services' operations are included in the Consolidated Financial Statements of the Company contained in Item 8 of this Form 10-K.

The Trust Company is an asset management company providing trust, estate planning and investment management services. The Trust Company had net income of $519,000 for the fiscal year ended March 31, 2019 and total assets of $5.7 million at that date. The Trust Company earns fees on the management of assets held in fiduciary or agency capacity. At March 31, 2019, total assets under management were $646.0 million. The Trust Company's operations are included in the Consolidated Financial Statements of the Company contained in Item 8 of this Form 10-K.

21
Information about our Executive Officers .  The following table sets forth certain information regarding the executive officers of the Company and its subsidiaries:

Name
Age (1 )
Position
Kevin J. Lycklama
41
President and Chief Executive Officer
David Lam
42
Executive Vice President and Chief Financial Officer
Daniel D. Cox
41
Executive Vice President and Chief Credit Officer
Kim J. Capeloto
57
Executive Vice President and Chief Banking Officer
Steven P. Plambeck
59
Executive Vice President and Chief Lending Officer
Christopher P. Cline
58
President and Chief Executive Officer of Riverview Trust Company
(1)   At March 31, 2019

Kevin J. Lycklama is President and Chief Executive Officer of the Company, positions he has held since April 2, 2018. Prior to assuming the role of President and Chief Executive Officer, Mr. Lycklama served as Executive Vice President and Chief Operating Officer of the Company, positions he had held since July 2017. Prior to July 2017, Mr. Lycklama served as Executive Vice President and Chief Financial Officer of the Company since 2008 and Vice President and Controller of the Bank since 2006. Prior to joining Riverview, Mr. Lycklama spent five years with a local public accounting firm advancing to the level of audit manager. He holds a Bachelor of Arts degree from Washington State University, is a graduate of the Pacific Coast Banking School and is a certified public accountant (CPA).

David Lam is Executive Vice President and Chief Financial Officer of the Company, positions he has held since July 2017. Prior to July 2017, Mr. Lam served as Senior Vice President and Controller of the Bank since 2008. He is responsible for accounting, SEC reporting and treasury functions for the Bank and the Company. Prior to joining Riverview, Mr. Lam spent ten years working in the public accounting sector advancing to the level of audit manager. Mr. Lam holds a Bachelor of Arts degree in business administration with an emphasis in accounting from Oregon State University. Mr. Lam is a CPA, holds a chartered global management accountant designation and is a member of both the American Institute of CPA's and Oregon Society of CPAs.

Daniel D. Cox is Executive Vice President and Chief Credit Officer and is responsible for credit administration related to the Bank's commercial, mortgage and consumer loan activities. Mr. Cox joined Riverview in August 2002 and spent five years as a commercial lender and progressed through the credit administration function, most recently serving as Senior Vice President of Credit Administration. He holds a Bachelor of Arts degree from Washington State University and was an Honor Roll graduate of the Pacific Coast Banking School. Mr. Cox is an active mentor in the local schools and was the Past Treasurer and Endowment Chair for the Washougal Schools Foundation and Past Board Member of Camas-Washougal Chamber of Commerce.

Kim J. Capeloto is Executive Vice President and Chief Banking Officer. Mr. Capeloto has been employed by the Bank since September 2010. Mr. Capeloto has over 30 years of banking experience serving as regional manager for Union Bank of California and Wells Fargo Bank directing small business and personal banking activities. Prior to joining the Bank, Mr. Capeloto held the position of President and Chief Executive Officer of the Greater Vancouver Chamber of Commerce. Mr. Capeloto is active in numerous professional and civic organizations.

Steven P. Plambeck   is Executive Vice President and Chief Lending Officer, a position he has held since March 1, 2018.  Mr. Plambeck is responsible for all loan production including commercial, consumer, mortgage and builder/developer construction loans. Mr. Plambeck joined Riverview in January 2011 as Director of Medical Banking. For the past two years Mr. Plambeck served as Senior Vice President and Team Leader for the Portland Commercial Team. Mr. Plambeck holds a Bachelor of Science degree in Accounting from the University of Wyoming and is also a graduate of the Pacific Coast Banking School. Mr. Plambeck is a board member for the Providence St. Vincent Council of Trustees, Providence Heart and Vascular Institute and the Providence Brain and Spine Institute. Mr. Plambeck is also a member of the Medical and Dental Advisory Team.

Christopher P. Cline is President and Chief Executive Officer of the Trust Company, a wholly-owned subsidiary of the Bank. Mr. Cline joined the Trust Company in 2016, after having spent eight years managing the trust department of Wells Fargo's Private Bank in Oregon and Southwest Washington. Prior to that, Mr. Cline was an estate planning attorney for 17 years, most recently as a partner at Holland & Knight. Mr. Cline manages all aspects of the trust business, is a Fellow of the American College of Trust and Estate Counsel and is a nationally recognized speaker and author, having written books on estate planning and trust administration. Mr. Cline holds a Bachelor of Arts degree from San Francisco State University and a Juris Doctor degree from Hastings College of the Law in San Francisco.
22
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 ("Congress") that may affect the Company's and Bank's operations. In addition, the regulations governing the Company and the Bank may be amended from time to time by the OCC, the FDIC, the Federal Reserve Board or the SEC, as appropriate. Any such legislation or regulatory changes in the future could have an adverse effect   on our operations and financial condition. We cannot predict whether any such changes may occur.

General

As a federally chartered savings bank, the Bank is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and the FDIC, as the insurer of its deposits.   As used herein, the terms "savings institution" and "savings association" refer to federally chartered savings banks. Additionally, the Company is subject to extensive regulation, examination and supervision by the Federal Reserve as its primary federal regulator. The Bank is a member of the FHLB System and its deposits are insured up to applicable limits by the DIF, which is administered by the FDIC. The Bank must file reports with the OCC 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 of the Bank by the OCC and of the Company by the Federal Reserve to evaluate safety and soundness and compliance with various regulatory requirements. This regulatory structure establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the protection of the DIF 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 OCC, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on the Company and the Bank and their operations.

In connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), the laws and regulations affecting depository institutions and their holding companies have changed the bank regulatory structure and the lending, investment, trading and operating activities of depository institutions and their holding companies. Among other changes, the Dodd-Frank Act established the Consumer Financial Protection Bureau ("CFPB") as an independent bureau of the Federal Reserve Board. The CFPB assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. The Bank is subject to regulations issued by the CFPB, but as a smaller financial institution, the Bank is generally subject to supervision and enforcement by the OCC with respect to its compliance with consumer financial protection laws and CFPB regulations.

On May 23, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act passed by Congress (the "Act"). The Act contains a number of provisions extending regulatory relief to banks and savings institutions and their holding companies. Some of these provisions may benefit the Company and the Bank, such as (1) a simplified capital ratio, called the Community Bank Capital Ratio, computed as the ratio of tangible equity capital to average consolidated total assets to be set by the federal banking regulators at not less than 8% and not more than 10%, which for most institutions with less than $10 billion in consolidated assets will replace the leverage and risk-based capital ratios under current regulations; (2) an option for federal savings institutions to operate as national banks with respect to limits on lending, investments, and subsidiaries, without changing their charters to national bank charters; and (3) a lower risk weight on certain loans classified as high volatility commercial real estate exposures. A number of the provisions in the Act require rulemaking or other action by the federal banking regulators and so may not have an immediate impact on the Company and the Bank.   

23
Federal Regulation of Savings Institutions

Office of the Comptroller of the Currency.   The OCC has extensive authority over the operations of savings institutions. As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to periodic examinations by the OCC. The OCC also has extensive enforcement authority over savings institutions, including the Bank. 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 OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required by law.

All savings institutions are required to pay assessments to the OCC 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 OCC assessment for the fiscal year ended March 31, 2019 was $266,000.

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, 2019, the Bank's lending limit under this restriction was $21.2 million and, at that date, the Bank's largest lending relationship with one borrower was $14.6 million, which consisted of one commercial real estate loan which was performing according to its original payment terms.

The OCC's oversight of the Bank includes reviewing its compliance with the customer privacy requirements imposed by the Gramm-Leach-Bliley Act of 1999 ("GLBA") and the anti-money laundering provisions of the USA Patriot Act. The GLBA privacy requirements place limitations on the sharing of consumer financial information with unaffiliated third parties. They also require each financial institution offering financial products or services to retail customers to provide such customers with its privacy policy and with the opportunity to opt out of the sharing of their personal information with unaffiliated third parties. The USA Patriot Act imposes significant responsibilities on financial institutions to prevent the use of the U.S. financial system to fund terrorist activities. Its anti-money laundering provisions require financial institutions operating in the U.S. to develop anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. These compliance programs are intended to supplement requirements under the Bank Secrecy Act and the regulations of the Office of Foreign Assets Control.

The OCC, 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.

Capital Requirements.   Federally insured savings institutions, such as the Bank, are required by the OCC to maintain minimum levels of regulatory capital, including a common equity Tier 1 ("CET1") capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%.

Certain changes in what constitutes regulatory capital, including the phasing-out of certain instruments as qualifying capital, are subject to transition periods, most of which have expired. The Bank does not have any such instruments. Because of the Bank's asset size, the Bank elected to take a one-time option to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital calculations.

The Bank also must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.

In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to any of certain mandates by the OCC requiring it as an individual institution to meet any specified capital level.

As of March 31, 2019, the most recent notification from the OCC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. For additional information, see Note 15 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
 
24

Prompt Corrective Action.   An institution is considered adequately capitalized if it meets the minimum capital ratios described above. The OCC is required to take certain supervisory actions against undercapitalized savings institutions, the severity of which depends upon the institution's degree of undercapitalization. Subject to a narrow exception, the OCC is required to appoint a receiver or conservator for a savings institution that is critically undercapitalized. OCC regulations also require that a capital restoration plan be filed with the OCC 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 OCC also can take a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. An institution that is not well-capitalized is subject to certain restrictions on deposit rates and brokered deposits.

Federal Home Loan Bank System.   The Bank is a member of the FHLB, which is one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each of which 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 Agency. 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. At March 31, 2019, the Bank held $3.6 million in FHLB stock, which was in compliance with this requirement. During the year ended March 31, 2019, the Bank purchased $27,000 of FHLB membership stock at par and $2.3 million of FHLB activity stock at par.

The FHLB continues 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 adversely affected 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 decrease in net income and possibly capital.

Federal Deposit Insurance Corporation .  The DIF of the FDIC insures deposits in the Bank up to $250,000 per separately insured depositor category. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The Bank's deposit insurance premiums for the fiscal year ended March 31, 2019 were $326,000.

Under its regulations, the FDIC sets assessment rates for established small institutions (generally, those with total assets of less than $10 billion) based on an institution's weighted average CAMELS component ratings and certain financial ratios. Total base assessment rates range from 1.5 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 3 to 30 basis points for those with a CAMELS composite score of 3, and 11 to 30 basis points for those with CAMELS composite scores of 4 or 5, all subject to certain adjustments. Assessment rates are expected to decrease in the future as the reserve ratio increases in specified increments to the 1.35% ratio required by the Dodd-Frank Act. An institution that has reported on its Call Reports total assets of $10 billion or more for at least four consecutive quarters is considered a large institution and is assessed under a complex scorecard method employing many factors.

The Dodd-Frank Act increased the minimum FDIC deposit insurance reserve ratio from 1.15 percent to 1.35 percent. The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of December 31, 2020. The Dodd-Frank Act directs the FDIC to offset the effects of higher assessments due to the increase in the reserve ratio on established small institutions by charging higher assessments to large institutions. To implement this mandate, large and highly complex institutions paid a surcharge which was discontinued for assessment periods beginning after September 30, 2018. Since established small institutions contribute to the DIF while the reserve ratio remains below 1.35% and large institutions paid the surcharge, the FDIC will provide assessment credits to established small institutions for the portion of their assessments that contribute to the increase. When the reserve ratio reaches 1.35%, the FDIC will automatically apply an established small institution's assessment credits to reduce its regular deposit insurance assessments.

The FDIC may increase or decrease its rates by 2 basis points without further rule-making. In an emergency, the FDIC may also impose a special assessment.

25

The FDIC may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the deposit insurance of the Bank.

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.

Any institution that fails to meet the QTL test is subject to certain operating restrictions and may be required to convert to a national bank charter, and a savings and loan holding company of such an institution may become regulated as a bank holding company. As of March 31, 2019, the Bank maintained 89.37% of its portfolio assets in qualified thrift investments and therefore met the QTL test.

Limitations on Capital Distributions. OCC 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 OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC's approval prior to making such distribution. In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve. The Federal Reserve or the OCC may object to a capital distribution based on safety and soundness concerns. Additional restrictions on Bank dividends may apply if the Bank fails the QTL test. In addition, as noted above, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company will be limited, which may limit the ability of the Company to pay dividends to its stockholders.

Activities of Savings 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 savings institution controls, the savings institution must file a notice or application with the OCC and, in certain circumstances with the FDIC, and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders.

With respect to subsidiaries generally, the OCC may determine that investment by a savings institution in, or the activities of, a subsidiary must be restricted or eliminated based on safety and soundness or legal reasons.

Transactions with Affiliates. The Bank's authority to engage in transactions with affiliates is limited by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve's Regulation W. The term affiliates for these purposes generally mean any company that controls or is under common control with an institution except subsidiaries of the 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. 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. FDIC-insured institutions are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, these institutions are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.
 
26

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") generally prohibits a company that makes filings with the SEC from making loans to its executive officers and directors. That act, however, contains a specific exception for loans by a depository institution to its executive officers and directors, if the lending is in compliance with federal banking laws. Under such laws, the Bank's authority to extend credit to executive officers, directors and 10% stockholders ("insiders"), as well as entities which 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.

Community Reinvestment Act and Consumer Protection Laws. Under the Community Reinvestment Act of 1977 ("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 OCC, 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. The OCC may use an unsatisfactory rating as the basis for the denial of an application. Similarly, the Federal Reserve is required to take into account the performance of an insured institution under the CRA when considering whether to approve an acquisition by the institution's holding company. 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.

In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws designed to protect consumers and promote lending to various sectors of the economy and population. Some state laws can apply to these activities as well. The CFPB issues regulations and standards under these federal laws, which include, among others, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Through its rulemaking authority, the CFPB has promulgated a number of regulations under these laws that affect our consumer businesses. Among these are regulations setting "ability to repay" and "qualified mortgage" standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator compensation standards. The Bank devotes substantial compliance, legal and operational business resources to ensure compliance with applicable consumer protection standards. In addition, the OCC has enacted customer privacy regulations that limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.

Enforcement.   The OCC has primary enforcement responsibility over federally-chartered 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 a 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 up to $2.0 million per day. The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, 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 OCC determines that a savings institution fails to meet any standard prescribed by the guidelines, the OCC may require the institution to submit an acceptable plan to achieve compliance with the standard.

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Federal Reserve System. The Federal Reserve requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Interest-bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. At March 31, 2019, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy any liquidity requirements that may be imposed by the OCC.

Commercial Real Estate Lending Concentrations .  The federal banking agencies have 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 guidance directs the OCC and other federal bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A federal savings 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 or 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 supervisory guidance on evaluation of capital adequacy.

Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), is a federal statute that generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress acted 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. 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.

Bank Secrecy Act/Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

Other Consumer Protection Laws and Regulations.   The Dodd-Frank Act established the CFPB and empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, the Bank is generally subject to supervision and enforcement by the OCC with respect to compliance with consumer financial protection laws and CFPB regulations.

The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the following list is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting
 
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unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

Savings and Loan Holding Company Regulation

General. The Company is a unitary savings and loan holding company subject to regulatory oversight of the Federal Reserve. Accordingly, the Company is required to register and file reports with the Federal Reserve and is subject to regulation and examination by the Federal Reserve. In addition, the Federal Reserve has enforcement authority over the Company and its non-savings institution subsidiaries, which also permits the Federal Reserve to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. In accordance with the Dodd-Frank Act, the Federal Reserve must require any company that controls an FDIC-insured depository institution to serve as a source of financial strength for the institution. These and other Federal Reserve policies, as well as the capital conservatism buffer requirement, may restrict the Company's ability to pay dividends.

Capital Requirements. For a savings and loan holding company   that qualifies as a small bank holding company under the Federal Reserve's Small Bank Holding Company Policy Statement, such as the Company, the capital regulations apply to its savings institution subsidiaries, but not the Company. The Federal Reserve expects the holding company's savings institution subsidiaries to be well capitalized under the prompt corrective action regulations. At March 31, 2019, the Company exceeded all regulatory capital requirements. See "Federal Regulation of Savings Institutions- Capital Requirements" above.
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. 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 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 by Federal Reserve regulation.

Mergers and Acquisitions. The Company must obtain approval from the Federal Reserve 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 Federal Reserve 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 DIF, the convenience and the needs of the community, including performance under the CRA and competitive factors.

The Federal Reserve 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) supervisory acquisitions 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.   Any company, except a bank holding company, that acquires control of a savings association or savings and loan holding company becomes a "savings and loan holding company" subject to registration, examination and regulation by the Federal Reserve and must obtain the prior approval of the Federal Reserve under the Savings and Loan Holding Company Act before obtaining control of a savings association or savings and loan holding company. A bank holding company must obtain the prior approval of the Federal Reserve under the Bank Holding Company Act before obtaining control of a savings association or savings and loan holding company and remains subject to regulation under the Bank Holding Company Act. The term "company" includes corporations, partnerships, associations, and certain trusts and other entities. "Control" of a savings association or savings and loan holding company is deemed to exist if a company has voting control, directly or indirectly, of more than 25% of any class of the savings association's voting stock or controls in any manner the election of a majority of the directors of the savings association or savings and loan holding company, and may be presumed under other circumstances, including, but not limited to, holding in certain cases 10% or more of a class of voting securities. In addition, a savings and loan holding company must obtain Federal Reserve approval prior to acquiring voting control of more than 5% of any class of voting stock of another savings association or another savings association holding company. A similar provision limiting the acquisition by a bank holding company of 5% or more of a class of voting
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stock of any company is included in the Bank Holding Company Act.
Accordingly, the prior approval of the Federal Reserve would be required:
before any savings and loan holding company or bank holding company could acquire 5% or more of the common stock of the Company; and
before any other company could acquire 25% or more of the common stock of the Company and may be required for an acquisition of as little as 10% of such stock.

In addition, persons that are not companies are subject to the same or similar definitions of control with respect to savings and loan holding companies and savings associations and requirements for prior regulatory approval by the Federal Reserve in the case of control of a savings and loan holding company or by the OCC in the case of control of a savings association not obtained through control of a holding company of such savings association.

Dividends and Stock Repurchases.   The Federal Reserve's policy statement on the payment of cash dividends applicable to savings and loan holding companies expresses its view that a savings and loan holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company's net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company's capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. In addition, a savings and loan holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. The capital conservation buffer requirement may also limit or preclude dividends payable by the Company.

Sarbanes-Oxley Act of 2002.   The Sarbanes-Oxley Act was enacted in 2002 in response to public concerns regarding corporate accountability in connection with accounting scandals. The stated goals of the Sarbanes-Oxley 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 Sarbanes-Oxley 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 Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, and requires the SEC and securities exchanges to adopt extensive additional disclosures, corporate governance and related rules. The Sarbanes-Oxley 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.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.   On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and implemented new capital regulations discussed above under "- Regulation and Supervision of the Bank - Capital Requirements." In addition, among other changes, the Dodd-Frank Act requires public companies, such as the Company, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a "say on pay" vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain provisions of the Dodd-Frank Act, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

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Item 1A.  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, other risks 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. The risks below also include forward-looking statements. This report is qualified in its entirety by these risk factors.

Our business may be adversely affected by downturns in the national and the regional economies on which we depend.

Substantially all of our loans are to businesses and individuals in the states of Washington and Oregon. A decline in the economies of the seven counties in which we operate, including the Portland, Oregon metropolitan area, which we consider to be our primary market area, could have a material adverse effect on our business, financial condition, results of operations and prospects. Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade.

While real estate values and unemployment rates have recently improved, a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
·
loan delinquencies, problem assets and foreclosures may increase;
·
we may increase our allowance for loan losses;
·
the slowing of sales of foreclosed assets;
·
demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;
·
collateral for loans made may decline further in value, exposing us to increased risk loans, reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans;
·
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
·
the amount of our low-cost or non-interest bearing deposits may decrease.
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower's ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes and tornadoes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations.
Our real estate construction and land acquisition and development loans expose us to risk.

We make construction and land acquisition and development loans primarily to builders to finance the construction of single and multifamily homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale. At March 31, 2019, construction loans totaled $90.9 million, or 10.4% of our total loan portfolio, of which $20.3 million were for residential real estate projects. Undisbursed funds for construction projects totaled $62.8 million at March 31, 2019. Land acquisition and development loans, which are loans made with land as security, totaled $17.0 million, or 1.9% of our total loan portfolio at March 31, 2019.

In general, construction and land lending involves additional risks because of the inherent difficulty in estimating a property's value both before and at completion of the project, as well as the estimated cost of the project and the time needed to sell the property at completion. Construction costs may exceed original estimates as a result of increased materials, labor or other costs. 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 on real property, it is relatively difficult to evaluate accurately
 
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the total funds required to complete a project and the related loan-to-value ratio. Changes in the demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. A 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. Some of our builders have more than one loan outstanding with us and also have residential mortgage loans for rental properties 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.

In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent 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 the 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. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Further, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project, and thus pose a greater potential risk than construction loans to individuals on their personal residences. Loans on land under development or raw land held for future construction, including lot loans made to individuals for the future construction of a residence also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand conditions.

At March 31, 2019, real estate construction and land development loans totaled $107.9 million comprised mainly of $17.1 million of speculative and custom/presold construction loans, $17.0 million of land acquisition and development loans, $70.5 million of commercial/multi-family construction loans and $3.3 million of custom/presold construction loans.

Our emphasis on commercial real estate lending may expose us to increased lending risks.
Our current business strategy is focused on the expansion of commercial real estate lending. This type of lending activity, while potentially more profitable than single-family residential lending, is 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. 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.

At March 31, 2019, we had $513.0 million of commercial and multi-family real estate mortgage loans, representing 58.55% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some 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 compared to an adverse development with respect to a one-to-four family residential loan. Repayment on these loans is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. 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. Commercial and multi-family mortgage loans also expose a lender to greater credit risk than loans secured by one-to-four family residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial and multi-family real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.

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A secondary market for most types of commercial real estate and multi-family 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. As a result of these characteristics, if we foreclose on a commercial or multi-family real estate loan, 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. Accordingly, charge-offs on commercial and multi-family real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these criteria, the Bank has a concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land represented 337% of total risk-based capital at March 31, 2019. The particular focus of the guidance 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 at greater risk 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 to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.

Our business may be adversely affected by credit risk associated with residential property.

At March 31, 2019, $84.1 million, or 9.60% of our total loan portfolio, was secured by one-to-four family mortgage loans and home equity loans. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the Washington and Oregon housing markets in which we operate may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations. Further, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") enacted in the fourth quarter of calendar year 2017 could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments and could also negatively impact the housing market, which could adversely affect our business and loan growth.
Many of our one-to-four family loans and home equity lines of credit are secured by liens on mortgage properties. Residential loans with high combined loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale. Further, the majority of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.
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Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
At March 31, 2019, we had $162.8 million, or 18.6% of total loans, in commercial business loans. 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. Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. This collateral may consist of equipment, inventory, accounts receivable, or other business assets. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the specific type of business and equipment. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself which, in turn, is often dependent in part upon general economic conditions and secondarily on the underlying collateral provided by the borrower.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

·
the cash flow of the borrower and/or the project being financed;
·
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
·
the duration of the loan;
·
the credit history of a particular borrower; and
·
changes in economic and industry conditions.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to:

·
our general reserve, based on our historical default and loss experience and certain macroeconomic factors based on management's expectations of future events;
·
our specific reserve, based on our evaluation of impaired loans and their underlying collateral; and
·
an unallocated reserve to provide for other credit losses inherent in our loan portfolio that may not have been contemplated in the other loss factors.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our allowance for loan losses through the provision for losses on loans which is charged against income. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may also require an increase in the allowance for loan losses. Additionally, pursuant to our growth strategy, 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 and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

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The Financial Accounting Standards Board has adopted a new accounting standard update ("ASU") that will be effective for our first fiscal year beginning after December 15, 2019. This standard, referred to as "Current Expected Credit Loss", or "CECL", will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses at inception of the loan. This will change the current method of providing allowances for credit losses that are probable of having been incurred, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. For more on this ASU, see Note 1 of the Notes to Consolidated Financial Statements - Recently Issued Accounting Pronouncements contained in Item 8 of this report. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

Uncertainty relating to the London Interbank Offered Rate ("LIBOR") calculation process and potential phasing out of LIBOR may adversely affect our results of operations.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent, securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and trust preferred securities. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property is taken in as REO and at certain other times during the assets' holding periods. Our net book value ("NBV") in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset's NBV over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of the investments in real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. Significant write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.

In addition, bank regulators periodically review our REO and may require us to recognize further write-downs. Any increase in our write-downs, as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.

Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income (loss) and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Our securities portfolio is evaluated for OTTI. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale
 
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securities, net of taxes. There can be no assurance that the declines in market value will not result in OTTI of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

Changes in interest rates may reduce our net interest income and may result in higher defaults in a rising rate environment.

Our earnings and cash flows are largely dependent upon our net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including domestic and international economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. The Federal Reserve has steadily increased the target Fed Funds over the last three years to a range of 2.25% to 2.50% as of March 31, 2019. The Federal Reserve could make additional increases in interest rates during 2019 subject to economic conditions. If the Federal Reserve increases the target Fed Funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans, which could negatively affect our financial performance.
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but also can affect: (1) our ability to originate and/or sell loans; (2) the fair value of our financial assets and liabilities, which could negatively impact shareholders' equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; (4) the ability of our borrowers to repay adjustable or variable rate loans; and (5) the average duration of our investment securities portfolio and other interest-earning assets.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. 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 affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability.  Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding.  Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income.  Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract.  Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates.  As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up.  Changes in the slope of the "yield curve"—or the spread between short-term and long-term interest rates—could also reduce our net interest margin.  Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates.  Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.  Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs.  Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. A significant portion of our loans have fixed interest rates and longer terms than our deposits and borrowings. As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of certificates of deposit and other deposits yielding no or a relatively low rate of interest having a shorter duration than our assets. At March 31, 2019, we had $59.5 million in certificates of deposit that mature within one year and $284.9 million in non-interest bearing demand deposits. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans. In addition, a substantial amount of our home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.
 
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Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio.  Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates.  Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax.  Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders' equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our consolidated balance sheet or projected operating results. See Item 7A., "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-K.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.
Liquidity is essential to our business; therefore, the inability to obtain adequate funding may negatively affect growth and, consequently, our earnings capability and capital levels. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities, or other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that 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 Washington or Oregon markets in which our loans are concentrated, negative operating results, 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 and the continued uncertainty in credit markets. In particular, our liquidity position could be significantly constrained if we are unable to access funds from the FHLB, the Federal Reserve Bank of San Francisco or other wholesale funding sources, or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources, our revenues may not increase proportionately to cover our costs. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

An increase in interest rates, change in the programs offered by governmental sponsored entities ("GSE") or our ability to qualify for such programs may reduce our mortgage revenues, which would negatively impact our non-interest income.

Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage revenues primarily from gains on the sales of single-family mortgage loans pursuant to programs currently offered by FNMA, FHLMC, GNMA and non- GSE entities . These entities account for a substantial portion of the secondary market in residential mortgage loans. Any future changes in these programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.

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We may be adversely affected by risks associated with completed and potential acquisitions.

As part of our general growth strategy, in February 2017 we expanded our business through the purchase and assumption transaction in which the Company purchased certain assets and assumed certain liabilities of MBank, the wholly-owned subsidiary of Merchants Bancorp. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of our common stock. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:

·
We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;

·
Higher than expected deposit attrition;

·
Our strategic efforts may divert resources or management's attention from ongoing business operations and may subject us to additional regulatory scrutiny;

·
Prices at which acquisitions can be made may not be acceptable to us;

·
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;

·
To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition;

·
To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and

·
We expect our net income will increase following our acquisitions; however, we also expect our general and administrative expenses and consequently our efficiency rates will also increase. Ultimately, we would expect our efficiency ratio to improve; however, if we are not successful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in the short or long-term.

The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.

Under GAAP, we are required to record loans acquired through acquisitions, including purchase credit-impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition date. Actual performance could differ from management's initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the "discount") is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest margins and lower interest income in future periods.
 
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A general decline in economic conditions may adversely affect the fees generated by our asset management company.

To the extent our asset management clients and their assets become adversely affected by weak economic and stock market conditions, they may choose to withdraw the amount of assets managed by us and the value of their assets may decline. Our asset management revenues are based on the value of the assets we manage. If our clients withdraw assets or the value of their assets decline, the revenues generated by the Trust Company will be adversely affected.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
We may experience future goodwill impairment, which could reduce our earnings.
In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair values with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, business combinations typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. We performed our annual goodwill impairment test during the quarter-ended December 31, 2018, and 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 our judgment was incorrect and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge to earnings, which could adversely affect our results of operations, perhaps materially; however, it would have no impact on our liquidity, operations or regulatory capital. The MBank transaction has increased our goodwill.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company's shareholders. These regulations may sometimes impose significant limitations on operations.   Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions. The significant federal and state banking regulations that affect us are described under the heading "Item 1. Business-Regulation" in Item I of this Form 10-K. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations. Additionally, actions by regulatory agencies or significant litigation against us may lead to penalties that materially affect us. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These accounting changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes.
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Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
Competition with other financial institutions could adversely affect our profitability.

Although we consider ourselves competitive in our market areas, we face intense competition in both making loans and attracting deposits. Price competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability to compete successfully in our market areas.

We are subject to certain risks in connection with our use of technology.

Our security measures may not be sufficient to mitigate the risk of a cyber-attack . Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

Further, our cardholders use their debit and credit cards to make purchases from third parties or through third-party processing services. As such, we are subject to risk from data breaches of such third-party's information systems or their payment processors. Such a data security breach could compromise our account information. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for losses associated with reimbursing our clients for such fraudulent transactions on clients' card accounts, as well as costs incurred by payment card issuing banks and other third parties or may be subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. We may also incur other costs related to data security breaches, such as replacing cards associated with compromised card accounts. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs.

Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our clients' or counterparties' confidential information, including employees. The Company is continuously working to install new and upgrade its existing information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to further protect the Company against cyber risks and security breaches.

There continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our
 
40
information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for companies, including ours. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, some of our clients may have been affected by third-party breaches, which could increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation . Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our security measures may not protect us from system failures or interruptions . While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While the Company selects third-party vendors carefully, it does not control their actions. If our third-party providers encounter difficulties, including   those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct our business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third-party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. 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 identify 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. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President and Chief Executive Officer, and certain other employees. In addition, our success
 
41
has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors.

Our operations rely on numerous external vendors.

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by a third-party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors' performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

Our framework for managing risks may not be effective in mitigating risk and loss to us.

We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses which could have a material adverse effect on our financial condition and results of operations.

Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion challenges as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

We rely on dividends from the Bank for substantially all of our revenue at the holding company level.

We are an entity separate and distinct from our principal subsidiary, the Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. The Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock. 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.
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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 is also located in Vancouver, Washington (both offices are leased). At March 31, 2019, the Bank had 10 offices located in Clark County, Washington (five of which are leased), two offices in Klickitat County, Washington and one office in Skamania County, Washington. The Bank also has three offices in Multnomah County, Oregon, one leased office in Washington County, Oregon and one office in Marion County, Oregon. In addition, at March 31, 2019, the Trust Company had one office as part of the executive offices leased and one leased office in Clackamas County, Oregon.

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.

Item 4.  Mine Safety Disclosures

Not applicable.
 
 
 
43
PART II

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

The Company's common stock is traded on the Nasdaq Global Market under the symbol "RVSB." At March 31, 2019, there were 22,607,712 shares of Company common stock issued and outstanding, 595 stockholders of record and an estimated 2,776 holders in nominee or "street name".

Stock Repurchase

The Company may repurchase shares of its common stock 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. The Company did not repurchase any shares of its common stock during the years ended March 31, 2019, 2018 or 2017.

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.

Five-Year Stock Performance Graph

The following graph compares the cumulative total shareholder return on our common stock with the cumulative total return on the Standard & Poor's 500 Stock Index and The NASDAQ Bank Index. The graph assumes that total return includes the reinvestment of all dividends and that the value of the investment in Riverview's common stock and each index was $100 on March 31, 2014, and is the base amount used in the graph. The closing price of Riverview's common stock on March 31, 2019 was $7.31.
 
 

44

 
 
3/31/14*
3/31/15
3/31/16
3/31/17
3/31/18
3/31/19
               
Riverview Bancorp, Inc.
 
100.00
131.37
124.10
214.46
283.47
225.62
S & P 500
 
100.00
112.73
114.74
134.45
153.26
167.81
NASDAQ Bank
 
100.00
101.72
102.05
145.83
161.33
142.38

*$100 invested on 3/31/14 in stock or index-including reinvestment of dividends.

Copyright © 2019, Standard & Poor's, a division of S&P Global. All rights reserved.
www.researchdatagroup.com/S&P.htm
45
Item 6.  Selected Financial Data

The following condensed consolidated statements of operations and financial condition and selected performance ratios as of March 31, 2019, 2018, 2017, 2016 and 2015 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 Statements and Supplementary Data" included in this Form 10-K.

   
At March 31,
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
   
(In thousands)
 
FINANCIAL CONDITION DATA:
                             
                               
Total assets
 
$
1,156,921
   
$
1,151,535
   
$
1,133,939
   
$
921,229
   
$
858,750
 
Loans receivable, net
   
864,659
     
800,610
     
768,904
     
614,934
     
569,010
 
Loans held for sale
   
909
     
210
     
478
     
503
     
778
 
Investment securities available for sale
   
178,226
     
213,221
     
200,214
     
150,690
     
112,463
 
Investment securities held to maturity
   
35
     
42
     
64
     
75
     
86
 
Cash and cash equivalents
   
22,950
     
44,767
     
64,613
     
55,400
     
58,659
 
Deposits
   
925,068
     
995,691
     
980,058
     
779,803
     
720,850
 
Shareholders' equity
   
133,122
     
116,901
     
111,264
     
108,273
     
103,801
 
                                         
 
 
 
         Years Ended March 31,  
   
2019
   
2018
   
2017
   
2016
   
2015
 
   
(Dollars in thousands, except per share data)
 
OPERATING DATA:
                                       
                                         
Interest and dividend income
 
$
49,118
   
$
44,960
   
$
35,627
   
$
30,948
   
$
28,626
 
Interest expense
   
2,815
     
2,349
     
1,869
     
1,742
     
1,916
 
Net interest income
   
46,303
     
42,611
     
33,758
     
29,206
     
26,710
 
Provision for (recapture of) loan losses
   
50
     
-
     
-
     
(1,150
)
   
(1,800
)
Net interest income after provision for (recapture of) loan losses
   
46,253
     
42,611
     
33,758
     
30,356
     
28,510
 
Gains from sales of loans, securities and real estate owned
   
326
     
722
     
493
     
338
     
674
 
Other non-interest income
   
11,532
     
10,282
     
9,521
     
9,037
     
8,201
 
Non-interest expense
   
35,699
     
35,618
     
32,981
     
29,947
     
30,744
 
Income before income taxes
   
22,412
     
17,997
     
10,791
     
9,784
     
6,641
 
Provision for income taxes
   
5,146
     
7,755
     
3,387
     
3,426
     
2,150
 
Net income
 
$
17,266
   
$
10,242
   
$
7,404
   
$
6,358
   
$
4,491
 
 
Earnings per share                                         
Basic
 
$
0.76
   
$
0.45
   
$
0.33
   
$
0.28
   
$
0.20
 
Diluted
   
0.76
     
0.45
     
0.33
     
0.28
     
0.20
 
Dividends per share
   
0.15000
     
0.10500
     
0.08000
     
0.06500
     
0.01125
 

 

46

                               
 
At or For the Years Ended March 31,
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
     
KEY FINANCIAL RATIOS:
                             
Performance Ratios:
                             
Return on average assets
 
1.51
%
 
0.90
%
 
0.76
%
 
0.72
%
 
0.54
%
Return on average equity
 
13.86
   
8.78
   
6.66
   
5.93
   
4.42
 
Dividend payout ratio (1)
 
19.74
   
23.33
   
24.24
   
23.21
   
5.63
 
Interest rate spread
 
4.25
   
3.99
   
3.72
   
3.60
   
3.52
 
Net interest margin
 
4.38
   
4.08
   
3.79
   
3.67
   
3.59
 
Non-interest expense to average assets
 
3.13
   
3.15
   
3.38
   
3.39
   
3.70
 
Efficiency ratio (2)
 
61.38
   
66.43
   
75.35
   
77.62
   
86.40
 
Average equity to average assets
 
10.92
   
10.30
   
11.39
   
12.14
   
12.23
 
Asset Quality Ratios:
                             
Allowance for loan losses to
total loans at end of period
 
1.31
   
1.33
   
1.35
   
1.58
   
1.86
 
Allowance for loan losses to
   nonperforming loans
 
754.25
   
445.24
   
382.98
   
364.22
   
202.37
 
Net (recoveries) charge-offs to average outstanding
loans during the period
 
(0.08
)
 
(0.03
)
 
(0.10
)
 
(0.05
)
 
-
 
                               
Ratio of nonperforming assets
  to total assets
 
0.13
   
0.24
   
0.27
   
0.36
   
0.81
 
Ratio of nonperforming loans
to total loans
 
0.17
   
0.30
   
0.35
   
0.43
   
0.92
 
 
Capital Ratios:
                             
Total capital to risk-weighted assets
 
16.88
   
15.41
   
14.06
   
16.07
   
15.89
 
Tier 1 capital to risk-weighted assets
 
15.63
   
14.16
   
12.81
   
14.81
   
14.63
 
Common equity tier 1 capital to risk-weighted assets
 
15.63
   
14.16
   
12.81
   
14.81
   
14.63
 
Leverage ratio
 
11.56
   
10.26
   
10.21
   
11.18
   
10.89
 

(1)
Dividends per share divided by earnings per share
(2)
Non-interest expense divided by the sum of net interest income and non-interest income
47
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. This section contains certain financial information determined by methods other than in accordance with GAAP. These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company's performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets. As a result of the enactment of the Tax Act, the federal income tax rate for corporations was reduced from a maximum of 35% to 21%. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Critical Accounting Policies

The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company's Consolidated Financial Statements. The Company has identified 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 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.

Operating Strategy

Fiscal year 2019 marked the 96 th anniversary since the Bank began operations in 1923. The primary business strategy of the Company is to provide comprehensive banking and related financial services within its primary market area. The historical emphasis had previously 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, 2019, commercial and construction loans represented 89.5% of total loans. Commercial lending, including commercial real estate loans, typically has higher credit risk, greater interest margins and shorter terms than residential lending which can increase the loan portfolio's profitability.

The Company's goal is to deliver returns to shareholders by increasing higher-yielding assets (in particular, commercial real estate and commercial business loans), increasing core deposit balances, managing problem assets, reducing expenses, hiring experienced employees with a commercial lending focus and exploring expansion opportunities. The Company seeks to achieve these results by focusing on the following objectives:

Execution of our Business Plan . The Company is focused on increasing its loan portfolio, especially higher yielding commercial and construction loans, and its core deposits by expanding its customer base throughout its primary market areas. By emphasizing total relationship banking, the Company intends to deepen the relationships with its customers and increase individual customer profitability through cross-marketing programs, which allows the Company to better identify lending opportunities and services for customers. To build its core deposit base, the Company will continue to utilize additional product offerings, technology and a focus on customer service in working toward this goal. The Company will also continue to seek to expand its franchise through the selective acquisition of individual branches, loan purchases and whole bank transactions that meet its investment and market objectives, such as the February 2017 MBank transaction.

48
Maintaining Strong Asset Quality . The Company believes that strong asset quality is a key to long-term financial success. The Company has actively managed delinquent loans and nonperforming assets by aggressively pursuing the collection of consumer debts, marketing saleable properties upon foreclosure or repossession, and through work-outs of classified assets and loan charge-offs. In the past several years, the Company has applied more conservative and stringent underwriting practices to new loans, including, among other things, increasing the amount of required collateral or equity requirements, reducing loan-to-value ratios and increasing debt service coverage ratios resulting in improved credit metrics/asset quality. Although the Company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate, real estate construction and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, the Company intends to manage credit exposure through the use of experienced bankers in these areas and a conservative approach to its lending.

Implementation of a Profit Improvement Plan ("PIP") . The Company's PIP committee is comprised of several members of management and the Board of Directors to undertake several initiatives to reduce non-interest expense and continue its on-going efforts to identify cost saving opportunities throughout all aspects of the Company's operations. The PIP committee's mission is not only to find additional cost saving opportunities but also to search for and implement revenue enhancements and additional areas for improvement. As a result, the Company has improved its efficiency ratio over the last several years from 98.0% at March 31, 2014 to 61.4% at March 31, 2019.

Introduction of New Products and Services . 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. The Company continues to experience growth in customer use of its online banking services, where the Bank provides a full array of traditional cash management products as well as online banking products including mobile banking, mobile deposit, bill pay, e-statements, and text banking. The products are tailored to meet the needs of small to medium size businesses and households in the markets we serve. The Bank has implemented remote check capture at all of its branches and for selected customers of the Bank. The Company intends to selectively add other products to further diversify revenue sources and to capture more of each customer's banking relationship by cross selling loan and deposit products and additional services, including services provided through the Trust Company to increase its fee income. Assets under management by the Trust Company totaled $646.0 million and $484.3 million at March 31, 2019 and March 31, 2018, respectively. The Company offers a third-party identity theft product to its customers. The identity theft product assists our customers in monitoring their credit and includes an identity theft restoration service.

Attracting Core Deposits and Other Deposit Products . The Company offers personal checking, savings and money-market accounts, which generally are lower-cost sources of funds than certificates of deposit and are less likely to be withdrawn when interest rates fluctuate. To build its core deposit base, the Company has sought to reduce its dependence on traditional higher cost deposits in favor of stable lower cost core deposits to fund loan growth and decrease its reliance on other wholesale funding sources, including FHLB and FRB advances. The Company believes that its continued focus on building customer relationships will help to increase the level of core deposits and locally-based retail certificates of deposit. In addition, the Company intends to increase demand deposits by growing business banking relationships through expanded product lines tailored to meet its target business customers' needs. The Company maintains technology-based products to encourage the growth of lower cost deposits, such as personal financial management, business cash management, and business remote deposit products, that enable it to meet its customers' cash management needs and compete effectively with banks of all sizes. Core branch deposits decreased $71.1 million at March 31, 2019 compared to March 31, 2018 reflecting increased competition and pricing pressure for deposits over the last year.

Recruiting and Retaining Highly Competent Personnel with a Focus on Commercial Lending . The Company's ability to continue to attract and retain banking professionals with strong community relationships and significant knowledge of its markets will be a key to its success. The Company believes that it enhances its market position and adds profitable growth opportunities by focusing on hiring and retaining experienced bankers focused on owner occupied commercial real estate and commercial lending, and the deposit balances that accompany these relationships. The Company emphasizes to its employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with its customers. The goal is to compete with other financial service providers by relying on the strength of the Company's customer service and relationship banking approach. The Company believes that one of its strengths is that its employees are also shareholders through the Company's employee stock ownership ("ESOP") and 401(k) plans.

49
Comparison of Financial Condition at March 31, 2019 and 2018

Cash and cash equivalents, including interest-earning accounts, totaled $23.0 million at March 31, 2019 compared to $44.8 million at March 31, 2018. The decrease in cash balances was primarily the result of funding the increase in loans receivable. The Company's cash balances fluctuate based upon funding needs, and the Company will deploy a portion of excess cash balances to purchase investment securities to earn higher yields than the nominal yield earned on cash held in interest-earning accounts, based on the Company's asset/liability management program and liquidity objectives in order to maximize earnings. As a part of this strategy, the Company also invests a portion of its excess cash in short-term certificates of deposit held for investment. All of the certificates of deposit held for investment are fully insured by the FDIC. At March 31, 2019, certificates of deposits held for investment totaled $747,000 compared to $6.0 million at March 31, 2018.

Investment securities totaled $178.3 million and $213.3 million at March 31, 2019 and 2018, respectively. The decrease was due to the utilization of the cash proceeds from pay downs, calls and maturities to supplement the cash needed to fund loan growth.  During the fiscal year ended March 31, 2019, there were no purchases of investment securities. The Company primarily purchases a combination of securities backed by government agencies (FHLMC, FNMA, SBA or GNMA). At March 31, 2019, the Company determined that none of its investment securities required an OTTI charge. For additional information on the Company's investment securities, see Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Loans receivable, net, totaled $864.7 million at March 31, 2019, compared to $800.6 million at March 31, 2018, an increase of $64.0 million. The Company has had steady loan demand in its market areas and anticipates continued organic loan growth. The increase was mainly concentrated in real estate construction loans which increased $51.3 million or 129.6%. Due to the timing of the completion of these real estate construction projects, balances may fluctuate in these categories. Once these projects are completed, these loans will roll to permanent financing and be classified within a category under other real estate mortgage. In addition, commercial business loans increased $25.1 million, or 18.2%. Partially offsetting these increases was a decrease in consumer loans of $12.7 million, or 12.1%, as payoffs outpaced originations. The Company also purchases the guaranteed portion of SBA loans as a way to supplement loan originations, further diversify its loan portfolio and earn a higher yield than earned on its cash or short-term investments. These SBA loans are originated through another financial institution located outside the Company's primary market area. These loans are purchased with servicing retained by the seller. At March 31, 2019, the Company's purchased SBA loan portfolio was $67.9 million compared to $47.0 million at March 31, 2018. During the year ended March 31, 2019, the Bank purchased $28.6 million of SBA loans, including premiums.

Goodwill was $27.1 million at March 31, 2019 and 2018. For the year ended March 31, 2019, the Company performed its annual goodwill impairment test during the third quarter ended December 31, 2018 and determined that no impairment of goodwill existed. For additional information on our goodwill impairment testing, see "Goodwill Valuation" included in this Item 7.

Deposits decreased $70.6 million to $925.1 million at March 31, 2019 compared to $995.7 million at March 31, 2018. The decrease was due to increased competition and pricing pressures in the Company's market area . The Company had no wholesale-brokered deposits at March 31, 2019 and 2018. Core branch deposits accounted for 98.2% of total deposits at March 31, 2019 compared to 98.3% at March 31, 2018. The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.

FHLB advances increased to $56.6 million at March 31, 2019. There were no outstanding FHLB advances at March 31, 2018.  These advances were deployed to supplement the funding of loan originations and offset the decrease in deposit balances.

Shareholders' equity increased $16.2 million to $133.1 million at March 31, 2019 from $116.9 million at March 31, 2018. The increase was mainly attributable to net income of $17.3 million. The increase was partially offset by cash dividends declared of $3.4 million and a decrease in accumulated other comprehensive loss related to unrealized holding loss on securities available for sale, net of tax, of $2.1 million for the fiscal year ended March 31, 2019.

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 two reporting units, the Bank and the Trust Company, for purposes of evaluating goodwill for impairment. All of the Company's goodwill has been allocated to the Bank reporting unit. The Company performs an annual review in the third quarter of each fiscal year, or more frequently if
 
50
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 greater 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 Company performed its annual goodwill impairment test as of October 31, 2018. The goodwill impairment test involves a two-step process. Step one of the goodwill impairment test estimates the fair value of the reporting unit utilizing the allocation of corporate value approach, the income approach and the market approach in order to derive an enterprise value of the Company. The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized as the value of a company from the perspective of a controlling interest is generally higher than the widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transactional history. The income approach uses a reporting unit's projection of estimated operating results and cash flows that are 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. Assumptions used by the Company in its discounted cash flow model (income approach) included an annual revenue growth rate that approximated 6.9%, a net interest margin that approximated 4.3% and a return on assets that ranged from 1.33% to 1.53% (average of 1.42%). In addition to utilizing the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 14.90% utilized for our cash flow estimates and a terminal value estimated at 1.7 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 market approach estimates fair value by applying tangible book value 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. In applying the market approach method, the Company selected four publicly traded comparable institutions. 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 a market multiple of 1.3 times tangible book value. The Company calculated a fair value of its reporting unit of $254.0 million using the corporate value approach, $194.9 million using the income approach and $259.0 million using the market approach, with a final concluded value of $238.0 million, with primary weight given to the market approach. The results of the Company's step one test indicated that the reporting unit's fair value was greater than its carrying value and therefore no impairment of goodwill exists.

Even though the Company determined that there was no goodwill impairment, a decline in the value of its stock price as well as values of other financial institutions, declines in revenue for the Company beyond our current forecasts, significant adverse changes in the operating environment for the financial industry or an increase in the value of our assets without an increase in the value of the reporting unit 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.

51
Estimated Fair Value of Level 3 Assets

The Company determines the estimated fair value of certain assets that are classified as Level 3 under the fair value hierarchy established under GAAP. 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 estimated fair value of the assets. These Level 3 assets are certain loans measured for impairment 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 estimated fair values of these assets are determined using pricing models, discounted cash flow methodologies, appraisals, and other valuation methods in accordance with accounting standards, for which the determination of fair value requires significant management judgment or estimation.
Valuations using models or other techniques are dependent upon 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.

Certain loans included in the loan portfolio were deemed impaired at March 31, 2019. 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 by estimating the present value of expected future cash flows, discounted at the loan's effective interest rate.

For additional information on our Level 1, 2 and 3 fair value measurements see Note 17 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Comparison of Operating Results for the Years Ended March 31, 2019 and 2018

Net Income. Net income was $17.3 million, or $0.76 per diluted share, for the fiscal year ended March 31, 2019, compared to $10.2 million, or $0.45 per diluted share, for the fiscal year ended March 31, 2018.   The Company's earnings for the year ended March 31, 2019 compared to last year improved due to increases in both net interest income and non-interest income, partially offset by a slight increase in non-interest expense, as well as the impact of utilizing a lower effective tax rate due to the Tax Act. In addition, net income for the year ended March 31, 2018 was negatively affected due to the revaluation of deferred tax assets due to the lower federal corporate income tax rate included in the Tax Act, which resulted in a $1.6 million net increase to the Company's provision for income taxes.

Net Interest Income. The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on interest-earning assets and the interest paid on deposits and borrowings. When the rate earned on interest-earning assets equals or exceeds the rate paid on interest-bearing liabilities, this positive interest rate spread will generate net interest income. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies.

Net interest income for fiscal year 2019 increased $3.7 million, or 8.7%, to $46.3 million compared to $42.6 million in fiscal year 2018. The net interest margin for the fiscal year ended March 31, 2019 was 4.38% compared to 4.08% for the prior fiscal year. This increase in the net interest margin was primarily the result of the increase in the average balance of loans receivable as a result of organic loan growth.

Interest and Dividend Income. Interest and dividend income increased to $49.1 million for the fiscal year ended March 31, 2019 from $45.0 million for the fiscal year ended March 31, 2018 due primarily to increases in interest from loans receivable of $4.5 million. This increase was due to higher average balances for loans receivable as compared to the prior fiscal year. The average balance of net loans increased $54.9 million to $844.1 million for the fiscal year ended March 31, 2019 from $789.2 million for the prior fiscal year. The average yield on net loans was 5.23% for the fiscal year ended March 31, 2019 compared to 5.03% for the prior fiscal year.

Interest Expense. Interest expense for the fiscal year ended March 31, 2019 totaled $2.8 million, a $466,000 or 19.8% increase from $2.3 million for the fiscal year ended March 31, 2018. The increase in interest expense was primarily the result of an increase in FHLB advances and an interest rate increase related to the Company's variable rate subordinated debentures, which repriced quarterly based on the three-month LIBOR. The weighted average interest rate on other interest-bearing liabilities increased to 4.10% for the fiscal year ended March 31, 2019 compared to 3.85% for the prior fiscal year.
 
52
Interest expense on deposits decreased $212,000 due to the decrease in the average balance of interest-bearing deposits primarily as a result of the increased competition and pricing pressures in the Company's market area. The average balance of interest-bearing deposits decreased $39.7 million to $674.2 million for the fiscal year ended March 31, 2019 compared to $714.0 million for the fiscal year ended March 31, 2018. The weighted average interest rate on interest-bearing deposits was relatively unchanged, decreasing to 0.15% for the fiscal year ended March 31, 2019 from 0.17% for the prior fiscal year.

Provision for Loan Losses.
The provision for loan losses totaled $50,000 for the fiscal year ended March 31, 2019 compared to no provision for the fiscal year ended March 31, 2018. The increase in the provision for loan losses for the fiscal year 2019 was primarily due to the required provision related to the overall increase in the loan portfolio. The lack of a provision for loan losses for the fiscal year 2018 was based primarily upon net recoveries and the stabilization of real estate values in our market areas.

In accordance with GAAP, loans acquired from MBank were recorded at their estimated fair value, which resulted in a net discount to the loans' contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. However, we believe it should be considered when comparing certain financial ratios of the Company calculated in periods after the MBank transaction, compared to the same financial ratios of the Company in periods prior to the MBank transaction. For additional information, see Note 1 and Note 3 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K. At March 31, 2019, the Company had an allowance for loan losses of $11.5 million, or 1.31% of total loans, compared to $10.8 million, or 1.33% at March 31, 2018. Net recoveries for the years ended March 31, 2019 and 2018 were $641,000 and $238,000, respectively. Net recoveries to average net loans for the years ended March 31, 2019 and 2018 were (0.08)% and (0.03)%, respectively.

Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of March 31, 2019, the Company had identified $5.7 million of impaired loans. Because the significant majority of the impaired loans are collateral dependent, nearly all of the specific allowances are calculated based on the estimated fair value of the collateral. Of those impaired loans, $5.2 million have no specific valuation allowance as their estimated net collateral value is equal to or exceeds the carrying amount of the loan, which in some cases is the result of previous loan charge-offs. The remaining $416,000 have specific valuation allowances totaling $22,000. Charge-offs on these impaired loans totaled $83,000 from their original loan balances. Based on a comprehensive analysis, management deemed the allowance for loan losses adequate to cover probable losses inherent in the loan portfolio at March 31, 2019. See Note 6 of the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding the allowance for loan losses.

Non-Interest Income. Non-interest income increased $854,000 to $11.9 million for the year ended March 31, 2019 from $11.0 million for fiscal year 2018. The increase in non-interest income was primarily due to the increase in fees and service charges and asset management fees of $920,000 and $343,000, respectively. These increases were partially offset by a decrease in net gains on sales of loans held for sale of $324,000 for the year ended March 31, 2019 compared to the same prior fiscal year reflecting the decline in loans originated for sale.

Non-Interest Expense. Non-interest expense increased $81,000 to $35.7 million for the fiscal year ended March 31, 2019 compared to $35.6 million for the fiscal year ended March 31, 2018. The increase for the fiscal year March 31, 2019 was due to an increase in professional fees of $245,000 and salaries and employee benefits of $577,000 for the year ended March 31, 2019 compared to the prior fiscal year. Offsetting these increases was a decrease in other non-interest expense primarily due to the $355,000 gain on sale of the land and building, which occurred in December 2018, related to the Longview branch closure.

Income Taxes. The provision for income taxes was $5.1 million and $7.8 million for the fiscal years ended March 31, 2019 and 2018, respectively.   Although income before income taxes increased, the provision for income taxes decreased as a result of utilizing a lower effective federal corporate income tax rate in addition to a one-time net charge to the provision for income taxes of $1.6 million related to the revaluation of the deferred tax assets and liabilities, as a result of the Tax Act.  The effective tax rate was 23.0% for the year ended March 31, 2019 compared to 43.1% for the year ended March 31, 2018. At March 31, 2019, the Company had a deferred tax asset of $4.2 million. As of March 31, 2019, management deemed that a deferred tax asset valuation allowance related to the Company's deferred tax asset was not necessary. See Note 13 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.

53
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. Non-accruing loans were included in the average loan amounts outstanding. Loan fees, net, of $1.5 million, $1.4 million and $1.3 million were included in interest income for the years ended March 31, 2019, 2018 and 2017, respectively.
 
   
Years Ended March 31,
 
   
2019
   
2018
   
2017
 
   
Average
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
 
$
663,225
   
$
35,725
     
5.39
%
 
$
629,153
   
$
31,914
     
5.07
%
 
$
547,609
   
$
26,609
     
4.86
%
Non-mortgage loans
   
180,917
     
8,462
     
4.68
     
160,051
     
7,745
     
4.84
     
115,460
     
5,000
     
4.33
 
Total net loans (1)
   
844,142
     
44,187
     
5.23
     
789,204
     
39,659
     
5.03
     
663,069
     
31,609
     
4.77
 
                                                                         
Investment securities (2)
   
199,463
     
4,647
     
2.33
     
214,723
     
4,786
     
2.23
     
175,862
     
3,589
     
2.04
 
Daily interest-earning assets
   
64
     
1
     
1.56
     
104
     
-
     
-
     
238
     
-
     
-
 
Other earning assets
   
15,394
     
328
     
2.13
     
40,876
     
558
     
1.37
     
51,547
     
443
     
0.86
 
Total interest-earning assets
   
1,059,063
     
49,163
     
4.64
     
1,044,907
     
45,003
     
4.31
     
890,716
     
35,641
     
4.00
 
                                                                         
Non-interest-earning assets:
                                                                       
Office properties and equipment, net 
     15,485                        15,888                        14,435                  
Other non-interest-earning assets
   
66,142
                     
71,648
                     
70,906
                 
Total assets
 
$
1,140,690
                   
$
1,132,443
                   
$
976,057
                 
                                                                         
Interest-bearing liabilities:
                                                                       
Savings accounts
 
$
136,720
   
$
145
     
0.11
%
 
$
132,376
   
$
133
     
0.10
%
 
$
106,324
   
$
110
     
0.10
%
Interest checking accounts
   
180,256
     
101
     
0.06
     
170,124
     
100
     
0.06
     
151,801
     
98
     
0.06
 
Money market accounts
   
252,202
     
302
     
0.12
     
275,092
     
335
     
0.12
     
252,040
     
309
     
0.12
 
Certificates of deposit
   
105,049
     
448
     
0.43
     
136,370
     
640
     
0.47
     
118,769
     
634
     
0.53
 
Total interest-bearing deposits
   
674,227
     
996
     
0.15
     
713,962
     
1,208
     
0.17
     
628,934
     
1,151
     
0.18
 
                                                                         
Other interest-bearing liabilities
   
44,368
     
1,819
     
4.10
     
29,668
     
1,141
     
3.85
     
25,977
     
718
     
2.76
 
Total interest-bearing liabilities
   
718,595
     
2,815
     
0.39
     
743,630
     
2,349
     
0.32
     
654,911
     
1,869
     
0.28
 
                                                                         
Non-interest-bearing liabilities:
                                                                       
Non-interest-bearing deposits
   
289,707
                     
264,128
                     
202,376
                 
Other liabilities
   
7,846
                     
8,016
                     
7,560
                 
Total liabilities
   
1,016,148
                     
1,015,774
                     
864,847
                 
Shareholders' equity
   
124,542
                     
116,669
                     
111,210
                 
Total liabilities and shareholders'
  equity
 
$
1,140,690
                   
$
1,132,443
                   
$
976,057
                 
Net interest income
         
$
46,348
                   
$
42,654
                   
$
33,772
         
Interest rate spread
                   
4.25
%
                   
3.99
%
                   
3.72
%
Net interest margin
                   
4.38
%
                   
4.08
%
                   
3.79
%
Ratio of average interest-earning assets
to average interest-bearing liabilities
                   
147.38
%
                   
140.51
%
                   
136.01
%
Tax-Equivalent Adjustment (3)
         
$
45
                   
$
43
                   
$
14
         
                                                                         
(1) Includes non-accrual loans.
 
(2) For purposes of the computation of average yield on investment securities available for sale, historical cost balances were utilized; therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders' equity.
 
(3) Tax-equivalent adjustment relates to non-taxable investment interest income and preferred equity securities dividend income.
 
 
54
Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the fiscal year ended March 31, 2019 compared to the fiscal year ended March 31, 2018, and the fiscal year ended March 31, 2018 compared to the fiscal year ended March 31, 2017. 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). Variances that were insignificant have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change (in thousands). The changes noted in the table below include tax equivalent adjustments, and as a result, will not agree to the amounts reflected on the Company's consolidated statements of income for the categories that have been adjusted to reflect tax equivalent income.


   
Year Ended March 31,
 
   
2019 vs. 2018
   
2018 vs. 2017
 
                                     
   
Increase (Decrease) Due to
         
Increase (Decrease) Due to
       
                                     
               
Total
                   
(Dollars in thousands)
 
Volume
   
Rate
   
Increase
(Decrease)
   
Volume
   
Rate
   
Total
Increase
 
       
Interest Income:
                                   
Mortgage loans
 
$
1,760
   
$
2,051
   
$
3,811
   
$
4,112
   
$
1,193
   
$
5,305
 
Non-mortgage loans
   
980
     
(263
)
   
717
     
2,103
     
642
     
2,745
 
Investment securities (1)
   
(349
)
   
210
     
(139
)
   
842
     
355
     
1,197
 
Daily interest-earning
   
-
     
1
     
1
     
-
     
-
     
-
 
Other earning assets
   
(451
)
   
221
     
(230
)
   
(107
)
   
222
     
115
 
Total interest income
   
1,940
     
2,220
     
4,160
     
6,950
     
2,412
     
9,362
 
                                                 
Interest Expense:
                                               
Savings accounts
   
3
     
9
     
12
     
23
     
-
     
23
 
Interest checking accounts
   
1
     
-
     
1
     
2
     
-
     
2
 
Money market accounts
   
(33
)
   
-
     
(33
)
   
26
     
-
     
26
 
Certificates of deposit
   
(140
)
   
(52
)
   
(192
)
   
84
     
(78
)
   
6
 
Other interest-bearing liabilities
   
600
     
78
     
678
     
112
     
311
     
423
 
Total interest expense
   
431
     
35
     
466
     
247
     
233
     
480
 
Net interest income
 
$
1,509
   
$
2,185
   
$
3,694
   
$
6,703
   
$
2,179
   
$
8,882
 
                                                 
(1) Interest on municipal securities is presented on a fully tax-equivalent basis.

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 loans, consumer loans that are adjustable rate and other short-term 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 selling most long term, fixed-rate, one-to-four family mortgage loan originations. The strategy for liabilities has been to shorten the maturities for both deposits and borrowings. The longer-term objective is to increase the proportion of noninterest bearing demand deposits, low interest bearing demand deposits, money market accounts, and savings deposits relative to certificates of deposit to reduce our overall cost of funds.

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 the loan portfolio diminish in value. However, the value of the servicing loan 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. See "Item 1.  Business – Lending Activities – Mortgage Loan Servicing."

Consumer loans, such as home equity lines of credit and installment loans, commercial loans 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 $499.6 million or 57.02% of total loans at March 31, 2019 as compared to $477.1 million or 58.80% at March 31, 2018. 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 – Real Estate Construction " and "- Lending Activities - Consumer Lending."

The Company may also invest 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, 2019, the combined investment portfolio carried at $178.3 million had an average life of 4.5 years. Adjustable rate mortgage-backed securities totaled $14.7 million at March 31, 2019 compared to $17.8 million at March 31, 2018. See Item 1. "Business – Investment Activities" for additional information.

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, to 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.

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 and other wholesale facilities. These sources of funds may be used on a long or short-term basis to compensate for a reduction in other sources of funds or on a long-term basis to support lending activities.

The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, proceeds from the sale of loans, maturing securities, FHLB advances and FRB borrowings. 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.

The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations, deposit withdrawals and continuing operations, satisfy other financial commitments and take advantage of investment opportunities. During the year ended March 31, 2019, the Bank used its sources of funds primarily to fund loan commitments. At March 31, 2019, cash and cash equivalents, certificates of deposit held for investment and available for sale investment securities totaled $202.0 million, or 17.5% of total assets. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs; however, its primary liquidity management practice is to increase or decrease short-term borrowings, including FRB borrowings and FHLB advances. At March 31, 2019, the Bank had no advances from the FRB and had a borrowing capacity of $58.3 million from the FRB, subject to sufficient collateral. At March 31, 2019, FHLB advances totaled $56.6 million and the Bank had an available borrowing capacity of $186.8 million, subject to sufficient collateral and stock investment. At March 31, 2019, the Bank had sufficient unpledged collateral to allow it to utilize its available borrowing capacity from the FRB and the FHLB. Borrowing capacity may, however, fluctuate based on acceptability and risk rating of loan collateral and counterparties could adjust discount rates applied to such collateral at their discretion.

56
An additional source of wholesale funding includes brokered certificates of deposit. While the Company has utilized brokered deposits from time to time, the Company historically has not extensively relied on brokered deposits to fund its operations. At March 31, 2019 and 2018, the Bank had no wholesale brokered deposits. The Bank also participates in the CDARS and ICS deposit products, which allow the Company to accept deposits in excess of the FDIC insurance limit for that depositor and obtain "pass-through" insurance for the total deposit. The Bank's CDARS and ICS balances were $14.5 million, or 1.6% of total deposits, and $23.6 million, or 2.4% of total deposits, at March 31, 2019 and 2018, respectively. In addition, the Bank is enrolled in an internet deposit listing service. Under this listing service, the Bank may post time deposit rates on an internet site where institutional investors have the ability to deposit funds with the Bank. At March 31, 2019 and 2018, the Company had no deposits through this listing service. Although the Company did not originate any internet based deposits during the year ended March 31, 2019, the Company may do so in the future consistent with its asset/liability objectives. The combination of all the Bank's funding sources gives the Bank available liquidity of $605.3 million, or 52.5% of total assets at March 31, 2019.

At March 31, 2019 , the Company had total commitments of $183.0 million, which includes commitments to extend credit of $40.7 million, unused lines of credit totaling $77.0 million, undisbursed construction loans totaling $62.8 million, and standby letters of credit totaling $2.4 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, 2019 totaled $59.5 million. Historically, the Bank 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 $48.6 million at March 31, 2019.

Riverview Bancorp, Inc., as a separate legal entity from the Bank, must provide for its own liquidity. Sources of capital and liquidity for Riverview Bancorp, Inc. include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At March 31, 2019, Riverview Bancorp, Inc. had $4.2 million in cash to meet its liquidity needs.

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.

New Accounting Pronouncements

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

Contractual Obligations

The following table shows the contractual obligations by expected period. Further discussion of commitments is included in Note 19 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

At March 31, 2019 , scheduled maturities of certificates of deposit, future operating minimum lease commitments, capital lease obligations and subordinated debentures were as follows (in thousands):

   
Within
1 Year
   
Over
1 - 3 Years
   
Over
3 - 5 Years
   
After
5 Years
   
Total
Balance
 
Certificates of deposit
 
$
59,487
   
$
19,273
   
$
4,709
   
$
2,537
   
$
86,006
 
Operating leases
   
1,492
     
1,582
     
1,062
     
1,453
     
5,589
 
Capital lease
   
34
     
86
     
115
     
2,168
     
2,403
 
Junior subordinates debentures
   
-
     
-
     
-
     
27,836
     
27,836
 
Total other contractual obligations
 
$
61,013
   
$
20,941
   
$
5,886
   
$
33,994
   
$
121,834
 

The Company is periodically a 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 future 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.

57
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 consolidated balance sheets. 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, 2019, the Company had commercial loan commitments of $9.5 million and undisbursed commercial lines of credit of $51.8 million. Commercial real estate mortgage loan commitments totaled $7.0 million and the undisbursed balance of commercial real estate mortgage loans was $5.0 million at March 31, 2019. At March 31, 2019, construction loan commitments totaled $19.6 million and undisbursed construction loans totaled $62.8 million. Unused lines of credit secured by land development loans totaled $529,000. Real estate one-to-four family loan commitments totaled $4.7 million and unused lines of credit secured by real estate one-to-four family loans totaled $18.6 million at March 31, 2019. Other installment loan commitments totaled $19,000 and unused lines of credit on other installment loans totaled $1.1 million at March 31, 2019. At March 31, 2019, the Company had standby letters of credit totaling $2.4 million. For additional information regarding future financial commitments, this discussion and analysis should be read in conjunction with Note 19 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
 
 
 
 

58
Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities.   Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution's earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution's assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance.

Our Asset/Liability Management Committee ("ALCO") is responsible for monitoring and reviewing asset/liability processes and interest rate risk exposure to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the ALCO, which is comprised of members of our senior management. The ALCO closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances.

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".

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 retaining in its loan portfolio, short–term loans and loans with interest rates subject to periodic adjustments.

Consumer and commercial loans are originated and held in the loan 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 short or long-term maturities. FRB borrowings 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 earnings that 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.
 
59
 
The following table shows the approximate percentage change in net interest income as of March 31, 2019 over a 12 and 24-month period under several rate scenarios:
 
 
Change in interest rates (1)
 
Percent change in net
interest income (12 months)
 
Percent change in net
interest income (24 months)
         
Up 300 basis points
 
(5.5)%
 
3.3%
Up 200 basis points
 
(3.6)%
 
2.5%
Up 100 basis points
 
(1.5)%
 
1.9%
Base case
 
-
 
0.3%
Down 100 basis points
 
(0.7)%
 
(4.6)%
Down 200 basis points
 
(1.8)%
 
(8.8)%
         
(1)   The target federal funds rate as of March 31, 2019 was 2.5%. No rates in this model are allowed to go below zero and therefore a down 300 basis point scenario would not be plausible.

Our consolidated 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. Net interest income will increase in year two as our interest-earning assets are expected to continue to reprice faster than interest-bearing liabilities. In a falling interest rate environment, our net interest income will be negatively impacted as our deposit costs are currently relatively low and interest rates paid cannot decrease significantly. 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 that 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.

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, 2019. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments (dollars in thousands).

   
Average
Rate
   
Within
1 Year
   
After
1 - 3
Years
   
After
3 - 5
Years
   
After
5 - 10
Years
   
Beyond
10
Years
   
Total
 
                                           
Interest-Sensitive Assets:
           
                                           
Loans receivable
   
4.94
%
 
$
48,639
   
$
48,451
   
$
85,521
   
$
453,499
   
$
240,006
   
$
876,116
 
Investment securities and other
                                                       
interest-earning assets
   
2.31
     
27,536
     
21,919
     
58,946
     
76,450
     
-
     
184,851
 
FHLB stock
   
2.46
     
1,458
     
1,093
     
1,093
     
-
     
-
     
3,644
 
Total assets
         
$
77,633
   
$
71,463
   
$
145,560
   
$
529,949
   
$
240,006
   
$
1,064,611
 
                                                         
Interest-Sensitive Liabilities:
                                                       
                                                         
Interest checking
   
0.06
   
$
73,356
   
$
55,016
   
$
55,016
   
$
-
   
$
-
   
$
183,388
 
Savings accounts
   
0.10
     
55,001
     
41,251
     
41,251
     
-
     
-
     
137,503
 
Money market accounts
   
0.12
     
93,327
     
69,995
     
69,995
     
-
     
-
     
233,317
 
Certificate accounts
   
0.53
     
59,487
     
19,273
     
4,709
     
2,521
     
16
     
86,006
 
FHLB advances
   
2.62
     
56,586
     
-
     
-
     
-
     
-
     
56,586
 
Subordinated debentures
   
4.22
     
-
     
-
     
-
     
-
     
27,836
     
27,836
 
Obligations under capital lease
   
7.16
     
34
     
86
     
115
     
438
     
1,730
     
2,403
 
Total liabilities
           
337,791
     
185,621
     
171,086
     
2,959
     
29,582
     
727,039
 
Interest sensitivity gap
           
(260,158
)
   
(114,158
)
   
(25,526
)
   
526,990
     
210,424
   
$
337,572
 
Cumulative interest sensitivity gap
         
$
(260,158
)
 
$
(374,316
)
 
$
(399,842
)
 
$
127,148
   
$
337,572
         
Off-Balance Sheet Items:
                                                       
                                                         
Commitments to extend credit
         
$
40,737
   
$
-
   
$
-
   
$
-
   
$
-
   
$
40,737
 
Unused lines of credit
         
$
139,842
   
$
-
   
$
-
   
$
-
   
$
-
   
$
139,842
 
60

 
Item 8.   Financial Statements and Supplementary Data

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements for the Years Ended March 31, 2019, 2018 and 2017
Report of Independent Registered Public Accounting Firm


TABLE OF CONTENTS
 
   
 
Page
   
Report of Independent Registered Public Accounting Firm
62
   
Consolidated Balance Sheets as of March 31, 2019 and 2018
64
   
Consolidated Statements of Income for the Years Ended March 31, 2019, 2018 and 2017
65
   
Consolidated Statements of Comprehensive Income for the Years Ended March 31, 2019, 2018 and 2017
66
   
Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2019, 2018 and 2017
67
   
Consolidated Statements of Cash Flows for the Years Ended March 31, 2019, 2018 and 2017
68
   
Notes to Consolidated Financial Statements
69
 

 
61
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Riverview Bancorp, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Riverview Bancorp, Inc. and Subsidiary (collectively, "the Company") as of March 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2019, and the related notes (collectively referred to as "the financial statements"). We have also audited the Company's internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America (U.S.). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Basis for Opinion

The Company's management is responsible for these financial statements, 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 Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

62
Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




We have served as the Company's auditor since 2015.

Lake Oswego, Oregon
June 14, 2019
63
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2019 AND 2018

(In thousands, except share and per share data)
 
2019
   
2018
 
ASSETS
           
Cash and cash equivalents (including interest-earning accounts of $5,844 and $30,052)
 
$
22,950
   
$
44,767
 
Certificates of deposit held for investment
   
747
     
5,967
 
Loans held for sale
   
909
     
210
 
Investment securities:
               
Available for sale, at estimated fair value
   
178,226
     
213,221
 
Held to maturity, at amortized cost (estimated fair value of $35 and $43)
   
35
     
42
 
Loans receivable (net of allowance for loan losses of $11,457 and $10,766)
   
864,659
     
800,610
 
Real estate owned ("REO")
   
-
     
298
 
Prepaid expenses and other assets
   
4,596
     
3,870
 
Accrued interest receivable
   
3,919
     
3,477
 
Federal Home Loan Bank ("FHLB") stock, at cost
   
3,644
     
1,353
 
Premises and equipment, net
   
15,458
     
15,783
 
Deferred income taxes, net
   
4,195
     
4,813
 
Mortgage servicing rights, net
   
296
     
388
 
Goodwill
   
27,076
     
27,076
 
Core deposit intangible ("CDI"), net
   
920
     
1,103
 
Bank owned life insurance ("BOLI")
   
29,291
     
28,557
 
TOTAL ASSETS
 
$
1,156,921
   
$
1,151,535
 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Deposits
 
$
925,068
   
$
995,691
 
Accrued expenses and other liabilities
   
12,536
     
9,391
 
Advance payments by borrowers for taxes and insurance
   
631
     
637
 
FHLB advances
   
56,586
     
-
 
Junior subordinated debentures
   
26,575
     
26,484
 
Capital lease obligation
   
2,403
     
2,431
 
Total liabilities
   
1,023,799
     
1,034,634
 
                 
COMMITMENTS AND CONTINGENCIES (See Note 19)
               
                 
SHAREHOLDERS' EQUITY:
               
Serial preferred stock, $.01 par value; 250,000 shares authorized; issued and outstanding: none
   
-
     
-
 
Common stock, $.01 par value; 50,000,000 shares authorized
               
March 31, 2019 – 22,607,712 shares issued and outstanding
   
226
     
226
 
March 31, 2018 – 22,570,179 shares issued and outstanding
               
Additional paid-in capital
   
65,094
     
64,871
 
Retained earnings
   
70,428
     
56,552
 
Accumulated other comprehensive loss
   
(2,626
)
   
(4,748
)
Total shareholders' equity
   
133,122
     
116,901
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,156,921
   
$
1,151,535
 

  See accompanying notes to consolidated financial statements .
64
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2019, 2018 AND 2017

(In thousands, except share and per share data)
 
2019
   
2018
   
2017
 
                   
INTEREST AND DIVIDEND INCOME:
                 
Interest and fees on loans receivable
 
$
44,187
   
$
39,659
   
$
31,609
 
Interest on investment securities – taxable
   
4,456
     
4,648
     
3,550
 
Interest on investment securities – nontaxable
   
146
     
95
     
25
 
Other interest and dividends
   
329
     
558
     
443
 
Total interest and dividend income
   
49,118
     
44,960
     
35,627
 
                         
INTEREST EXPENSE:
                       
Interest on deposits
   
996
     
1,208
     
1,151
 
Interest on borrowings
   
1,819
     
1,141
     
718
 
Total interest expense
   
2,815
     
2,349
     
1,869
 
Net interest income
   
46,303
     
42,611
     
33,758
 
Provision for loan losses
   
50
     
-
     
-
 
Net interest income after provision for loan losses
   
46,253
     
42,611
     
33,758
 
                         
NON-INTEREST INCOME:
                       
Fees and service charges
   
6,699
     
5,779
     
5,177
 
Asset management fees
   
3,791
     
3,448
     
2,988
 
Net gains on sales of loans held for sale
   
317
     
641
     
656
 
BOLI
   
734
     
819
     
760
 
Other, net
   
317
     
317
     
433
 
Total non-interest income, net
   
11,858
     
11,004
     
10,014
 
                         
NON-INTEREST EXPENSE:
                       
Salaries and employee benefits
   
22,320
     
21,743
     
19,356
 
Occupancy and depreciation
   
5,334
     
5,454
     
4,819
 
Data processing
   
2,467
     
2,313
     
2,111
 
Amortization of CDI
   
183
     
232
     
27
 
Advertising and marketing
   
769
     
747
     
754
 
FDIC insurance premium
   
326
     
476
     
356
 
State and local taxes
   
651
     
605
     
609
 
Telecommunications
   
353
     
417
     
317
 
Professional fees
   
1,426
     
1,181
     
1,628
 
Litigation settlement
   
-
     
-
     
500
 
Other
   
1,870
     
2,450
     
2,504
 
Total non-interest expense
   
35,699
     
35,618
     
32,981
 
                         
INCOME BEFORE INCOME TAXES
   
22,412
     
17,997
     
10,791
 
PROVISION FOR INCOME TAXES
   
5,146
     
7,755
     
3,387
 
NET INCOME
 
$
17,266
   
$
10,242
   
$
7,404
 
                         
Earnings per common share:
                       
Basic
 
$
0.76
   
$
0.45
   
$
0.33
 
Diluted
   
0.76
     
0.45
     
0.33
 
Weighted average number of common shares outstanding:
                       
Basic
   
22,588,395
     
22,531,480
     
22,478,306
 
Diluted
   
22,659,594
     
22,623,455
     
22,548,340
 

See accompanying notes to consolidated financial statements.
65
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 2019, 2018 AND 2017

(In thousands)
 
2019
   
2018
   
2017
 
                   
Net income
 
$
17,266
   
$
10,242
   
$
7,404
 
                         
Other comprehensive income (loss):
                       
Net unrealized holding gain (loss) from available for sale investment securities arising
                       
    during the period, net of tax of ($629), $871 and $1,581, respectively
   
2,122
     
(2,719
)
   
(2,872
)
                         
Reclassification adjustment for other than temporary impairment ("OTTI") of available for
                       
    sale investment security included in income, net of tax of $0, $0 and ($85) respectively
   
-
     
-
     
155
 
                         
Reclassification adjustment of net gain from sale of available for sale investment
                       
securities included in income, net of tax of $0, $0 and $29, respectively
   
-
     
-
     
(53
)
Total other comprehensive income (loss), net
   
2,122
     
(2,719
)
   
(2,770
)
                         
Total comprehensive income, net
 
$
19,388
   
$
7,523
   
$
4,634
 
                         
 
See accompanying notes to consolidated financial statements.

66
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2019, 2018 AND 2017
 
    Common Stock                
Unearned
Shares
Issued to
Employee
Stock  
   
Accumulated 
       
(In thousands, except share data)
 
Shares 
    Amount    
Additional
Paid-In
Capital
   
Retained
Earnings
   
Ownership
Plan
("ESOP")
   
Other
Comprehensive
Income (Loss)
   
Total
 
                                           
Balance April 1, 2016
   
22,507,890
   
$
225
   
$
64,418
   
$
42,728
   
$
(181
)
 
$
1,083
   
$
108,273
 
                                                         
Net income
   
-
     
-
     
-
     
7,404
     
-
     
-
     
7,404
 
Cash dividend on common stock ($0.08
   per share)
   
-
     
-
     
-
     
(1,797
)
   
-
     
-
     
(1,797
)
Exercise of stock options
   
3,000
     
-
     
11
     
-
     
-
     
-
     
11
 
Earned ESOP shares
   
-
     
-
     
39
     
-
     
104
     
-
     
143
 
Other comprehensive loss, net
   
-
     
-
     
-
     
-
     
-
     
(2,770
)
   
(2,770
)
                                                         
Balance March 31, 2017
   
22,510,890
     
225
     
64,468
     
48,335
     
(77
)
   
(1,687
)
   
111,264
 
                                                         
Net income
   
-
     
-
     
-
     
10,242
     
-
     
-
     
10,242
 
Cash dividend on common stock ($0.105
   per share)
   
-
     
-
     
-
     
(2,367
)
   
-
     
-
     
(2,367
)
Exercise of stock options
   
59,289
     
1
     
244
     
-
     
-
     
-
     
245
 
Stock-based compensation expense
   
-
     
-
     
88
     
-
     
-
     
-
     
88
 
Reclassification of certain stranded income
   tax effects as a result of change in federal
   corporate income tax rate (see Note 1)
-
     
-
     
-
     
342
     
-
     
(342
)
   
-
 
Earned ESOP shares
   
-
     
-
     
71
     
-
     
77
     
-
     
148
 
Other comprehensive loss, net
   
-
     
-
     
-
     
-
     
-
     
(2,719
)
   
(2,719
)
                                                         
Balance March 31, 2018
   
22,570,179
     
226
     
64,871
     
56,552
     
-
     
(4,748
)
   
116,901
 
                                                         
Net income
   
-
     
-
     
-
     
17,266
     
-
     
-
     
17,266
 
Cash dividend on common stock ($0.15
   per share)
   
-
     
-
     
-
     
(3,390
)
   
-
     
-
     
(3,390
)
Exercise of stock options
   
37,533
     
-
     
179
     
-
     
-
     
-
     
179
 
Stock-based compensation expense
   
-
     
-
     
44
     
-
     
-
     
-
     
44
 
Other comprehensive income, net
   
-
     
-
     
-
     
-
     
-
     
2,122
     
2,122
 
                                                         
Balance March 31, 2019
   
22,607,712
   
$
226
   
$
65,094
   
$
70,428
   
$
-
   
$
(2,626
)
 
$
133,122
 
                                                         
See accompanying   notes to consolidated financial statements.

67
RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2019, 2018 AND 2017

(In thousands)
 
2019
   
2018
   
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net income
 
$
17,266
   
$
10,242
   
$
7,404
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
   
2,718
     
2,917
     
2,746
 
Purchased loans amortization (accretion), net
   
(147
)
   
(277
)
   
441
 
Provisions for loan losses
   
50
     
-
     
-
 
Provision (benefit) for deferred income taxes
   
(11
)
   
3,668
     
3,103
 
Expense related to ESOP
   
-
     
148
     
143
 
Stock-based compensation expense
   
44
     
88
     
-
 
Increase in deferred loan origination fees, net of amortization
   
498
     
498
     
543
 
Origination of loans held for sale
   
(11,105
)
   
(20,502
)
   
(21,032
)
Proceeds from sales of loans held for sale
   
10,579
     
21,204
     
21,477
 
Writedown of REO
   
-
     
-
     
30
 
Loss on impairment of investment security
   
-
     
-
     
240
 
Net gains on sales of loans held for sale, sales of investment securities and sale of REO
   
(682
)
   
(725
)
   
(731
)
Income from BOLI
   
(734
)
   
(819
)
   
(760
)
BOLI death benefit in excess of cash surrender value
   
-
     
-
     
(423
)
Changes in certain other assets and liabilities:
                       
Prepaid expenses and other assets
   
(868
)
   
(212
)
   
(369
)
Accrued interest receivable
   
(442
)
   
(536
)
   
(291
)
Accrued expenses and other liabilities
   
2,988
     
(3,755
)
   
5,538
 
Net cash provided by operating activities
   
20,154
     
11,939
     
18,059
 
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Loan repayments (originations), net
   
(34,427
)
   
11,156
     
(37,103
)
Purchases of loans receivable
   
(29,929
)
   
(43,016
)
   
(5,746
)
Principal repayments on investment securities available for sale
   
26,519
     
28,569
     
29,782
 
Purchases of investment securities available for sale
   
-
     
(47,494
)
   
(92,418
)
Proceeds from calls, maturities, and sales of investment securities available for sale
   
10,000
     
950
     
7,261
 
Principal repayments on investment securities held to maturity
   
7
     
22
     
11
 
Purchases of premises and equipment and capitalized software
   
(1,046
)
   
(753
)
   
(598
)
Redemption of certificates of deposit held for investment
   
5,220
     
5,075
     
5,727
 
Purchases of FHLB stock, net
   
(2,291
)
   
(172
)
   
(121
)
Cash acquired, net of cash consideration paid in business combination
   
-
     
-
     
15,116
 
Proceeds from death benefit on BOLI
   
-
     
-
     
1,236
 
Proceeds from sales of REO and premises and equipment
   
976
     
81
     
262
 
Net cash used in investing activities
   
(24,971
)
   
(45,582
)
   
(76,591
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net increase (decrease) in deposits
   
(70,568
)
   
15,771
     
69,470
 
Dividends paid
   
(3,163
)
   
(2,140
)
   
(1,799
)
Proceeds from borrowings
   
326,956
     
55,980
     
23,200
 
Repayment of borrowings
   
(270,370
)
   
(55,980
)
   
(23,200
)
Net increase (decrease) in advance payments by borrowers for taxes and insurance
   
(6
)
   
(56
)
   
84
 
Principal payments on capital lease obligation
   
(28
)
   
(23
)
   
(21
)
Proceeds from exercise of stock options
   
179
     
245
     
11
 
Net cash provided by (used in) financing activities
   
(17,000
)
   
13,797
     
67,745
 
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(21,817
)
   
(19,846
)
   
9,213
 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
44,767
     
64,613
     
55,400
 
CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
22,950
   
$
44,767
   
$
64,613
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                       
Cash paid during the year for:
                       
Interest
 
$
2,686
   
$
2,176
   
$
1,655
 
Income taxes
   
6,877
     
3,280
     
285
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
                       
Dividends declared and accrued in other liabilities
 
$
904
   
$
677
   
$
450
 
Other comprehensive income (loss)
   
2,751
     
(3,590
)
   
(4,295
)
Income tax effect related to other comprehensive income (loss)
   
(629
)
   
871
     
1,525
 
Business combinations (See Note 3)
                       
Fair value of assets acquired
   
-
     
-
     
(145,386
)
Fair value of liabilities assumed
   
-
     
-
     
134,810
 

See accompanying   notes to consolidated financial statements.
68
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2019, 2018 and 2017  

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of Riverview Bancorp, Inc.; its wholly-owned subsidiary, Riverview Community Bank (the "Bank"); and the Bank's wholly-owned subsidiaries, Riverview Services, Inc. and Riverview Trust Company (the "Trust Company") (collectively referred to as the "Company"). All inter-company transactions and balances have been eliminated in consolidation.

At March 31, 2019 and 2018, the Trust Company had 2,500 Trust Company stock options outstanding which had been granted to the President and Chief Executive Officer of the Trust Company. During the year ended March 31, 2019 and 2018, the Trust Company incurred $44,000 and $88,000, respectively, of stock-based compensation expense related to these options. No Trust Company stock options were exercised during the years ended March 31, 2019, 2018 and 2017.

On February 17, 2017, Riverview Bancorp, Inc. and the Bank completed a purchase and assumption transaction in which the Bank purchased certain assets and assumed certain liabilities of MBank, the wholly-owned subsidiary of Merchants Bancorp (the "MBank transaction"). In addition, as part of the MBank transaction, Riverview Bancorp, Inc. assumed the obligations of Merchant Bancorp's trust preferred securities. The MBank transaction was accounted for as a business combination pursuant to accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP"). The results of operations of the acquired assets and assumed liabilities have been included in the Company's consolidated financial statements as of and for the periods since the acquisition date. See Note 3 for additional discussion.

The Company has three subsidiary grantor trusts which were established in connection with the issuance of trust preferred securities (see Note 12). In accordance with GAAP, the accounts and transactions of the trusts are not included in the accompanying consolidated financial statements.

Nature of Operations – The Bank is a community-oriented financial institution which operates 18 branches in rural and suburban communities in southwest Washington State and Multnomah, Washington 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 make various commercial business, commercial real estate, land, multi-family real estate, real estate construction and consumer loans. Additionally, the Trust Company offers trust and investment services and 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.

In September 2018, the Bank completed a purchase and assumption transaction in which all of the Bank's Longview, Washington branch deposits were sold to a community bank headquartered in Longview. The Bank sold approximately $3.2 million of deposits and recognized a gain on sale of these deposits of approximately $70,000, which is included in other non-interest income in the accompanying consolidated statements of income for the year ended March 31, 2019. This purchase and assumption transaction did not include the sale of any loans, or the exchange of any assets or liabilities other than deposits. The Bank subsequently sold the Longview branch land and building in December 2018 and recognized a $355,000 gain on sale, which is included in other non-interest expense in the accompanying consolidated statement of income for the year ended March 31, 2019.

Business segments – The Company's operations are managed along two operating segments, consisting of banking operations performed by the Bank and trust and investment services performed by the Trust Company. While the chief operating decision maker uses financial information related to these segments to analyze business performance and allocate resources, the trust and investment services segment does not meet the quantitative threshold under GAAP to be considered a reportable segment. As such, these operating segments are aggregated into a single reportable operating segment in the consolidated financial statements. No revenues are derived from foreign countries.

Use of Estimates in the Preparation of Consolidated Financial Statements – The preparation of consolidated financial statements in conformity with 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 consolidated financial statements and the reported amounts of related revenue and expense during the reporting period. Actual results could differ from those estimates.
 
69

Cash and Cash Equivalents – Cash and cash equivalents include amounts on hand, due from banks and interest-earning deposits in other banks. Cash and cash equivalents have a maturity of 90 days or less at the time of purchase.

Certificates of Deposit Held for Investment – Certificates of deposit held for investment include amounts invested with financial institutions at a stated interest rate and maturity date. Early withdrawal penalties apply; however, the Company plans to hold these investments to maturity.

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 estimated fair value. Estimated fair 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 these loans sold. The Company capitalizes mortgage servicing rights ("MSRs") acquired through 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 net gains on sales of loans held for sale. The MSRs are amortized in proportion to and over the estimated period of the net servicing income and such amortization is reflected as a component of loan servicing income and is included in the consolidated statements of income in other non-interest income.

Investment Securities – Investments in debt securities are classified as held to maturity when the Company has the ability and positive intent to hold such securities to maturity. Investments in debt securities held to maturity are carried at amortized cost. Unrealized losses on investments in debt securities held to maturity due to fluctuations in fair value are recognized when it is determined that a credit-related other than temporary decline in value has occurred. Investments in debt securities bought and held principally for the purpose of sale in the near-term are classified as trading securities. Investments in debt securities that the Company intends to hold for an indefinite period, but not necessarily to maturity, are classified as available for sale. Such debt securities may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates and similar factors. Investments in debt securities available for sale are reported at estimated fair value. Unrealized gains and losses on investment securities available for sale, net of the related deferred tax effect, are included in total comprehensive income and are reported as a net amount in a separate component of shareholders' equity entitled "accumulated other comprehensive income (loss)." Realized gains and losses on sales of investments in debt securities available for sale, determined using the specific identification method, are included in earnings on the trade date. Amortization of premiums and accretion of discounts are recognized in interest income over the period to contractual maturity or expected call, if sooner. The Company's investment portfolio consists of debt securities and does not include any equity securities.

The Company analyzes investments in debt securities for OTTI on a quarterly basis. OTTI is separated into a credit component and noncredit component. Credit component losses are reported in non-interest income when the present value of expected future cash flows is less than the amortized cost. Noncredit component losses are recorded in other comprehensive income (loss) when the Company (1) does not intend to sell the security or (2) is not more likely than not to have to sell the security prior to the security's anticipated recovery. If the Company is likely to sell an investment in a debt security, any noncredit component losses are recognized and are reported in non-interest income.

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

Loans are reviewed regularly and it is the Company's general policy that a loan is past due when it is 30 days to 89 days delinquent. In general, 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 unrecoverable accrued interest is established and charged against operations. As a general practice, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cost recovery method. Also as a general practice, a loan is not removed from non-accrual status until all delinquent principal, interest and late fees have been brought current and the borrower has demonstrated a history of performance based upon the contractual terms of the note. A history of repayment performance generally would be a minimum of six months.

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.

Acquired Loans Purchased loans, including loans acquired in business combinations, are recorded at their estimated fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for
 
70
loan losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The excess of the cash flows expected to be collected over a PCI loan's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the PCI loan using the effective yield method. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the Company's estimate of the credit losses expected to occur and would be considered in determining the estimated fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording an allowance for loan losses. The Company had no PCI loans as of March 31, 2019 and 2018.

For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording an allowance for loan losses.

Allowance for Loan Losses – The allowance for loan losses is maintained at a level sufficient to provide for estimated 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 collectability 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 loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value (less estimated selling costs, if applicable) of the impaired loan is lower than the carrying value of that loan.

The general component covers non-impaired loans based on the Company's risk rating system and historical loss experience adjusted for qualitative factors. The Company calculates its historical loss rates using the average of the last four quarterly 24-month periods. The Company calculates and applies its historical loss rates by individual loan types in its loan portfolio. These historical loss rates are adjusted for qualitative and environmental factors.

An unallocated component is maintained to cover uncertainties that the Company believes have resulted in incurred losses that have not yet been allocated to specific elements of the general and specific components of the allowance for loan 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 loan 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 loan portfolio. The appropriate allowance level is estimated based upon factors and trends identified by the Company as of the date of the filing of the consolidated financial statements.

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 Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or 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.

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Typically, factors used in determining if a loan is impaired include, but are not limited to, whether the loan is 90 days or more delinquent, internally designated as substandard or worse, on non-accrual status or represents a troubled debt restructuring ("TDR"). The majority of the Company's impaired loans are considered collateral dependent. When a loan is considered collateral dependent, impairment is measured using the estimated value of the underlying collateral, less any prior liens, and when applicable, less estimated selling costs. For impaired loans that are not collateral dependent, impairment is measured using the present value of expected future cash flows, discounted at the loan's original effective interest rate. When the estimated net realizable value of the impaired loan
 
71
is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized by adjusting an allocation of the allowance for loan losses. Subsequent to the initial allocation of allowance to the individual loan, the Company may conclude that it is appropriate to record a charge-off of the impaired portion of the loan. When a charge-off is recorded, the loan balance is reduced and the specific allowance is eliminated. Generally, when a collateral dependent loan is initially measured for impairment and has not had an appraisal of the collateral in the last six months, the Company obtains an updated market valuation. Subsequently, the Company generally obtains an updated market valuation of the collateral on an annual basis. The collateral valuation may occur more frequently if the Company determines that there is an indication that the market value may have declined.

In accordance with the Company's policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. Consumer installment loans delinquent six months or more that have not received at least 75% of their required monthly payments in the last 90 days are charged-off. In addition, loans discharged in bankruptcy proceedings are charged-off. Loans under bankruptcy protection with no payments received for four consecutive months are charged-off. The outstanding balance of a secured loan that is in excess of the net realizable value of the underlying collateral is generally charged-off if no payments are received for four to five consecutive months. However, charge-offs are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential sources of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is charged off.

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.

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, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, 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 affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company 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 accrued expenses and other liabilities in 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 and is initially recorded at the estimated fair value of the properties, less estimated costs of disposal. At the time of foreclosure, specific charge-offs are taken against the allowance for loan losses based upon a detailed analysis of the fair value of collateral on the underlying loans on which the Company is in the process of foreclosing. Subsequently, the Company performs an evaluation of the properties and records a valuation allowance with an offsetting charge to REO expenses for any declines in value. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. The amounts the Company will ultimately recover and record in the accompanying consolidated financial statements from the disposition of 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. Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed.
 
72

Federal Home Loan Bank Stock – The Bank, as a member of the Federal Home Loan Bank of Des Moines ("FHLB"), is required to maintain a minimum investment in capital stock of the FHLB based on specific percentages of its outstanding FHLB advances. The Company's investment in FHLB stock is carried at cost, which approximates fair value. The Company views its investment in FHLB stock as a long-term investment. Accordingly, when evaluating FHLB stock for impairment, the value is determined based on the ultimate redemption of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate redemption value is influenced by criteria such as: (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount of the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. The Company evaluated its investment in FHLB stock for OTTI, consistent with its accounting policy. Based on the Company's evaluation, the Company determined there is not any OTTI on its FHLB stock at March 31, 2019.

Premises and Equipment – Premises and equipment are stated at cost less accumulated depreciation and amortization. Leasehold improvements are amortized over the estimated term of the related lease or the estimated useful life of the improvements, whichever is less. Depreciation is generally computed on the straight-line method over the following estimated useful lives: buildings and improvements – up to 45 years; furniture and equipment – 3 to 20 years; and leasehold improvements – 15 to 25 years, or estimated lease term if shorter. Gains or losses on dispositions are reflected in earnings. 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.

Assets held under the Company's capitalized lease, net of accumulated amortization, are included in premises and equipment. The assets held under the capitalized lease are amortized on a straight-line basis over the lease term and the amortization is included in depreciation and amortization expense.

MSRs – The Company services certain loans that it has originated and sold to the Federal Home Loan Mortgage Corporation ("FHLMC"). Loan servicing includes collecting payments; remitting funds to investors, insurance companies and tax authorities; collecting delinquent payments; and foreclosing on properties when necessary. Fees earned for servicing loans for the FHLMC are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred. In addition, the Company has recorded MSRs, which represent the rights to service loans.

The Company records its originated MSRs at fair value in accordance with GAAP, which requires the Company to allocate the total cost of all mortgage loans sold between 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 the coupon interest rate and the 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 loan portfolio based on various factors, such as servicing costs, servicing income, expected prepayment speeds, discount rate, loan maturity and interest rate. Market sources are used to determine prepayment speeds, ancillary income, servicing cost and pre-tax required yield. 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 MSRs in proportion to and over the period of estimated net servicing income.

MSRs are reviewed quarterly for impairment based on their estimated fair value. The estimated fair value of the MSRs, for the purposes of impairment, is measured using the methods described above. Impairment losses are recognized through a valuation allowance for each impaired stratum, with any associated provision recorded as a component of loan servicing income.

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Business Combinations, CDI and Goodwill – GAAP requires the total purchase price in a business combination to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets. Subsequent adjustments to the initial allocation of the purchase price may be made related to fair value estimates for which all relevant information has not been obtained, known, or discovered relating to the acquired entity during the allocation period (which is the period of time required to identify and measure the estimated fair values of the assets acquired and liabilities assumed in a business combination). The allocation period is generally limited to one year following consummation of a business combination.

CDI represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment and recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. The Company recorded CDI of approximately $1.36 million in connection with the assumption of the MBank deposits during the year ended March 31, 2017 (see Note 3). At both March 31, 2019 and 2018, gross CDI was $1.36 million. At March 31, 2019 and 2018, accumulated amortization was $443,000 and $260,000, respectively. The amortization expense for CDI in future years is estimated to be $160,000, $140,000, $125,000, $116,000, $108,000 and $271,000 for the years ended March 31, 2020, 2021, 2022, 2023, 2024 and thereafter, respectively.

Goodwill and certain other intangibles generally arise from business combinations. Goodwill and other intangibles generated from business combinations that are deemed to have indefinite lives are not subject to amortization and are instead tested for impairment not less than annually. 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.

BOLI – BOLI policies are recorded at their cash surrender value less applicable surrender charges. Income from BOLI is recognized when earned.

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

Transfers of financial assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Trust Assets – Assets held by the Trust Company 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 $646.0 million and $484.3 million were held in trust as of March 31, 2019 and 2018, respectively.

Earnings Per Share – GAAP 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. The Company's basic earnings per share is computed by dividing net 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 ESOP. The Company's 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.

 
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Stock-Based Compensation – The Company measures compensation cost for all stock-based awards based on the grant-date fair value of the awards and recognizes compensation cost over the service period of stock-based awards. The fair value of stock options is determined using the Black-Scholes valuation model.

ESOP – The Company sponsors a leveraged ESOP; however, all ESOP debt was fully repaid during the year ended March 31, 2018. As shares were released, compensation expense was recorded equal to the then current market price of the shares and the shares became available for earnings per share calculations. The Company recorded cash dividends on unallocated shares as a reduction of debt and accrued interest. See Note 14 for further discussion.

New Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606"). ASC 606 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company adopted ASC 606 on April 1, 2018 using the modified retrospective approach. Therefore, the comparative information for prior periods has not been adjusted and continues to be reported under superseded ASC 605. There was no cumulative effect adjustment as of April 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the year ended March 31, 2019; however, additional disclosures were incorporated in the Notes to the Consolidated Financial Statements upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Company elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less. See Note 18 for additional discussion.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 generally requires equity investments – except those accounted for under the equity method of accounting or those that result in consolidation of the investee – to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU on April 1, 2018. As required by ASU 2016-01, the fair value disclosure for loans receivable was computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 17.

In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02 created FASB ASC Topic 842 ("ASC 842") related to leases and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities in the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ASU 2016-02 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of ASU 2016-02 is permitted. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) Targeted Improvements" ("ASU 2018-11"). The amendments in this ASU provide entities with an additional (and optional) transition method to adopt ASU 2016-02.  Under this new transition method, an
 
75
entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP. The Company will adopt the provisions of ASC 842 effective April 1, 2019 utilizing the transition method allowed under ASU 2018-11 and will not restate comparative periods. The Company will elect the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease. The Company will also elect to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. The Company expects the adoption of ASC 842 will result in an increase in other assets and an increase in other liabilities of approximately $5.6 million. The Company does not expect the adoption of ASC 842 to have a material impact on its future consolidated statements of income.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 replaces the existing incurred losses methodology for estimating allowances with a current expected credit losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of carrying amount. ASU 2016-13 also changes the accounting for PCI debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, management anticipates the allowance for loan losses will increase as a result of the implementation of ASU 2016-13; however, until its evaluation is complete, the magnitude of the increase will not be known.

In January 2017, the FASB issued ASU 2017-04, "Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of ASU 2017-04 is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, "Receivables – Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-08"). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, "Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") (see Note 13). The amount of the reclassification would be calculated on the basis of the difference between the historical and newly enacted tax rates for deferred tax liabilities and assets related to items within AOCI. ASU 2018-02 was effective for fiscal years beginning after December 15, 2018, and early adoption was permitted. ASU 2018-02 should be applied either in the period of adoption or retrospectively to each
 
76
period in which the effect of the change in the federal corporate tax rate is recognized. The Company elected to early adopt ASU 2018-02 and, as a result, reclassified $342,000 of stranded tax effects from AOCI to retained earnings in the fourth quarter of the fiscal year ended March 31, 2018.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820 – Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. In addition, ASU 2018-13 adds new disclosure requirements for Level 3 measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). The amendments in ASU 2018-15 broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in ASU 2018-15 result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in ASU 2018-15. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-15 is not expected to have a material impact on the Company's future consolidated financial statements.

Reclassifications – Certain prior period amounts have been reclassified to conform to the current period presentation; such reclassifications had no effect on previously reported net income or total shareholders' equity.

2.
RESTRICTED ASSETS

Regulations of the Board of Governors of the Federal Reserve System require that the Bank maintain minimum reserve balances either on hand or on deposit with the Federal Reserve Bank of San Francisco ("FRB") based on a percentage of deposits. The amounts of such balances as of March 31, 2019 and 2018 were $1.8 million and $1.7 million, respectively, which were in compliance with the minimum reserve requirements.

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3.
BUSINESS COMBINATIONS

On February 17, 2017, the Company acquired certain assets and assumed certain liabilities of Merchants Bancorp and its wholly-owned subsidiary, MBank. MBank provided community banking services to individuals and businesses from banking offices in the Portland, Oregon metropolitan area. As a result of the MBank transaction, the Company has increased its presence in the Portland, Oregon metropolitan area and further diversified its loan, customer and deposit base. Total consideration paid under the MBank transaction consisted of $12.1 million in cash. There were no transfers of common stock or other equity instruments in connection with the MBank transaction, and the Company did not obtain any equity interests in Merchants Bancorp or MBank.

The acquired assets and assumed liabilities were recorded in the Company's consolidated balance sheets at their estimated fair values as of the February 17, 2017 transaction date, and the related results of operations have been included in the Company's consolidated statements of income since the transaction date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the transaction consists largely of the synergies and economies of scale expected from combining the operations of the Company and the acquired business.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as estimated credit losses, prepayments or early withdrawals, and other factors. The most significant of those determinations related to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. In accordance with GAAP, there was no carry-over of MBank's previously established allowance for loan losses. Goodwill is expected to be fully deductible for income tax purposes as, under the terms of the MBank transaction, the Company purchased certain assets and assumed certain liabilities of MBank but did not acquire any equity or other ownership interests.

The following table summarizes the fair value of consideration transferred, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction (in thousands):

   
At February 17, 2017
 
   
Book
Value
   
Fair Value
Adjustment
   
Estimated
Fair Value
 
                   
Cash consideration transferred
             
$
12,080
 
                     
Recognized amounts of identifiable assets acquired and liabilities assumed
                   
Identifiable assets acquired
                   
Cash and cash equivalents
 
$
27,196
   
$
-
     
27,196
 
Loans receivable
   
115,283
     
(3,258
)
   
112,025
 
CDI
   
-
     
1,363
     
1,363
 
Premises and equipment
   
1,769
     
399
     
2,168
 
BOLI
   
2,113
     
-
     
2,113
 
Accrued interest receivable and other assets
   
431
     
90
     
521
 
Total identifiable assets acquired
   
146,792
     
(1,406
)
   
145,386
 
                         
Liabilities assumed
                       
Deposits
   
130,572
     
235
     
130,807
 
Junior subordinated debentures
   
5,155
     
(1,468
)
   
3,687
 
Accrued expenses and other liabilities
   
293
     
23
     
316
 
Total liabilities assumed
   
136,020
     
(1,210
)
   
134,810
 
Total identifiable net assets acquired
 
$
10,772
   
$
(196
)
   
10,576
 
Goodwill recognized
                 
$
1,504
 

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The acquired loan portfolio was valued using Level 3 inputs (see Note 17) and included the use of present value techniques (including cash flow estimates) and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values.

The operating results of the Company for the years ended March 31, 2019, 2018 and 2017 included operating results produced by the MBank transaction for the years ended March 31, 2019 and 2018 and the period from February 17, 2017 to March 31, 2017, respectively. Disclosure of the amount of MBank's revenue and net income (excluding integration costs) included in the Company's consolidated statements of income is impracticable due to the integration of the operations and accounting for the transaction.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the years ended March 31, 2017 and 2016. This unaudited estimated pro forma financial information was calculated as if MBank had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of MBank with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the transaction occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, the Company expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the transaction, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented (in thousands):

   
For the Year Ended March 31,
 
Unaudited Pro Forma
 
2017
   
2016
 
             
Total revenues (net interest income plus non-interest income)
 
$
49,290
   
$
45,261
 
Net income
   
9,277
     
8,260
 

The following table shows the impact of the acquisition-related expenses related to the MBank transaction for the year ended March 31, 2017 to the various components of noninterest expense (in thousands):

Salaries and employee benefits
 
$
26
 
Occupancy and depreciation
   
6
 
Data processing
   
63
 
Professional fees
   
653
 
Total impact of acquisition related costs to noninterest expense
 
$
748
 
         

4.
INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities consisted of the following at the dates indicated (in thousands):
 
   
Amortized
Cost
   
Gross
Unrealized Gains
   
Gross
Unrealized Losses
   
Estimated Fair
Value
 
March 31, 2019
                       
Available for sale:
                       
Municipal securities
 
$
8,885
   
$
30
   
$
(34
)
 
$
8,881
 
Agency securities
   
12,426
     
22
     
(107
)
   
12,341
 
Real estate mortgage investment conduits (1)
   
40,835
     
-
     
(673
)
   
40,162
 
Residential mortgage-backed securities (1)
   
77,402
     
7
     
(1,588
)
   
75,821
 
Other mortgage-backed securities (2)
   
42,133
     
12
     
(1,124
)
   
41,021
 
Total available for sale
 
$
181,681
   
$
71
   
$
(3,526
)
 
$
178,226
 
                                 
Held to maturity:
                               
Residential mortgage-backed securities (3)
 
$
35
   
$
-
   
$
-
   
$
35
 
                                 
(1) Comprised of FHLMC, Federal National Mortgage Association ("FNMA") and Ginnie Mae ("GNMA") issued securities.
 
(2) Comprised of U.S. Small Business Administration ("SBA") issued securities and commercial real estate ("CRE") secured securities issued by FNMA.
 
(3) Comprised of FHLMC and FNMA issued securities.
 
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Amortized
Cost
   
Gross
Unrealized Gains
   
Gross
Unrealized Losses
   
Estimated Fair
Value
 
March 31, 2018
                       
Available for sale:
                       
Municipal securities
 
$
9,041
   
$
-
   
$
(309
)
 
$
8,732
 
Agency securities
   
22,412
     
1
     
(311
)
   
22,102
 
Real estate mortgage investment conduits (1)
   
48,310
     
-
     
(1,355
)
   
46,955
 
Residential mortgage-backed securities (1)
   
91,786
     
3
     
(2,715
)
   
89,074
 
Other mortgage-backed securities (2)
   
47,878
     
1
     
(1,521
)
   
46,358
 
Total available for sale
 
$
219,427
   
$
5
   
$
(6,211
)
 
$
213,221
 
                                 
Held to maturity:
                               
Residential mortgage-backed securities (3)
 
$
42
   
$
1
   
$
-
   
$
43
 
   
(1) Comprised of FHLMC, FNMA and GNMA issued securities.
 
(2) Comprised of SBA issued securities and CRE secured securities issued by FNMA.
 
(3) Comprised of FHLMC and FNMA issued securities.
 

The contractual maturities of investment securities as of March 31, 2019 are as follows (in thousands):
 
   
Available for Sale
   
Held to Maturity
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Due in one year or less
 
$
4,961
   
$
4,949
   
$
-
   
$
-
 
Due after one year through five years
   
8,585
     
8,505
     
32
     
32
 
Due after five years through ten years
   
48,050
     
47,373
     
-
     
-
 
Due after ten years
   
120,085
     
117,399
     
3
     
3
 
Total
 
$
181,681
   
$
178,226
   
$
35
   
$
35
 

Expected maturities of investment securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

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

   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
 
March 31, 2019
                                   
                                     
Available for sale:
                                   
Municipal securities
 
$
-
   
$
-
   
$
6,554
   
$
(34
)
 
$
6,554
   
$
(34
)
Agency securities
   
-
     
-
     
6,861
     
(107
)
   
6,861
     
(107
)
Real estate mortgage investment conduits (1)
   
-
     
-
     
40,126
     
(673
)
   
40,126
     
(673
)
Residential mortgage-backed securities (1)
   
-
     
-
     
74,288
     
(1,588
)
   
74,288
     
(1,588
)
Other mortgage-backed securities (2)
   
-
     
-
     
40,409
     
(1,124
)
   
40,409
     
(1,124
)
Total available for sale
 
$
-
   
$
-
   
$
168,238
   
$
(3,526
)
 
$
168,238
   
$
(3,526
)
                                                 
March 31, 2018
                                               
                                                 
Available for sale:
                                               
Municipal securities
 
$
6,626
   
$
(236
)
 
$
2,106
   
$
(73
)
 
$
8,732
   
$
(309
)
Agency securities
   
5,301
     
(112
)
   
15,797
     
(199
)
   
21,098
     
(311
)
Real estate mortgage investment conduits (1)
   
31,922
     
(774
)
   
14,983
     
(581
)
   
46,905
     
(1,355
)
Residential mortgage-backed securities (1)
   
50,941
     
(1,192
)
   
37,823
     
(1,523
)
   
88,764
     
(2,715
)
Other mortgage-backed securities (2)
   
16,355
     
(382
)
   
29,351
     
(1,139
)
   
45,706
     
(1,521
)
Total available for sale
 
$
111,145
   
$
(2,696
)
 
$
100,060
   
$
(3,515
)
 
$
211,205
   
$
(6,211
)
                                                 
(1) Comprised of FHLMC, FNMA and GNMA issued securities.
 
(2) Comprised of SBA and CRE secured securities issued by FNMA.
 

80
The unrealized losses on the Company's investment securities were primarily attributable to increases in market interest rates subsequent to their purchase by the Company. The Company expects the fair value of these securities to recover as the securities approach their maturity dates or sooner if market yields for such securities decline. The Company does not believe that these securities are other than temporarily impaired because of their credit quality or related to any issuer or industry specific event. Based on management's evaluation and intent, the unrealized losses related to the investment securities in the above tables are considered temporary.

The Company had no sales and realized no gains or losses on sales of investment securities for the years ended March 31, 2019 and 2018. Gross realized gains on sales of investment securities available for sale totaled $82,000 for the year ended March 31, 2017 and were recorded in other non-interest income in the 2017 consolidated statement of income. The income tax of $29,000 related to these realized gains was recorded in the provision for income taxes in the consolidated statement of income for the year ended March 31, 2017.

Investment securities available for sale with an amortized cost of $5.8 million and $3.7 million and a fair value of $5.7 million and $3.6 million at March 31, 2019 and 2018, respectively, were pledged as collateral for government public funds held by the Bank.

5.
LOANS RECEIVABLE

Loans receivable at March 31, 2019 and 2018 are reported net of deferred loan fees totaling $4.0 million and $3.6 million, respectively. Loans receivable are also reported net of discounts and premiums, totaling $1.5 million and $1.8 million, respectively, as of March 31, 2019, compared to $2.2 million and $2.0 million, respectively, as of March 31, 2018. Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated (in thousands):


   
March 31,
2019
   
March 31,
2018
 
Commercial and construction
           
Commercial business
 
$
162,796
   
$
137,672
 
Commercial real estate
   
461,432
     
450,597
 
Land
   
17,027
     
15,337
 
Multi-family
   
51,570
     
63,080
 
Real estate construction
   
90,882
     
39,584
 
Total commercial and construction
   
783,707
     
706,270
 
                 
Consumer
               
Real estate one-to-four family
   
84,053
     
90,109
 
Other installment (1)
   
8,356
     
14,997
 
Total consumer
   
92,409
     
105,106
 
                 
Total loans
   
876,116
     
811,376
 
                 
Less: Allowance for loan losses
   
11,457
     
10,766
 
Loans receivable, net
 
$
864,659
   
$
800,610
 
                 
(1) Consists primarily of purchased automobile loans totaling $5.8 million and $12.9 million at March 31, 2019 and 2018, respectively.
 

The Company's loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that the Company would be able to collect all contractually required payments, are referred to collectively as "loans". The Company originates commercial business, commercial real estate, land, multi-family real estate, real estate construction, residential real estate and other consumer loans. At March 31, 2019 and 2018, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the mortgage loans in the Company's loan 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. Loans and extensions of credit outstanding at one time to one borrower are generally limited by federal regulations to 15% of the Bank's shareholders' equity, excluding AOCI. 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. At March 31, 2019, loans carried at $513.3 million were pledged as collateral to the FHLB and FRB for borrowing arrangements.

81
Aggregate loans to officers and directors, all of which are current, consist of the following for the periods indicated (in thousands):


   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
Beginning balance
 
$
981
   
$
859
   
$
841
 
Originations
   
359
     
526
     
228
 
Principal repayments
   
(562
)
   
(404
)
   
(210
)
Ending balance
 
$
778
   
$
981
   
$
859
 

Loan segment risk characteristics: The Company considers its loan classes to be the same as its loan segments. The following are loan segment risk characteristics of the Company's loan portfolio:

Commercial business – Commercial business loans are primarily made based on the operating cash flows of the borrower or conversion of working capital assets to cash and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers may be volatile and the value of the collateral securing these loans may be difficult to measure. Most commercial business loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and generally include a personal guarantee based on a review of personal financial statements. The Company will extend some short-term loans on an unsecured basis to highly qualified borrowers. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use. Accordingly, the repayment of a commercial business loan depends primarily on the credit-worthiness of the borrower (and any guarantors), while the liquidation of collateral is a secondary and potentially insufficient source of repayment. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of the borrowers and the guarantors.

Commercial real estate – The Company originates commercial real estate loans within its primary market areas secured by properties such as office buildings, warehouse/industrial, retail, assisted living, single purpose facilities, and other commercial properties. These are cash flow loans that share characteristics of both real estate and commercial business loans. The primary source of repayment is cash flow from the operation of the collateral property and secondarily through liquidation of the collateral. These loans are generally higher risk than other classifications of loans in that they typically involve higher loan amounts, are dependent on the management experience of the owners, and may be adversely affected by conditions in the real estate market or the economy. Owner-occupied commercial real estate loans are generally of lower credit risk than non-owner occupied commercial real estate loans as the borrowers' businesses are likely dependent on the properties. Underwriting for these loans is primarily dependent on the repayment capacity derived from the operation of the occupying business rather than rents paid by third-parties. The Company attempts to mitigate these risks by generally limiting the maximum loan-to-value ratio to 65%-80% depending on the property type and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Land – The Company has historically originated loans for the acquisition of raw land upon which the purchaser can then build or make improvements necessary to build or sell as improved lots. Currently, the Company is originating new land loans on a limited basis. Loans secured by undeveloped land or improved lots involve greater risks than one-to-four family residential mortgage loans because these loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default or foreclosure, the Company may incur a loss. The Company attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on raw land loans to 65% and on improved land loans to 75%.

82
Multi-family – The Company originates loans secured by multi-family dwelling units (more than four units). These loans involve a greater degree of risk than one-to-four family residential mortgage loans as these loans are usually greater in amount, dependent on the cash flow capacity of the project, and are more difficult to evaluate and monitor. Repayment of loans secured by multi-family properties typically depends on the successful operation and management of the properties. Consequently, repayment of such loans may be affected by adverse conditions in the real estate market or economy. The Company attempts to mitigate these risks by thoroughly evaluating the global financial condition of the borrower, the management experience of the borrower, and the quality of the collateral property securing the loan.

Real estate construction- – The Company originates construction loans for one-to-four family residential, multi-family, and commercial real estate properties. The one-to-four family residential construction loans include construction of consumer custom homes whereby the home buyer is the borrower as well as speculative and presold loans for home builders. Speculative one-to four-family construction loans are loans for which the home builder does not have, at the time of the loan origination, a signed contract with a home buyer who has a commitment for permanent financing with the Company or another lender for the finished home. The home buyer may be identified either during or after the construction period. Multi-family construction loans are originated to construct apartment buildings and condominium projects. Commercial construction loans are originated to construct properties such as office buildings, retail rental space and mini-storage facilities, and assisted living facilities. All construction loans are short-term and generally the rate is variable in nature. Construction lending can involve a higher level of risk than other types of lending because funds are advanced based on a prospective value of the project at completion, the total estimated construction cost of the project, and the borrowers' equity at risk. Additionally, the repayment of the loan is conditional on the success of the ultimate project which is subject to interest rate changes, governmental regulations, general economic conditions and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company's estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder's ability to sell the property prior to the time that the construction loan is due. Although the nature of real estate construction loans is such that they are generally more difficult to evaluate and monitor, the Company attempts to closely monitor the construction project by on-site inspections. The Company also attempts to mitigate the risks of construction lending by adhering to its underwriting policies, disbursement procedures and monitoring practices.

Real estate one-to-four family – The Company originates both fixed-rate and adjustable-rate loans secured by one- to-four family residences located in its primary market areas. The majority of the fixed-rate one-to-four family loans are sold in the secondary market for asset/liability management purposes and to generate non-interest income. The Company's lending policies generally limit the maximum loan-to-value on one-to-four family loans to 80% of the lesser of the appraised value or the purchase price. However, the Company usually obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property. Terms of maturity typically range from 15 to 30 years. The Company also originates home equity lines of credit and second mortgage loans. Home equity lines of credit and second mortgage loans have a greater credit risk than one-to-four family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company. The Company attempts to mitigate residential lending risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the borrower.

Other installment – The Company originates other consumer loans, which include automobile, boat, motorcycle, recreational vehicle, savings account and unsecured loans. As of March 31, 2019 and 2018, other installment loans primarily consist of purchased automobile loans. These purchased automobile loans were originated through a single dealership group located outside the Company's primary market area. The collateral for these purchased automobile loans is comprised of a mix of used automobiles. These loans were purchased with servicing retained by the seller. Other consumer loans generally have shorter terms to maturity than mortgage loans. Other consumer loans generally involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.
 
83
6.
ALLOWANCE FOR LOAN LOSSES

The following tables present a reconciliation of the allowance for loan losses for the periods indicated (in thousands):

March 31, 2019
 
Commercial
Business
   
Commercial
Real Estate
   
Land
   
Multi-
Family
   
Real Estate Construction
   
Consumer
   
Unallocated
   
Total
 
                                                 
Beginning balance
 
$
1,668
   
$
4,914
   
$
220
   
$
822
   
$
618
   
$
1,809
   
$
715
   
$
10,766
 
Provision for (recapture of)
  loan losses
   
139
     
(685
)
   
34
     
(94
)
   
839
     
(178
)
   
(5
)
   
50
 
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
(291
)
   
-
     
(291
)
Recoveries
   
1
     
824
     
-
     
-
     
-
     
107
     
-
     
932
 
Ending balance
 
$
1,808
   
$
5,053
   
$
254
   
$
728
   
$
1,457
   
$
1,447
   
$
710
   
$
11,457
 

March 31, 2018
                                               
                                                 
Beginning balance
 
$
1,418
   
$
5,084
   
$
228
   
$
297
   
$
714
   
$
2,099
   
$
688
   
$
10,528
 
Provision for (recapture of)
  loan losses
   
10
     
(156
)
   
(301
)
   
525
     
(96
)
   
(9
)
   
27
     
-
 
Charge-offs
   
-
     
(68
)
   
-
     
-
     
-
     
(340
)
   
-
     
(408
)
Recoveries
   
240
     
54
     
293
     
-
     
-
     
59
     
-
     
646
 
Ending balance
 
$
1,668
   
$
4,914
   
$
220
   
$
822
   
$
618
   
$
1,809
   
$
715
   
$
10,766
 

March 31, 2017
                                               
                                                 
Beginning balance
 
$
1,048
   
$
4,273
   
$
325
   
$
712
   
$
416
   
$
2,403
   
$
708
   
$
9,885
 
Provision for (recapture of)
  loan losses
   
(121
)
   
926
     
(558
)
   
(415
)
   
298
     
(110
)
   
(20
)
   
-
 
Charge-offs
   
(1
)
   
(117
)
   
-
     
-
     
-
     
(340
)
   
-
     
(458
)
Recoveries
   
492
     
2
     
461
     
-
     
-
     
146
     
-
     
1,101
 
Ending balance
 
$
1,418
   
$
5,084
   
$
228
   
$
297
   
$
714
   
$
2,099
   
$
688
   
$
10,528
 

The following tables present an analysis of loans receivable and the allowance for loan losses, based on impairment methodology, at the dates indicated (in thousands):

   
Allowance for Loan Losses
   
Recorded Investment in Loans
 
March 31, 2019
 
Individually
Evaluated for
Impairment
   
Collectively
Evaluated for
Impairment
   
Total
   
Individually
Evaluated for
Impairment
   
Collectively
Evaluated for
Impairment
   
Total
 
                                     
Commercial business
 
$
-
   
$
1,808
   
$
1,808
   
$
160
   
$
162,636
   
$
162,796
 
Commercial real estate
   
-
     
5,053
     
5,053
     
2,482
     
458,950
     
461,432
 
Land
   
-
     
254
     
254
     
728
     
16,299
     
17,027
 
Multi-family
   
-
     
728
     
728
     
1,598
     
49,972
     
51,570
 
Real estate construction
   
-
     
1,457
     
1,457
     
-
     
90,882
     
90,882
 
Consumer
   
22
     
1,425
     
1,447
     
697
     
91,712
     
92,409
 
Unallocated
   
-
     
710
     
710
     
-
     
-
     
-
 
Total
 
$
22
   
$
11,435
   
$
11,457
   
$
5,665
   
$
870,451
   
$
876,116
 


March 31, 2018
                                   
                                     
Commercial business
 
$
-
   
$
1,668
   
$
1,668
   
$
1,004
   
$
136,668
   
$
137,672
 
Commercial real estate
   
-
     
4,914
     
4,914
     
2,883
     
447,714
     
450,597
 
Land
   
-
     
220
     
220
     
763
     
14,574
     
15,337
 
Multi-family
   
-
     
822
     
822
     
1,644
     
61,436
     
63,080
 
Real estate construction
   
-
     
618
     
618
     
-
     
39,584
     
39,584
 
Consumer
   
69
     
1,740
     
1,809
     
1,428
     
103,678
     
105,106
 
Unallocated
   
-
     
715
     
715
     
-
     
-
     
-
 
Total
 
$
69
   
$
10,697
   
$
10,766
   
$
7,722
   
$
803,654
   
$
811,376
 

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

   
Year Ended March 31,
 
    2019     2018       2017    
Beginning balance
 
$
480
   
$
388
   
$
324
 
Net change in allowance for unfunded loan commitments
   
(11
)
   
92
     
64
 
Ending balance
 
$
469
   
$
480
   
$
388
 
 
84
 
The following tables present an analysis of loans by aging category at the dates indicated (in thousands):

March 31, 2019
 
30-89 Days
Past Due
   
90 Days
and
Greater
Past Due
   
Non-accrual
   
Total Past
Due and
Non-
accrual
   
Current
   
Total Loans
Receivable
 
                                     
Commercial business
 
$
-
   
$
-
   
$
225
   
$
225
   
$
162,571
   
$
162,796
 
Commercial real estate
   
-
     
-
     
1,081
     
1,081
     
460,351
     
461,432
 
Land
   
-
     
-
     
-
     
-
     
17,027
     
17,027
 
Multi-family
   
-
     
-
     
-
     
-
     
51,570
     
51,570
 
Real estate construction
   
-
     
-
     
-
     
-
     
90,882
     
90,882
 
Consumer
   
345
     
3
     
210
     
558
     
91,851
     
92,409
 
Total
 
$
345
   
$
3
   
$
1,516
   
$
1,864
   
$
874,252
   
$
876,116
 

 
March 31, 2018
                                   
                                     
Commercial business
 
$
7
   
$
-
   
$
178
   
$
185
   
$
137,487
   
$
137,672
 
Commercial real estate
   
-
     
-
     
1,200
     
1,200
     
449,397
     
450,597
 
Land
   
-
     
-
     
763
     
763
     
14,574
     
15,337
 
Multi-family
   
-
     
-
     
-
     
-
     
63,080
     
63,080
 
Real estate construction
   
-
     
-
     
-
     
-
     
39,584
     
39,584
 
Consumer
   
513
     
-
     
277
     
790
     
104,316
     
105,106
 
Total
 
$
520
   
$
-
   
$
2,418
   
$
2,938
   
$
808,438
   
$
811,376
 

Interest income foregone on non-accrual loans was $94,000, $102,000 and $81,000 for the years ended March 31, 2019, 2018 and 2017, respectively.

Credit quality indicators: The Company monitors credit risk in its loan portfolio using a risk rating system (on a scale of one to nine) for all commercial (non-consumer) loans. The risk rating system is a measure of the credit risk of the borrower based on their historical, current and anticipated future financial characteristics. The Company assigns a risk rating to each commercial loan at origination and subsequently updates these ratings, as necessary, so that the risk rating continues to reflect the appropriate risk characteristics of the loan. Application of appropriate risk ratings is key to management of loan portfolio risk. In determining the appropriate risk rating, the Company considers the following factors: delinquency, payment history, quality of management, liquidity, leverage, earnings trends, alternative funding sources, geographic risk, industry risk, cash flow adequacy, account practices, asset protection and extraordinary risks. Consumer loans, including custom construction loans, are not assigned a risk rating but rather are grouped into homogeneous pools with similar risk characteristics. When a consumer loan is delinquent 90 days, it is placed on non-accrual status and assigned a substandard risk rating. Loss factors are assigned to each risk rating and homogeneous pool based on historical loss experience for similar loans. This historical loss experience is adjusted for qualitative factors that are likely to cause the estimated credit losses to differ from the Company's historical loss experience. The Company uses these loss factors to estimate the general component of its allowance for loan losses.

Pass – These loans have a risk rating between 1 and 4 and are to borrowers that meet normal credit standards. Any deficiencies in satisfactory asset quality, liquidity, debt servicing capacity and coverage are offset by strengths in other areas. The borrower currently has the capacity to perform according to the loan terms. Any concerns about risk factors such as stability of margins, stability of cash flows, liquidity, dependence on a single product/supplier/customer, depth of management, etc. are offset by strengths in other areas. Typically, these loans are secured by the operating assets of the borrower and/or real estate. The borrower's management is considered competent. The borrower has the ability to repay the debt in the normal course of business.

Watch – These loans have a risk rating of 5 and are included in the "pass" rating. However, there would typically be some reason for additional management oversight, such as the borrower's recent financial setbacks and/or deteriorating financial position, industry concerns and failure to perform on other borrowing obligations. Loans with this rating are monitored closely in an effort to correct deficiencies.

Special mention – These loans have a risk rating of 6 and are rated in accordance with regulatory guidelines. These loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the credit position at some future date. These loans pose elevated risk but their weakness does not yet justify a "substandard" classification.

85
Substandard – These loans have a risk rating of 7 and are rated in accordance with regulatory guidelines, for which the accrual of interest may or may not be discontinued. By definition under regulatory guidelines, a "substandard" loan has defined weaknesses which make payment default or principal exposure likely but not yet certain. Repayment of such loans is likely to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.

Doubtful – These loans have a risk rating of 8 and are rated in accordance with regulatory guidelines. Such loans are placed on non-accrual status and repayment may be dependent upon collateral which has value that is difficult to determine or upon some near-term event which lacks certainty.

Loss – These loans have a risk rating of 9 and are rated in accordance with regulatory guidelines. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. "Loss" is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following tables present an analysis of loans by credit quality indicators at the dates indicated (in thousands):
 
March 31, 2019
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total Loans
Receivable
 
                                     
Commercial business
 
$
159,997
   
$
840
   
$
1,959
   
$
-
   
$
-
   
$
162,796
 
Commercial real estate
   
454,013
     
4,030
     
3,389
     
-
     
-
     
461,432
 
Land
   
16,299
     
-
     
728
     
-
     
-
     
17,027
 
Multi-family
   
51,093
     
457
     
20
     
-
     
-
     
51,570
 
Real estate construction
   
90,882
     
-
     
-
     
-
     
-
     
90,882
 
Consumer
   
92,199
     
-
     
210
     
-
     
-
     
92,409
 
Total
 
$
864,483
   
$
5,327
   
$
6,306
   
$
-
   
$
-
   
$
876,116
 

 
March 31, 2018
                                   
                                     
Commercial business
 
$
132,309
   
$
1,976
   
$
3,387
   
$
-
   
$
-
   
$
137,672
 
Commercial real estate
   
440,123
     
7,489
     
2,985
     
-
     
-
     
450,597
 
Land
   
14,574
     
-
     
763
     
-
     
-
     
15,337
 
Multi-family
   
60,879
     
2,190
     
11
     
-
     
-
     
63,080
 
Real estate construction
   
39,584
     
-
     
-
     
-
     
-
     
39,584
 
Consumer
   
104,829
     
-
     
277
     
-
     
-
     
105,106
 
Total
 
$
792,298
   
$
11,655
   
$
7,423
   
$
-
   
$
-
   
$
811,376
 

Impaired loans: The following tables present the total and average recorded investment in impaired loans at the dates and for the years indicated (in thousands):

March 31, 2019
 
Recorded
Investment with
No Specific
Valuation
Allowance
   
Recorded
Investment
with Specific
Valuation
Allowance
   
Total
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Specific
Valuation
Allowance
 
                               
Commercial business
 
$
160
   
$
-
   
$
160
   
$
182
   
$
-
 
Commercial real estate
   
2,482
     
-
     
2,482
     
3,424
     
-
 
Land
   
728
     
-
     
728
     
766
     
-
 
Multi-family
   
1,598
     
-
     
1,598
     
1,709
     
-
 
Consumer
   
281
     
416
     
697
     
807
     
22
 
Total
 
$
5,249
   
$
416
   
$
5,665
   
$
6,888
   
$
22
 
 
March 31, 2018
                                       
Commercial business
 
$
1,004
   
$
-
   
$
1,004
   
$
1,062
   
$
-
 
Commercial real estate
   
2,883
     
-
     
2,883
     
3,816
     
-
 
Land
   
763
     
-
     
763
     
790
     
-
 
Multi-family
   
1,644
     
-
     
1,644
     
1,765
     
-
 
Consumer
   
294
     
1,134
     
1,428
     
1,544
     
69
 
Total
 
$
6,588
   
$
1,134
   
$
7,722
   
$
8,977
   
$
69
 

86

   
Year ended
March 31, 2019
   
Year ended
March 31, 2018
   
Year ended
March 31, 2017
 
   
Average
Recorded
Investment
   
Interest
Recognized
on Impaired
Loans
   
Average
Recorded
Investment
   
Interest
Recognized
on Impaired
Loans
   
Average
Recorded
Investment
   
Interest
Recognized
on Impaired
Loans
 
                                     
Commercial business
 
$
334
   
$
-
   
$
930
   
$
41
   
$
255
   
$
10
 
Commercial real estate
   
2,607
     
64
     
4,185
     
101
     
8,823
     
337
 
Land
   
742
     
7
     
781
     
-
     
801
     
-
 
Multi-family
   
1,620
     
88
     
1,668
     
90
     
1,710
     
93
 
Consumer
   
992
     
45
     
1,452
     
62
     
1,529
     
62
 
Total
 
$
6,295
   
$
204
   
$
9,016
   
$
294
   
$
13,118
   
$
502
 

The cash basis interest income on impaired loans was not materially different than the interest recognized on impaired loans as shown in the above table.

TDRs are loans for which the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, and/or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk. TDRs are considered impaired loans and as such, impairment is measured as described for impaired loans in Note 1 – Summary of Significant Accounting Policies – Allowance for Loan Losses.

The following table presents TDRs by interest accrual status at the dates indicated (in thousands):

   
March 31, 2019
   
March 31, 2018
 
   
Accrual
   
Nonaccrual
   
Total
   
Accrual
   
Nonaccrual
   
Total
 
                                     
Commercial business
 
$
-
   
$
160
   
$
160
   
$
826
   
$
178
   
$
1,004
 
Commercial real estate
   
1,401
     
1,081
     
2,482
     
1,683
     
1,200
     
2,883
 
Land
   
728
     
-
     
728
     
-
     
763
     
763
 
Multi-family
   
1,598
     
-
     
1,598
     
1,644
     
-
     
1,644
 
Consumer
   
697
     
-
     
697
     
1,428
     
-
     
1,428
 
Total
 
$
4,424
   
$
1,241
   
$
5,665
   
$
5,581
   
$
2,141
   
$
7,722
 

At March 31, 2019, the Company had no commitments to lend additional funds on these loans. At March 31, 2019, all of the Company's TDRs were paying as agreed.

There were no new TDRs for the years ended March 31, 2019 and 2018. There was one new TDR for the year ended March 31, 2017 consisting of a commercial business loan with a pre-modification outstanding recorded investment balance of $116,000 and a post-modification outstanding recorded investment balance of $107,000. This loan was repaid in full during the year ended March 31, 2018. There were no loans that were modified as a TDR within the previous twelve months that subsequently defaulted in the twelve months ended March 31, 2019.

7.
REAL ESTATE OWNED

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

   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
Balance at beginning of year, net
 
$
298
   
$
298
   
$
595
 
Additions
   
-
     
-
     
-
 
Dispositions
   
(298
)
   
-
     
(267
)
Writedowns
   
-
     
-
     
(30
)
Balance at end of year, net
 
$
-
   
$
298
   
$
298
 

At March 31, 2019, there was one single family property for which formal foreclosure proceedings were in process with a carrying amount of $106,000.

87
8.
PREMISES AND EQUIPMENT

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

   
March 31,
 
   
2019
   
2018
 
             
Land
 
$
4,531
   
$
4,710
 
Buildings and improvements
   
15,349
     
15,281
 
Leasehold improvements
   
1,666
     
1,666
 
Furniture and equipment
   
10,694
     
10,783
 
Building under capitalized lease
   
2,956
     
2,956
 
Construction in progress
   
733
     
720
 
Total
   
35,929
     
36,116
 
Less accumulated depreciation and amortization
   
(20,471
)
   
(20,333
)
Premises and equipment, net
 
$
15,458
   
$
15,783
 


Depreciation and amortization expense was $1.1 million, $1.2 million and $1.1 million for the years ended March 31, 2019, 2018 and 2017, respectively.

The Company has a capital lease for the shell of the building constructed as the Company's operations center which expires in November 2039. For each of the years ended March 31, 2019, 2018 and 2017, the Company recorded $77,000 in amortization expense related to this capital lease. At March 31, 2019 and 2018, accumulated amortization for the capital lease totaled $1.4 million and $1.3 million, respectively.

In March 2010, the Company sold two of its branch locations. The Company maintains a substantial continuing involvement in the locations through various non-cancellable operating leases that contain certain renewal options. The resulting gain on sale of $2.1 million was deferred and is being amortized over the lives of the respective leases. At March 31, 2019, the remaining deferred gain was $697,000 and is included in accrued expenses and other liabilities in the accompanying 2019 consolidated balance sheets.

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. The following is a schedule of future minimum lease payments under the Company's capital lease 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, 2019 (in thousands):

Year Ending March 31:
 
Operating Leases
   
Capital Lease
 
2020
 
$
1,492
   
$
205
 
2021
   
905
     
208
 
2022
   
677
     
212
 
2023
   
527
     
215
 
2024
   
535
     
219
 
Thereafter
   
1,453
     
3,622
 
Total minimum lease payments
 
$
5,589
     
4,681
 
Less amount representing interest
           
(2,278
)
Present value of net minimum lease payments
         
$
2,403
 

Rent expense was $2.0 million, $2.1 million and $1.8 million for the years ended March 31, 2019, 2018 and 2017, respectively.

88
9.
GOODWILL

Goodwill and certain other intangibles generally arise from business combinations accounted for under the purchase method of accounting. Goodwill and other intangibles deemed to have indefinite lives generated from business combinations are not subject to amortization and are instead tested for impairment not less than annually. The Company has two reporting units, the Bank and the Trust Company, for purposes of evaluating goodwill for impairment. All of the Company's goodwill has been allocated to the Bank reporting unit.

The Company performed an impairment assessment as of October 31, 2018 and determined that no impairment of goodwill 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 and compares the implied fair value of goodwill to the carrying amount of goodwill in the Company's consolidated 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 results of the Company's step one test indicated that the reporting unit's fair value was greater than its carrying value, and, therefore, a step two analysis was not required; however, no assurance can be given that the Company's goodwill will not be written down in future periods.

An interim impairment test was not deemed necessary as of March 31, 2019 due to the amount by which 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 estimated fair value determination would be less than the current carrying amount of the reporting unit is remote.

The following table presents the changes in the carrying amount of goodwill for the years indicated (in thousands):
         
 
Year Ended March 31,
 
 
2019
 
2018
 
2017
 
Net carrying value at beginning of period
 
$
27,076
   
$
27,076
   
$
25,572
 
MBank Transaction (see Note 3)
   
-
     
-
     
1,504
 
Net carrying value at the end of period
 
$
27,076
   
$
27,076
   
$
27,076
 

10.
DEPOSITS

Deposit accounts consisted of the following at the dates indicated (in thousands):

Account Type
 
March 31,
2019
   
March 31,
2018
 
Non-interest-bearing
 
$
284,854
   
$
278,966
 
Interest-bearing checking
   
183,388
     
192,989
 
Money market
   
233,317
     
265,661
 
Savings accounts
   
137,503
     
134,931
 
Certificates of deposit
   
86,006
     
123,144
 
Total
 
$
925,068
   
$
995,691
 

Individual certificates of deposit in amounts of $250,000 or more totaled $10.5 million and $10.8 million at March 31, 2019 and 2018, respectively.
89
Scheduled maturities of certificates of deposit for future years ending March 31 are as follows (in thousands):

Year Ending March 31:
     
2020
 
$
59,487
 
2021
   
14,072
 
2022
   
5,201
 
2023
   
1,552
 
2024
   
3,157
 
Thereafter
   
2,537
 
Total
 
$
86,006
 

Interest expense by deposit type was as follows for the years indicated (in thousands):

   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
Interest-bearing checking
 
$
101
   
$
100
   
$
98
 
Money market
   
302
     
335
     
309
 
Savings accounts
   
145
     
133
     
110
 
Certificates of deposit
   
448
     
640
     
634
 
Total
 
$
996
   
$
1,208
   
$
1,151
 

11.
FEDERAL HOME LOAN BANK ADVANCES

FHLB advances – which consist of overnight borrowings – are summarized as follows (dollars in thousands):


   
March 31, 2019
   
March 31, 2018
 
FHLB advances
 
$
56,586
   
$
-
 
Weighted average interest rate on FHLB advances (1)
   
2.58
%
   
1.60
%
(1) Computed based on the borrowing activity for the years ending March 31, 2019 and 2018, respectively.
 

The Bank has a credit line with the FHLB equal to 45% of total assets, limited by available collateral. At March 31, 2019, based on collateral values, the Bank had additional borrowing capacity of $186.8 million from the FHLB.

FHLB advances are collateralized 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, 2019, loans carried at $402.7 million were pledged as collateral to the FHLB.

12.
JUNIOR SUBORDINATED DEBENTURES

The Company has 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 trust agreement. 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 governing the Debentures plus any accrued but unpaid interest to the redemption date. The Company also has the right to defer the payment of interest on each of the Debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity. During such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company may not pay cash dividends to the holders of shares of the Company's common stock.

The Debentures issued by the Company to the grantor trusts, totaling $26.6 million and $26.5 million at March 31, 2019 and 2018, respectively, are reported as "junior subordinated debentures" in the consolidated balance sheets. The common securities issued by the grantor trusts were purchased by the Company, and the Company's investment in the common securities of $836,000 at both March 31, 2019 and 2018, 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 income.
 
90
The following table is a summary of the terms and the amounts outstanding of the Debentures at March 31, 2019 (dollars in thousands):
Issuance Trust
 
Issuance
Date
   
Amount
Outstanding
 
Rate Type
 
Initial
Rate
   
Current
Rate
   
Maturity
Date
 
                                 
Riverview Bancorp Statutory Trust I
   
12/2005
   
$
7,217
 
Variable (1)
   
5.88
%
   
3.97
%
   
3/2036
 
Riverview Bancorp Statutory Trust II
   
06/2007
     
15,464
 
Variable (2)
   
7.03
%
   
3.96
%
   
9/2037
 
Merchants Bancorp Statutory Trust I (4)
   
06/2003
     
5,155
 
Variable (3)
   
4.16
%
   
5.71
%
   
6/2033
 
             
27,836
                           
Fair value adjustment (4)
           
(1,261
)
                         
Total Debentures
         
$
26,575
                           
 
(1) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.36%.
 
(2) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.35%.
 
(3) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 3.10%.
 
(4) Amount, net of accretion, attributable to the MBank transaction. See Note 3.
 

13.
INCOME TAXES

Provision for income taxes consisted of the following for the periods indicated (in thousands):

   
Year Ended March 31 
 
 
 
  2019    
 
2018  
 
  2017    
Current
 
$
5,157
   
$
4,087
   
$
284
 
Deferred
   
(11
)
   
3,668
     
3,103
 
Total
 
$
5,146
   
$
7,755
   
$
3,387
 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows at the dates indicated (in thousands):

   
March 31, 2019
   
March 31, 2018
 
Deferred tax assets:
           
Deferred compensation
 
$
45
   
$
77
 
Allowance for loan losses
   
2,862
     
2,643
 
Accrued expenses
   
131
     
127
 
Accumulated depreciation and amortization
   
797
     
753
 
Deferred gain on sale
   
167
     
201
 
Purchase accounting
   
141
     
150
 
Net unrealized loss on investment securities available for sale
   
829
     
1,458
 
Other
   
242
     
236
 
Total deferred tax assets
   
5,214
     
5,645
 

 
Deferred tax liabilities:
           
FHLB stock dividend
   
(97
)
   
(95
)
Prepaid expenses
   
(148
)
   
(109
)
Loan fees/costs
   
(774
)
   
(628
)
Total deferred tax liabilities
   
(1,019
)
   
(832
)
Deferred tax assets, net
 
$
4,195
   
$
4,813
 

A reconciliation of the Company's effective income tax rate with the federal statutory tax rate is as follows for the years indicated:
 
   
Year Ended March 31,
   
2019
   
2018
   
2017
Statutory federal income tax rate
 
21.0
%
 
30.8
%
 
34.0
%
State and local income tax rate
 
3.0
   
2.5
   
1.5
 
Revaluation of net deferred tax assets due to Tax Act
 
-
   
11.4
   
-
 
ESOP market value adjustment
 
(0.1)
   
-
   
(0.1
)
BOLI
 
(0.8)
   
(1.5
)
 
(3.8
)
Other, net
 
(0.1)
   
(0.1
)
 
(0.2
)
Effective federal income tax rate
 
23.0
%
 
43.1
%
 
31.4
%

On December 22, 2017, the federal government enacted the Tax Act. The Tax Act made significant changes to the U.S. tax law including, among other things: a reduction in the federal corporate income tax rate from a maximum of 35.0% to 21.0%
 
91
effective January 1, 2018; changes to the tax treatment of net operating loss carryforwards and carrybacks; and a repeal of the corporate alternative minimum tax. The Tax Act reduced the Company's federal corporate income tax rate from 34.0% to a blended federal corporate income tax rate of 30.8% for the fiscal year ended March 31, 2018. As a result of using a blended tax rate, the Company recognized a $422,000 benefit for income taxes during the quarter ended December 31, 2017. Also as a result of the Tax Act, the reduction of the corporate tax rate required the Company to remeasure its deferred tax assets and liabilities based upon the lower federal tax rate. Accordingly, during the year ended March 31, 2018, the Company recorded a one-time $2.1 million charge to the provision for income taxes in conjunction with remeasuring its net deferred tax asset to account for the future impact of the decrease in the federal corporate income tax rate. In addition, the Company has made an adjustment between retained earnings and AOCI related to the stranded tax effects due to the change in the federal corporate tax rate applied to the net unrealized losses on available for sale investment securities (see discussion of ASU 2018-02 in Note 1).  Beginning in fiscal year 2019, the Company utilized a federal corporate income tax rate of 21.0%.

The Bank's retained earnings at both March 31, 2019 and 2018 include a base year allowance for loan losses, which amounted to $2.2 million, for which no federal income tax liability has been recognized. The related unrecognized deferred tax liability at both March 31, 2019 and 2018 was $517,000. This represents the balance of the allowance for loan losses 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.

At March 31, 2019 and 2018, the Company had no unrecognized tax benefits or uncertain tax positions. In addition, the Company had no accrued interest or penalties related to income tax matters as of March 31, 2019 or 2018. It is the Company's policy to recognize potential accrued interest and penalties related to income tax matters as a component of provision for income taxes. The Company is subject to U.S. federal and State of Oregon income taxes. The years 2016 to 2019 remain open to examination for federal income taxes, and the years 2015 to 2019 remain open to State of Oregon examination.

14.
EMPLOYEE BENEFIT 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. Company expenses related to the Plan for the years ended March 31, 2019, 2018 and 2017 were $527,000, $547,000 and $489,000, respectively.

Directors' and Executive Officers' Deferred Compensation Plan ("Deferred Compensation Plan") – The Deferred Compensation Plan is a nonqualified 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. The Chairman, President, and Executive and Senior Vice Presidents of the Company may also defer salary into the Deferred Compensation Plan. The Company accrues annual interest on the unfunded liability under the Deferred Compensation Plan based upon a formula relating to gross revenues, which was 4.28%, 3.99% and 3.68% for the years ended March 31, 2019, 2018 and 2017, respectively. The estimated liability under the Deferred Compensation Plan is accrued as earned by the participants. At March 31, 2019 and 2018, the Company's aggregate liability under the Deferred Compensation Plan was $186,000 and $330,000, respectively, which is recorded in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

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 in October 1998 and expired in October 2008. In addition, in July 2003, shareholders of the Company approved the adoption of the 2003 Stock Option Plan ("2003 Plan"). The 2003 Plan was effective in July 2003 and expired in July 2013. Accordingly, no further option awards may be granted under the 1998 Plan or the 2003 Plan; however, any awards granted prior to their respective expiration dates remain outstanding subject to their terms. Each option granted under the 1998 Plan or the 2003 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.

In July 2017, the shareholders of the Company approved the Riverview Bancorp, Inc. 2017 Equity Incentive Plan ("2017 Plan"). The 2017 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units. The Company has reserved 1,800,000 shares of its common stock for issuance under the 2017 Plan,
 
92
none of which have been awarded. The 1998 Plan, the 2003 Plan and the 2017 Plan are collectively referred to as "the Stock Option Plans".

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes 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 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 is 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. There were no stock options granted during the years ended March 31, 2019, 2018 and 2017 under the Stock Option Plans.

As of March 31, 2019, all outstanding stock options were fully vested and there was no remaining unrecognized compensation expense under the Stock Option Plans. There was no stock-based compensation expense related to stock options for the years ended March 31, 2019, 2018 and 2017 under the Stock Option Plans.

The following table presents the activity related to stock options under the Stock Option Plans for the years indicated:

   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Number of
Shares
   
Weighted
Average
Exercise
Price
 
Balance, beginning of year
   
141,365
   
$
3.77
     
220,654
   
$
4.74
     
223,654
   
$
4.73
 
Options exercised
   
(37,533
)
   
4.84
     
(59,289
)
   
4.13
     
(3,000
)
   
3.84
 
Options expired
   
(2,500
)
   
8.12
     
(20,000
)
   
13.42
     
-
     
-
 
Balance, end of year
   
101,332
   
$
3.26
     
141,365
   
$
3.77
     
220,654
   
$
4.74
 

Additional information regarding stock options outstanding as of March 31, 2019 is as follows:
`
           
Options Outstanding
   
Options Exercisable
 
     
Weighted Avg
         
Weighted
         
Weighted
 
     
Remaining
         
Average
         
Average
 
Range of
   
Contractual
         
Exercise
         
Exercise
 
Exercise Price
   
Life (years)
   
Number
   
Price
   
Number
   
Price
 
                                 
$
1.00 - $3.00
     
3.88
     
51,332
   
$
2.70
     
51,332
   
$
2.70
 
$
3.01 - $5.00
     
0.48
     
50,000
     
3.84
     
50,000
     
3.84
 
         
2.20
     
101,332
   
$
3.26
     
101,332
   
$
3.26
 

The following table presents information on stock options outstanding as of March 31, 2019 and 2018, less estimated forfeitures:

   
March 31, 2019
   
March 31, 2018
 
Stock options fully vested and expected to vest:
           
Number
   
101,332
     
141,365
 
Weighted average exercise price
 
$
3.26
   
$
3.77
 
Aggregate intrinsic value (1)
 
$
410,000
   
$
788,000
 
Weighted average contractual term of options (years)
   
2.20
     
2.78
 
Stock options fully vested and currently exercisable:
               
Number
   
101,332
     
141,365
 
Weighted average exercise price
 
$
3.26
   
$
3.77
 
Aggregate intrinsic value (1)
 
$
410,000
   
$
788,000
 
Weighted average contractual term of options (years)
   
2.20
     
2.78
 
                 
(1) The aggregate intrinsic value of a stock option 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 $153,000, $257,000 and $5,000 for the years ended March 31, 2019, 2018 and 2017, respectively.
 
93

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 were released and allocated to participant accounts on or about December 31 of each year through December 2017, at which point all available shares had been released and allocated. ESOP compensation expense included in salaries and employee benefits was $148,000 and $143,000 for the years ended March 31, 2018 and 2017, respectively.

ESOP share activity is summarized in the following table:

   
Estimated Fair
Value of
Unreleased
Shares
   
Unreleased
ESOP
Shares
   
Allocated
and Released
Shares
   
Total
 
                         
Balance, March 31, 2016
 
$
207,000
     
49,266
     
913,318
     
962,584
 
Allocation December 31, 2016
           
(24,633
)
   
24,633
     
-
 
Balance, March 31, 2017
 
$
176,000
     
24,633
     
937,951
     
962,584
 
Allocation December 31, 2017
           
(24,633
)
   
24,633
     
-
 
Balance, March 31, 2018
 
$
-
     
-
     
962,584
     
962,584
 

For the fiscal year ended March 31, 2019, the Bank purchased 25,000 shares of common stock on the open market and contributed such shares to the ESOP as a discretionary employer contribution. The Company recorded employee benefits expense of $197,000 for this contribution which represented the fair value of the related common stock. Shares held by the ESOP at March 31, 2019 totaled 441,966.

15.
SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency ("OCC") .   Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on   the Bank's   financial 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 met all capital adequacy requirements to which it was subject to as of March 31, 2019.

As of March 31, 2019, the most recent notification from the OCC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. The Bank's actual and required minimum capital amounts and ratios were as follows at the dates indicated (dollars in thousands):

   
Actual
   
For Capital
Adequacy Purposes
   
"Well Capitalized"
Under Prompt
Corrective Action
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
March 31, 2019
                                   
Total Capital:
                                   
(To Risk-Weighted Assets)
 
$
140,062
     
16.88
%
 
$
66,379
     
8.0
%
 
$
82,974
     
10.0
%
Tier 1 Capital:
                                               
(To Risk-Weighted Assets)
   
129,671
     
15.63
     
49,784
     
6.0
     
66,379
     
8.0
 
Common equity tier 1 Capital:
                                               
(To Risk-Weighted Assets)
   
129,671
     
15.63
     
37,338
     
4.5
     
53,933
     
6.5
 
Tier 1 Capital (Leverage):
                                               
(To Average Tangible Assets)
   
129,671
     
11.56
     
44,874
     
4.0
     
56,092
     
5.0
 


 
94

   
Actual
   
For Capital
 Adequacy Purposes
   
"Well Capitalized"
Under Prompt
Corrective Action
 
March 31, 2018
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
Total Capital:
                                   
(To Risk-Weighted Assets)
 
$
123,061
     
15.41
%
 
$
63,868
     
8.0
%
 
$
79,835
     
10.0
%
Tier 1 Capital:
                                               
(To Risk-Weighted Assets)
   
113,066
     
14.16
     
47,901
     
6.0
     
63,868
     
8.0
 
Common equity tier 1 Capital:
                                               
(To Risk-Weighted Assets)
   
113,066
     
14.16
     
35,926
     
4.5
     
51,893
     
6.5
 
Tier 1 Capital (Leverage):
                                               
(To Average Tangible Assets)
   
113,066
     
10.26
     
44,093
     
4.0
     
55,116
     
5.0
 


In addition to the minimum common equity tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. The capital conservation buffer is required to be an amount greater than 2.5% of risk-weighted assets. As of March 31, 2019, the Bank's CET1 capital exceeded the required capital conservation buffer at an amount greater than 2.5%.

For a savings and loan holding company, such as the Company, the capital guidelines apply on a bank only basis. The Federal Reserve expects the holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations. If the Company was subject to regulatory guidelines for bank holding companies at March 31, 2019, the Company would have exceeded all regulatory capital requirements.

At periodic intervals, the OCC and the FDIC routinely examine the Bank's financial condition and risk management processes as part of their legally prescribed oversight. 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 OCC or the FDIC could include a review of certain transactions or other amounts reported in the Company's 2019 consolidated financial statements. The Company did not repurchase any shares of common stock for the years ended March 31, 2019, 2018 or 2017.

16.
EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income or loss 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 or loss 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 the assumed exercise of outstanding stock options. Shares owned by the Company's ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted EPS . As of March 31, 2019 and 2018, all shares under the Company's ESOP were allocated. For the year ended March 31, 2019, there were no stock options excluded in computing diluted EPS.  For the years ended March 31, 2018 and 2017, stock options for 8,000 and 59,000 shares, respectively, of common stock were excluded in computing diluted EPS because they were antidilutive.

The following table presents a reconciliation of the components used to compute basic and diluted EPS for the years indicated:
 

     
Year Ended March 31,
 
(Dollars and share data in thousands, except per share data)
   
2019
   
2018
   
2017
 
   
P
                 
Basic EPS computation:
                   
Numerator-net income
   
$
17,266
   
$
10,242
   
$
7,404
 
Denominator-weighted average common shares outstanding
     
22,588
     
22,531
     
22,478
 
Basic EPS
   
$
0.76
   
$
0.45
   
$
0.33
 
Diluted EPS computation:
                         
Numerator-net income
   
$
17,266
   
$
10,242
   
$
7,404
 
Denominator-weighted average common shares outstanding
     
22,588
     
22,531
     
22,478
 
Effect of dilutive stock options
     
72
     
92
     
70
 
Weighted average common shares and common stock
                         
equivalents
     
22,660
     
22,623
     
22,548
 
Diluted EPS
   
$
0.76
   
$
0.45
   
$
0.33
 
 
95
 
17.
FAIR VALUE MEASUREMENTS

Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels.  Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market 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 or liabilities in active markets, quoted prices for identical or similar assets or liabilities 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 an asset or liability developed based on the best information available in the circumstances.

Financial instruments are presented 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 consolidated 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 consolidated financial statements at some time during the reporting period.

The following tables present assets that are measured at estimated fair value on a recurring basis at the dates indicated (in thousands):

         
Estimated Fair Value Measurements Using
 
March 31, 2019
 
Total Estimated
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
                         
Investment securities available for sale:
                       
Municipal securities
 
$
8,881
   
$
-
   
$
8,881
   
$
-
 
Agency securities
   
12,341
     
-
     
12,341
     
-
 
Real estate mortgage investment conduits
   
40,162
     
-
     
40,162
     
-
 
Residential mortgage-backed securities
   
75,821
     
-
     
75,821
     
-
 
Other mortgage-backed securities
   
41,021
     
-
     
41,021
     
-
 
Total assets measured at fair value on a recurring basis
 
$
178,226
   
$
-
   
$
178,226
   
$
-
 

         
Estimated Fair Value Measurements Using
 
March 31, 2018
 
Total Estimated
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
                         
Investment securities available for sale:
                       
Municipal securities
 
$
8,732
   
$
-
   
$
8,732
   
$
-
 
Agency securities
   
22,102
     
-
     
22,102
     
-
 
Real estate mortgage investment conduits
   
46,955
     
-
     
46,955
     
-
 
Residential mortgage-backed securities
   
89,074
     
-
     
89,074
     
-
 
Other mortgage-backed securities
   
46,358
     
-
     
46,358
     
-
 
Total assets measured at fair value on a recurring basis
 
$
213,221
   
$
-
   
$
213,221
   
$
-
 

There were no transfers of assets into or out of Levels 1, 2 or 3 during the years ended March 31, 2019 and 2018.
 
96
The following methods were used to estimate the fair value of investment securities in the above table:

Investment securities 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 models and/or quoted prices of investment securities with similar characteristics. Investment securities are included within Level 3 of the hierarchy when there are significant unobservable inputs.

For Level 2 securities, the independent pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data from market research publications. The Company's third-party pricing service has established processes for the Company to submit inquiries regarding the estimated fair value. In such cases, the Company's third-party pricing service will review the inputs to the evaluation in light of any new market data presented by the Company. The Company's third-party pricing service may then affirm the original estimated fair value or may update the evaluation on a go-forward basis.

Management reviews the pricing information received from the third-party pricing service through a combination of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics and trends. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. As necessary, management compares prices received from the pricing service to discounted cash flow models or by performing independent valuations of inputs and assumptions similar to those used by the pricing service in order to help ensure prices represent a reasonable estimate of fair value.

The following tables present assets that are measured at estimated fair value on a nonrecurring basis at the dates indicated (in thousands):

         
Estimated fair value measurements using
 
   
Total estimated
fair value 
   
Level 1
   
Level 2 
   
Level 3 
 
March 31, 2019
                       
Impaired loans
 
$
394
   
$
-
   
$
-
   
$
394
 

March 31, 2018
                       
                         
Impaired loans
 
$
2,143
   
$
-
   
$
-
   
$
2,143
 

The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a nonrecurring basis at March 31, 2019 and 2018:

   
Valuation technique
 
Significant unobservable inputs
 
Range
             
Impaired loans
 
Appraised value
 
Discounted cash flows
 
Adjustment for market conditions
 
Discount rate
 
N/A (1)
 
5.25% 8.00%
             
(1)   There were no adjustments to appraised values of impaired loans as of March 31, 2019 and 2018.
 

For information regarding the Company's method for estimating the fair value of impaired loans, see Note 1 – Summary of Significant Accounting Policies – Allowance for Loan Losses.

In determining the estimated net realizable value of the underlying collateral, the Company primarily uses third-party appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and include consideration of variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management's historical knowledge, changes in business factors and changes in market conditions.

Impaired loans are reviewed and evaluated quarterly for additional impairment and adjusted accordingly based on the same factors identified above. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, the Company considers the fair value of impaired loans to be highly sensitive to changes in market conditions.
97
The following disclosure of the estimated fair value of financial instruments is made in accordance with GAAP. 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 the future. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The carrying amounts and estimated fair values of financial instruments are as follows at the dates indicated (in thousands):

March 31, 2019
 
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
Assets:
                             
Cash and cash equivalents
 
$
22,950
   
$
22,950
   
$
-
   
$
-
   
$
22,950
 
Certificates of deposit held for investment
   
747
     
-
     
746
     
-
     
746
 
Loans held for sale
   
909
     
-
     
909
     
-
     
909
 
Investment securities available for sale
   
178,226
     
-
     
178,226
     
-
     
178,226
 
Investment securities held to maturity
   
35
     
-
     
35
     
-
     
35
 
Loans receivable, net
   
864,659
     
-
     
-
     
862,429
     
862,429
 
FHLB stock
   
3,644
     
-
     
3,644
     
-
     
3,644
 
                                         
Liabilities:
                                       
Certificates of deposit
   
86,006
     
-
     
84,455
     
-
     
84,455
 
FHLB advances
   
56,586
     
-
     
56,586
     
-
     
56,586
 
Junior subordinated debentures
   
26,575
     
-
     
-
     
15,468
     
15,468
 
Capital lease obligation
   
2,403
     
-
     
2,403
     
-
     
2,403
 

March 31, 2018
 
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
                               
Assets:
                             
Cash and cash equivalents
 
$
44,767
   
$
44,767
   
$
-
   
$
-
   
$
44,767
 
Certificates of deposit held for investment
   
5,967
     
-
     
5,959
     
-
     
5,959
 
Loans held for sale
   
210
     
-
     
210
     
-
     
210
 
Investment securities available for sale
   
213,221
     
-
     
213,221
     
-
     
213,221
 
Investment securities held to maturity
   
42
     
-
     
43
     
-
     
43
 
Loans receivable, net
   
800,610
     
-
     
-
     
792,916
     
792,916
 
FHLB stock
   
1,353
     
-
     
1,353
     
-
     
1,353
 
                                         
Liabilities:
                                       
Certificates of deposit
   
123,144
     
-
     
120,940
     
-
     
120,940
 
Junior subordinated debentures
   
26,484
     
-
     
-
     
15,274
     
15,274
 
Capital lease obligation
   
2,431
     
-
     
2,431
     
-
     
2,431
 

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

18.
REVENUE FROM CONTRACTS WITH CUSTOMERS

In accordance with ASC 606 , revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Company expects to be entitled to receive. The largest portion of the Company's revenue is from interest income, which is not within the scope of ASC 606. All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of REO, which are included in non-interest expense.

98
If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue as it satisfies a performance obligation. Payments from customers are generally collected at the time services are rendered, monthly, or quarterly. For contracts with customers within the scope of ASC 606, revenue is either earned at a point in time or revenue is earned over time. Examples of revenue earned at a point in time are automated teller machine ("ATM") transaction fees, wire transfer fees, overdraft fees and interchange fees. Revenue earned at a point in time is primarily based on the number and type of transactions that are generally derived from transactional information accumulated by the Company's systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Company is generally the principal in these contracts, with the exception of interchange fees, in which case the Company is acting as the agent and records revenue net of expenses paid to the principal. Examples of revenue earned over time, which generally occur on a monthly basis, are deposit account maintenance fees, investment advisory fees, merchant revenue, trust and investment management fees and safe deposit box fees. Revenue is generally derived from transactional information accumulated by the Company's systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.

Disaggregation of Revenue

The following table includes the Company's non-interest income disaggregated by type of service (in thousands):

   
Year Ended March 31
 
   
2019
   
2018
   
2017
 
                   
Asset management fees
 
$
3,791
   
$
3,448
   
$
2,988
 
Debit card and ATM fees
   
3,104
     
2,961
     
2,535
 
Deposit related fees
   
1,721
     
1,628
     
1,486
 
Loan related fees
   
1,258
     
671
     
725
 
BOLI (1)
   
734
     
819
     
760
 
Net gains on sales of loans held for sale (1)
   
317
     
641
     
656
 
FHLMC loan servicing fees (1)
   
141
     
122
     
114
 
Other, net
   
792
     
714
     
750
 
Total non-interest income
 
$
11,858
   
$
11,004
   
$
10,014
 
                         
(1) Not within the scope of ASC 606
                       

For the years ended March 31, 2019, 2018 and 2017, substantially all of the Company's revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date.

Revenues recognized within the scope of ASC 606

Asset management fees : Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by clients through the Trust Company. Asset management fees are recognized over the period that services are provided, and when the portfolio values are known or can be estimated at the end of each quarter.

Debit card and ATM fees : Debit and ATM interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the MasterCard® payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.

Deposit related fees : Fees are earned on the Bank's deposit accounts for various products offered to or services performed for the Bank's customers. Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box and others. These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service.

Loan related fees : Non-interest loan fee income is earned on loans that the Bank services, excluding loans serviced for the FHLMC which are not within the scope of ASC 606. Loan related fees include prepayment fees, late charges, brokered loan fees, maintenance fees and others. These fees are recognized on a daily, monthly, quarterly or annual basis, depending on the type of service.
 
99

Other : Fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the time of the event or the applicable billing cycle.

Contract Balances

As of March 31, 2019, the Company had no significant contract liabilities where the Company had an obligation to transfer goods or services for which the Company had already received consideration. In addition, the Company had no material unsatisfied performance obligations as of this date.

19.
COMMITMENTS AND CONTINGENCIES

Off-balance sheet arrangements – In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. 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.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. These 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 and is required in instances where the Company deems it necessary.

Significant off-balance sheet commitments are listed below at the dates indicated (in thousands):
 

   
Contract or Notional Amount
 
   
March 31, 2019
   
March 31, 2018
 
Commitments to originate loans:
           
       Adjustable-rate
 
$
30,579
   
$
20,065
 
       Fixed-rate
   
10,158
     
14,989
 
Standby letters of credit
   
2,410
     
2,432
 
Undisbursed loan funds and unused lines of credit
   
139,842
     
152,982
 
Total
 
$
182,989
   
$
190,468
 

At March 31, 2019, the Company had firm commitments to sell $1.7 million of residential loans to the FHLMC. Typically, these agreements are short-term fixed-rate commitments and no material gain or loss is likely.

Other Contractual Obligations – In connection with certain asset sales, the Company typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Company may have an obligation to repurchase the assets or indemnify the purchaser against loss. At March 31, 2019, loans under warranty totaled $111.4 million, which substantially represents the unpaid principal balance of the Company's loans serviced for the FHLMC. The Company believes that the potential for loss under these arrangements is remote. At March 31, 2019, the Company had an allowance for FHLMC loans of $13,000.

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 depository, the assessment attributable to all public depositories 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, 2019, 2018 and 2017.

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

Litigation – The Company is periodically a party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect, if any, on the Company's future consolidated financial position, results of operations and cash flows.
100

20.
RIVERVIEW BANCORP, INC. (PARENT COMPANY ONLY)

BALANCE SHEETS
           
AS OF MARCH 31, 2019 AND 2018
 
           
(In thousands)
 
2019
   
2018
 
ASSETS
           
Cash and cash equivalents
 
$
4,178
   
$
6,479
 
Investment in the Bank
   
155,041
     
136,497
 
Other assets
   
1,445
     
1,166
 
TOTAL ASSETS
 
$
160,664
   
$
144,142
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Accrued expenses and other liabilities
 
$
63
   
$
80
 
Dividend payable
   
904
     
677
 
Borrowings
   
26,575
     
26,484
 
Shareholders' equity
   
133,122
     
116,901
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
160,664
   
$
144,142
 

STATEMENTS OF INCOME
                 
FOR THE YEARS ENDED MARCH 31, 2019, 2018 AND 2017
 
                 
(In thousands)
 
2019
   
2018
   
2017
 
                   
INCOME:
                 
Interest on investment securities and other short-term investments
 
$
35
   
$
26
   
$
21
 
Interest on loan receivable from the Bank
   
-
     
6
     
15
 
Total income
   
35
     
32
     
36
 
                         
EXPENSE:
                       
Management service fees paid to the Bank
   
143
     
143
     
143
 
Other expenses
   
1,298
     
1,020
     
587
 
Total expense
   
1,441
     
1,163
     
730
 
LOSS BEFORE INCOME TAXES AND EQUITY
                       
IN UNDISTRIBUTED INCOME OF THE BANK
   
(1,406
)
   
(1,131
)
   
(694
)
BENEFIT FOR INCOME TAXES
   
(294
)
   
(513
)
   
(235
)
LOSS OF PARENT COMPANY
   
(1,112
)
   
(618
)
   
(459
)
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK
   
18,378
     
10,860
     
7,863
 
NET INCOME
 
$
17,266
   
$
10,242
   
$
7,404
 

There were no items of other comprehensive income that were solely attributable to the parent company.
101

RIVERVIEW BANCORP, INC. (PARENT COMPANY ONLY)

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2019, 2018 AND 2017

(In thousands)
 
2019
   
2018
   
2017
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net income
 
$
17,266
   
$
10,242
   
$
7,404
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
Equity in undistributed income of the Bank
   
(18,378
)
   
(10,860
)
   
(7,863
)
Amortization
   
91
     
94
     
22
 
Provision for deferred income taxes
   
10
     
174
     
666
 
Earned ESOP shares
   
-
     
148
     
143
 
Changes in assets and liabilities:
                       
Other assets
   
(447
)
   
1,770
     
(1,031
)
Accrued expenses and other liabilities
   
141
     
(132
)
   
(19
)
Net cash provided by (used in) operating activities
   
(1,317
)
   
1,436
     
(678
)
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Proceeds from assumption of junior subordinated debt (see Note 3)
   
-
     
-
     
3,687
 
Dividend from the Bank
   
2,000
     
1,750
     
2,500
 
Net cash provided by investing activities
   
2,000
     
1,750
     
6,187
 
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Dividends paid
   
(3,163
)
   
(2,140
)
   
(1,799
)
Proceeds from exercise of stock options
   
179
     
245
     
11
 
Net cash used in financing activities
   
(2,984
)
   
(1,895
)
   
(1,788
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(2,301
)
   
1,291
     
3,721
 
                         
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
6,479
     
5,188
     
1,467
 
                         
CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
4,178
   
$
6,479
   
$
5,188
 
102
RIVERVIEW BANCORP, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

(Dollars in thousands, except per share data)
 
Three Months Ended
 
   
March 31
   
December 31
   
September 30
   
June 30
 
Fiscal 2019:
                       
Interest and dividend income
 
$
12,464
   
$
12,336
   
$
12,213
   
$
12,105
 
Interest expense
   
930
     
656
     
611
     
618
 
Net interest income
   
11,534
     
11,680
     
11,602
     
11,487
 
Provision for (recapture of) loan losses
   
-
     
-
     
250
     
(200
)
Non-interest income, net
   
3,008
     
2,782
     
3,016
     
3,052
 
Non-interest expense
   
8,962
     
8,803
     
8,915
     
9,019
 
Income before income taxes
   
5,580
     
5,659
     
5,453
     
5,720
 
Provision for income taxes
   
1,373
     
1,271
     
1,224
     
1,278
 
                                 
Net income
 
$
4,207
   
$
4,388
   
$
4,229
   
$
4,442
 
                                 
Basic earnings per common share (1)
 
$
0.19
   
$
0.19
   
$
0.19
   
$
0.20
 
                                 
Diluted earnings per common share (1)
 
$
0.19
   
$
0.19
   
$
0.19
   
$
0.20
 
                                 
Fiscal 2018:
                               
Interest and dividend income
 
$
11,244
   
$
11,378
   
$
11,315
   
$
11,023
 
Interest expense
   
587
     
582
     
590
     
590
 
Net interest income
   
10,657
     
10,796
     
10,725
     
10,433
 
Provision for loan losses
   
-
     
-
     
-
     
-
 
Non-interest income, net
   
2,663
     
2,890
     
2,713
     
2,738
 
Non-interest expense
   
9,127
     
8,558
     
8,759
     
9,174
 
Income before income taxes
   
4,193
     
5,128
     
4,679
     
3,997
 
Provision for income taxes
   
1,184
     
3,608
     
1,620
     
1,343
 
                                 
Net income
 
$
3,009
   
$
1,520
   
$
3,059
   
$
2,654
 
                                 
Basic earnings per common share (1)
 
$
0.13
   
$
0.07
   
$
0.14
   
$
0.12
 
                                 
Diluted earnings per common share (1)
 
$
0.13
   
$
0.07
   
$
0.14
   
$
0.12
 

           (1)   Quarterly earnings per common share may vary from annual earnings common 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 Rule 13a-15(e) of the Securities Exchange Act of 1934 ("Exchange Act")) 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 annual report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2019, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act 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.

While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and 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, if any, within the Company have been
 
103
detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns in controls or procedures can occur because of simple errors or mistakes. 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 controls. The design of any control procedure 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 attributable to errors 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 consolidated 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, 2019. To make the assessment, we used the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we have concluded that, as of March 31, 2019, the Company's internal control over financial reporting was effective based on 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, 2019. The attestation report, appearing in "Item 8: Financial Statements and Supplementary Data" of this Form 10-K, expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of March 31, 2019.

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 2019 that was not so disclosed.


104
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 2019 Annual Meeting of Stockholders, and "Part I - Business -- Executive Officers" of this Form 10-K, is incorporated herein by reference.

Code of Ethics

In December 2003, the Board of Directors adopted the Officer and Director Code of Ethics. The Code of Ethics 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 Gerald L. Nies, Bess. R. Wills, 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 designated Mr. Olson, 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" in the Company's Proxy Statement for the 2019 Annual Meeting of Stockholders (excluding the information contained under the heading "Personnel/Compensation Committee Report,") is incorporated herein by reference.

105
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 Company's Proxy Statement for the 2019 Annual Meeting of Stockholders is incorporated herein by reference.

Equity Compensation Plan Information.   The following table summarizes share and exercise price information about the Company's equity compensation plan as of March 31, 2019.

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)
2017 Equity Incentive Plan
   
-
   
-
   
1,800,000
2003 Stock Option Plan
   
101,332
   
3.26
   
-
                   
Equity compensation plans not approved by security holders:
   
-
   
-
   
-
                   
Total
   
101,332
   
3.26
   
1,800,000

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

The information set forth under the headings "Related Party Transactions" and "Director Independence" under the heading "Meetings and Committees of the Board of Directors and Corporate Governance Matters – Corporate Governance" in the Company's Proxy Statement for the 2019 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 Registered Public Accounting Firm" in the Company's Proxy Statement for the 2019 Annual Meeting of Stockholders (excluding the information contained under the heading of "Report of the Audit Committee") is incorporated herein by reference.
106
PART IV
Item 15.  Exhibits and Financial Statement Schedules
 
 
   (a)
1.
Financial Statements
See "Part II –Item 8. Financial Statements and Supplementary Data."
 
 
2. 
Financial Statement Schedules 
All 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.
 
 
 
Exhibits
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
101
The following materials from Riverview Bancorp Inc.'s Annual Report on Form 10-K for the year ended March 31, 2019, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements *

 
(1)
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on September 29, 2016 and incorporated herein by reference.
(2)
Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 333-30203), and incorporated herein by reference.
(3)
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 3, 2019 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, 2019, and incorporated herein by reference.
(5)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2017 and incorporated herein by reference.
(6)
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.
(7)
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.
(8)
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.
(9)
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.
(10)
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2009 and incorporated herein by reference.
(11)
Filed as Appendix A to the Registrant’s Definitive Annual Meeting Proxy Statement (000-22957), filed with the Commission on June 16, 2017, and incorporated herein by reference.
(12)
Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-228099), and incorporated herein by reference.
(13)
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2017, and incorporated herein by reference.
*
Filed herewith
107
Item 16.  Form 10-K Summary

None.
 
 
 
 
 
 
 
 
 
108
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 14, 2019
By:
/s/ Kevin J. Lycklama
 
 
 
Kevin J. Lycklama
 
 
 
President and Chief Executive Officer
Director
(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/ Kevin J. Lycklama
 
Patrick Sheaffer
 
Kevin J. Lycklama
 
Chairman of the Board
 
President and Chief Executive Officer  
Director
(Principal Executive Officer)
 
 
 
 
Date:
June 14, 2019
Date:
June 14, 2019
 
 
 
 
 
 
 
 
By:
/s/ David Lam
By:
/s/ Bess R. Wills
 
David Lam
 
Bess R. Wills
 
Executive Vice President and
 
Director
 
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
Date:
June 14, 2019
Date:
June 14, 2019
 
 
 
 
 
 
 
 
By:
/s/ David Nierenberg
By:
/s/ Bradley J. Carlson
 
David Nierenberg
 
Bradley J. Carlson
 
Director
 
Director
 
 
 
 
Date:
June 14, 2019
Date:
June 14, 2019
 
 
 
 
 
 
 
 
By:
/s/ John A. Karas
By:
/s/ Jerry C. Olson
 
John A. Karas
 
Jerry C. Olson
  Director   Director 
       
Date: June 14, 2019 Date:  June 14, 2019 
       
       
By: /s/ Gerald L. Nies By:  /s/ Patricia W. Eby
 
Gerald L. Nies
 
Patricia W. Eby
 
Director
 
Director
       
Date:
June 14, 2019
Date:
June 14, 2019

                                                                                                                
 
 
 
109


            
 


 
Exhibit 10.1







RIVERVIEW BANCORP, INC.

RIVERVIEW COMMUNITY BANK



EMPLOYMENT AGREEMENT

FOR


___________________



RIVERVIEW BANCORP, INC.
RIVERVIEW COMMUNITY BANK
EMPLOYMENT AGREEMENT
FOR
______________
This EMPLOYMENT AGREEMENT (this “ Agreement ”) is entered into by and between RIVERVIEW BANCORP, INC., a registered savings and loan holding company (“ Bancorp ”), and RIVERVIEW COMMUNITY BANK, a federally chartered savings bank (the “ Bank ”), which is a wholly owned subsidiary of Bancorp, (Bancorp and Bank are collectively referred to as the “ Company ”), and _________ (“ Executive ”), and is dated December 31, 2018 (the “ Effective Date ”).  The Company and Executive are referred to herein individually as a “ Party ” and, collectively, as the “ Parties .”
1.
At-Will   Employment .   The Bank will commence or continue to employ Executive, subject to the terms and conditions set forth in this Agreement.  The employment is “at will.”  Notwithstanding the Employment Term set forth in this Agreement, the Company may terminate Executive’s employment at any time for any lawful reason or for no reason at all, subject to the provisions of this Agreement.
2.
Term; Extension .

(a)
Employment Term.   The term of this Agreement begins on the Effective Date and shall continue until the one (1) year anniversary thereof, unless Executive’s employment is terminated earlier pursuant to Section 6 of this Agreement.  The period during which Executive is employed by the Bank hereunder is hereinafter referred to as the “ Employment Term .”  The last day of Executive’s employment with the Bank is hereinafter referred to as the “ Termination Date .”

(b)
Extensions.   At any time during the Employment Term, Company’s Board of Directors (the “ Board ”) may elect in writing to extend the Employment Term of this Agreement on the same terms and conditions for one (1) additional year beyond the current Employment Term.  This Agreement may be extended by the Board in writing up to five (5) times in the same manner.
3.
Position .   Executive will serve as the Bank’s ____________ or such other position as the Company may designate from time to time.  Executive also agrees to serve, if elected, as an officer and/or director of the Company or any of its affiliates.  Executive will faithfully and diligently perform the duties that are normal and customary to the position, as well as those duties assigned from time to time by the Company’s Board and/or the Bank’s Chief Executive Officer (the “ CEO ”).  Executive’s duties and responsibilities shall be subject to change from time to time in the Board’s or the CEO’s discretion; provided, however, that the foregoing shall not vitiate or modify the application of the termination for Cause provision of Section 6(b) hereof, or Executive’s rights upon any resignation for Good Reason in Section 6(c).

1


4.
Obligations;

(a)
Executive shall devote Executive’s best efforts, energies, and skills to the position and shall not engage in any business, professional, or employment activity that is not on the Company’s behalf (whether or not pursued for gain or profit), except for:

(1)
Activities approved in writing in advance by the Board; and

(2)
Passive investments that do not involve Executive providing any advice or services to the businesses in which the investments are made.

(b)
The principal place of Executive’s employment shall be Company’s headquarters in the greater Vancouver, Washington metropolitan area, provided that Executive may be required to travel on Company business during the Employment Term.  Executive agrees to maintain a full-time residence in close proximity to Vancouver, Washington during the Employment Term.

(c)
Executive’s employment shall be governed by any employment policies, procedures or handbooks as may be adopted by Company and are applicable to employees (the “ Company’s Employment Policies ”), as they may be modified from time to time, except to the extent those Employment Policies are inconsistent with the terms of this Agreement, in which case this Agreement shall control.  The Company’s Employment Policies include, but are not limited to, the Personnel Policy Manual, the Code of Conduct, the Conflict of Interest and Whistleblower Policy, and the Technology Use Policy. In performing Executive’s duties, Executive also agrees to act in accordance with applicable state and federal laws.

(d)
The Company anticipates that Executive will be active in community associations in the Company’s market area.
5.   Compensation/Benefits .

(a)
Base Salary.   For services performed under this Agreement, Executive’s annual base salary as of the Effective Date is $ ______ (the “ Base Salary ”).  The Base Salary will be paid in periodic installments in accordance with the Company’s regular payroll schedule and subject to all lawful and authorized deductions and withholdings.  Executive’s Base Salary shall be reviewed at least annually by the Board after taking into consideration the Executive’s performance individually and as part of the Company, and the Board may, but shall not be required to, increase the Base Salary during the Employment Term.

(b)
Incentive Compensation.   In addition to the Base Salary, Executive will participate in the Company’s Annual Incentive Plan and any successor incentive compensation plans, to be paid in compliance with the terms and conditions of applicable incentive compensation plans (the “ Incentive Compensation ”).

(c)
Other Benefits.   During the term of this Agreement, Executive shall be entitled to participate in the Company’s health and welfare, retirement and all other employee benefit plans, practices, and programs maintained by the Company, as in effect from time to time (collectively, “ Employee Benefit Plans ”), and which other employees of the Company are generally eligible, subject to the terms of the applicable Employee Benefit
2



Plans.  The Company reserves the right to amend or terminate any Employee Benefit Plans at any time in its sole discretion, subject to the terms of such Employee Benefit Plans and applicable law.


(d)
Reimbursable Expenses.   Executive is authorized to receive reimbursement for reasonable expenses incurred in performing Executive’s duties and in promoting the business of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established from time to time by the Company, and further provided that all such reimbursements shall comply with Section 409A of the Internal Revenue Code of 1986, as it may be amended from time to time (the “ Code ”).

(e)
Vacation.   Executive shall be entitled to paid vacation and sick leave according to the Company’s Employment Policies.

(f)
Insurance and Indemnification.   The Company shall provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at Company’s expense, and, with respect to any claims not covered by that policy, shall indemnify Executive (and Executive’s heirs, executors and administrators) to the fullest extent permitted under law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding brought by a third party against the Company in which Executive may be involved by reason of having been a director or officer of the Company or any of its affiliates (whether or not Executive continues to be a director or officer at the time of incurring those expenses or liabilities).  Those expenses and liabilities include, but are not limited to, court costs, attorneys’ fees and expenses, judgments and reasonable settlement costs; provided, however, Company shall not be required to reimburse Executive for any expenses and liabilities caused by Executive’s intentional or reckless violation of the Company’s Employment Policies or the law.

(g)
Withholding Taxes.   All amounts payable to Executive as compensation hereunder, including any bonuses or other monetary incentives, shall be subject to such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
6.
Termination of Employment .   Executive’s employment and this Agreement may be terminated by Company with or without cause (as defined below), by Executive with or without Good Reason (as defined below), or upon the expiration of the Employment Term in accordance with Section 2 of this Agreement.  The Party seeking to terminate employment must provide written notice of its intent to terminate, citing the specific Section of this Agreement upon which the Party is relying and the Termination Date.  Executive’s employment may also terminate due to death or disability, as defined below in Subsection 6(a).

(a)
Death or Disability.   Upon death, this Agreement automatically terminates.  Company may terminate this Agreement because of disability by delivering written notice to Executive stating the Termination Date.  Company’s decision to terminate because of disability shall be based on its good faith determination that Executive is unable as result of physical or mental illness to perform the essential functions of Executive’s position, despite reasonable accommodation, for an aggregate of ninety (90) days during any period of one hundred eighty (180) consecutive days (unless a longer period is required
3



by law, in which case the longer period would apply).  Company’s disability determination should be based on evidence from a competent health care provider obtained with the cooperation of Executive, and should consider any reasonable accommodation that the Company may provide without undue hardship, and any other considerations required by law.


(b)
Cause.”

(1)
Definition.   Cause for termination of employment means the occurrence of any one or more of the following:

(A)
Conviction of any felony, a misdemeanor involving moral turpitude, or of any crime in connection with Executive’s duties;

(B)
Removal of Executive from office or permanent prohibition of Executive from participating in the conduct of the Company’s affairs by an order issued by a bank regulatory authority;

(C)
Conduct involving dishonesty, embezzlement, misappropriation, fraud, or a material breach of a fiduciary duty in the performance of Executive’s duties;

(D)
Participation in any incident compromising Executive’s reputation and as a consequence materially diminishing Executive’s ability to represent Company with the public;

(E)
Conduct significantly harmful to the Company, including but not limited to public disparagement of the Company or any affiliate of the Company, intentional or reckless violation of law or of any significant policy or procedure of the Company;

(F)
Willful misfeasance, gross negligence, or refusal or failure to act in accordance with any lawful and reasonable stipulation, requirement or directive of the Board or CEO. As used in this Subsection 6(b)(1)(F), the term “reasonable” means any stipulation, requirement, or directive that falls under the Board’s or CEO’s authority;

(G)
Material breach of any material obligations under this Agreement or any other written policies or rules of Company;

(H)
Sexual harassment, as defined by the Company’s Employment Policies.

(I)
Willful unauthorized disclosure of trade secrets and Confidential Information (as defined below); or

(J)
Chronic drug or alcohol abuse to an extent that materially impairs Executive’s performance of Executive’s duties.

(2)
Procedure for Termination for Cause.   Termination for Cause will be automatic upon the occurrence of an incident under Subsections (6)(b)(1)(A) or (B) above.
4



Otherwise, the Board may not terminate Executive’s employment for Cause unless:


(A)
With respect to incidents under Subsections 6(b)(1)(C), (D), (E), (F), (G), (H), (I), or (J):

(i)
Executive is given reasonable written notice (in no event less than five (5) business days’ notice) of the Board meeting called to make that determination; and

(ii)
Executive and Executive’s legal counsel are given the opportunity to address the incident(s) at that meeting.

(B)
In addition, with respect to incidents under Subsections (1)(F) or (G) only, Executive is first given:

(i)
Written notice by the Board or CEO specifying in detail the performance issues; and

(ii)
A reasonable opportunity to cure the issues specified in the notice; provided, however, if Company reasonably expects irreparable injury from a delay in termination, Company may terminate Executive without an opportunity to cure.

(iii)
If an opportunity to cure is provided, Company’s Board shall also determine, in its sole discretion, whether Executive has in fact cured the cause and done so in a timely manner.

(3)
Procedure for Termination Without Cause.   Company may terminate Executive’s employment and this Agreement during the Employment Term without Cause by delivering at least thirty (30) days’ prior written notice stating the Termination Date.  During the period between the delivery of the notice of termination and the Termination Date, the Executive’s employment shall continue and Executive shall continue to perform Executive’s duties and cooperate in the orderly transition of Executive’s duties.  At Company’s discretion, it may pay the Executive’s then-current Base Salary for the notice period and excuse Executive from any further duties during such period.

(c)
Good Reason.”

(1)
Definition Subject to Subsection 6(c)(2) below, Good Reason for Executive’s resignation means any one or more of the following occurring without Executive’s consent:

(A)
A material reduction of Executive’s Base Salary;

(B)
A relocation or transfer of Executive’s principal place of employment that would require Executive to commute on a regular basis more than twenty-five (25) miles each way from the main business office of the Company as of the Effective Date; or
5


(C)
Any other action or inaction that constitutes a material breach of this Agreement by Company.

(2)
Procedure for Resignation for Good Reason To resign for Good Reason, Executive must give the Company:

(A)
Written notice of the intended resignation and a detailed description of the Good Reason not more than thirty (30) days after Executive becomes aware of the initial existence of the Good Reason; and

(B)
A reasonable opportunity of at least thirty (30) days in which to cure those circumstances.

(C)
Good Reason shall not exist if Executive (a) fails to provide such notice within the thirty (30) day notice period, or (b) the Company cures the specified condition within the thirty (30) day cure period.

(d)
Resignation of All Other Positions.  Upon termination of Executive’s employment hereunder for any reason, Executive agrees to resign from all positions that Executive holds as an officer or member of a board (or a committee thereof) of Company or any of its affiliates.
7.
Separation Benefits .

(a)
Payment of Accrued Salary and Benefits.  Upon termination of Executive’s employment for any reason, Executive will receive payments for all Base Salary and benefits accrued and payable as of the date of Executive’s Termination Date, which shall be paid in accordance with applicable law.  All further compensation and benefits shall terminate as of the Termination Date, except as otherwise required by law (e.g., COBRA coverage) or as provided in Subsections 7(c), (d), or (e) below.

(b)
Termination for Cause or Without Good Reason.   If Executive’s employment is terminated upon death, the expiration of the Employment Term, by the Company for Cause, or by Executive without Good Reason, Executive will have no right to receive additional compensation past the Termination Date and will have no right to any unpaid Incentive Compensation.

(c)
Termination Without Cause or for Good Reason .

(1)
Subject to the limitations in Subsection 7(c)(3) below, if Executive’s employment is terminated by the Company without Cause or by Executive with Good Reason, the Company will pay Executive (or in the event of Executive’s subsequent death, Executive’s beneficiaries or estate) a severance benefit (the “ Severance Benefit ”) in an aggregate amount equal to:

(A)
Twelve (12) months of Executive’s monthly Base Salary (based on the Executive’s Base Salary as of the Termination Date), to be paid for a period of twelve months beginning on the commencement date as determined under Subsection 7(c)(3)(B) below, subject to all applicable payroll tax withholding and other deductions required by law;
6


(B)
Any unpaid Incentive Compensation based on the fiscal year that ended immediately before the Termination Date, to be paid on the same date and in the same manner Executive would be paid if Executive remained employed with Company, subject to all applicable payroll tax withholding and other deductions required by law; and

(C)
If Executive timely and properly elects health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 or any applicable state health insurance continuation law (“ COBRA ”), the Company shall directly pay or reimburse Executive for the monthly COBRA premium paid by Executive for Executive and Executive’s dependents (at the same percentage as paid by the Company as of the Termination Date). Executive shall be eligible to receive such reimbursement until the earliest of: (i) the twelve (12) month anniversary of the Termination Date; (ii) the date the Executive is no longer eligible to receive COBRA continuation coverage; or (iii) the date on which Executive becomes eligible to receive substantially similar coverage from another employer or other source.  Notwithstanding the foregoing, if the Company’s payments under this Section 7(c)(1)(C) would violate the nondiscrimination rules applicable to non-grandfathered plans under the Affordable Care Act (the “ ACA ”), or result in the imposition of penalties under the ACA and the related regulations and guidance promulgated thereunder, the Parties agree to reform this Section 7(c)(1)(C) in a manner as is necessary to comply with the ACA.

(2)
The Parties intend the Severance Payments under this Section 7 to qualify for the exemption from Section 409A of the Code, for separation pay, pursuant to Treasury Regulations 1.409A-1(b)(9)(iii).

(3)
Severance Benefits Limitations.  Payment of the Severance Benefit will be subject to the following limitations:

(A)
Release of Claims.   Executive’s receipt of the Severance Benefit is conditioned on Executive having executed a separation agreement in substantially the same form attached hereto as Exhibit A (the “ Separation Agreement ”) and the revocation period having expired without Executive having revoked the Separation Agreement.  Executive must execute the Separation Agreement and the revocation period must expire within sixty (60) days of the Termination Date.

(B)
Commencement of Payment.   The first payment of Severance Benefits is payable after the Separation Agreement is effective, but no later than sixty (60) days following the Termination Date; notwithstanding the foregoing to the contrary, where Executive’s Termination Date occurs after November 1 of a calendar year, assuming Company receives a fully executed Separation Agreement within sixty (60) days following the Termination Date, the first payment shall be made as soon as practicable after the beginning of the next following calendar year but in no event later than March 15 of such calendar year.
7


(C)
Conclusion of Payment.  Company’s obligation to pay Executive’s Severance Benefit under this Agreement shall end immediately upon Executive engaging in Prohibited Activity (as defined under Subsection 9(b)), or upon the conclusion of the twelve (12) month period, whichever occurs first.  Executive agrees to notify Company in writing immediately upon Executive’s commencement of Prohibited Activity (as defined under Subsection 9(b)). Executive understands and agrees that Executive must immediately return or repay to Company any Severance Benefit or portion thereof that was made to Executive after the time Executive engages in Prohibited Activity. The conclusion of payment for engaging in Prohibited Activity shall apply even if Executive’s noncompetition restriction does not extend beyond Executive’s Employment Term.

(D)
Compliance with Material Terms.  Receipt of the Severance Benefit is further conditioned on Executive not being in violation of any material term of this Agreement, including without limitation the restricted covenants in Section 9, or in violation of any material term of the Separation Agreement.  If Executive violates any material term of this Agreement or the Separation Agreement, the Company may immediately stop paying Severance Benefits and will have no further payment obligations.

(E)
Regulatory Limitation.   The Company shall make no payment for Severance Benefits provided for under this Agreement to the extent that the payment would be prohibited by applicable banking regulations or any regulatory order.  If the payment is prohibited, the Company shall use reasonable efforts to secure the consent of the banking regulator to make the payment in the highest amount permissible, up to the amount provided for in this Agreement.

(d)
Change in Control Benefits.
(1)
If Executive’s employment terminates under circumstances that qualify as a payment event under the Change In Control Agreement between the Company and Executive, as amended (the “ CIC Agreement ”), Executive will receive:
(A)
Only those payments under this Agreement that are payable under Subsection 7(a) above; and
(B)
The benefits payable in accordance with the terms and conditions of the CIC Agreement in lieu of any Severance Benefits payable under Subsection 7(c) above.
(2)
If Executive’s employment terminates under circumstances that do not qualify as a payment event under the CIC Agreement, the compensation and benefits payable to Executive upon termination of employment will be determined solely under this Section 7.

8


(e)
          Disability.

(1)
Transition Payment.  If Executive becomes disabled as defined in Subsection 6(a) above, Executive’s employment will terminate and the Company will pay Executive, as transition pay and in lieu of the Severance Benefits, a lump sum payment equal to four (4) months of Executive’s Base salary (based on the Executive’s Base Salary as of the Termination Date) (the “ Transition Payment ”). The Transition Payment is subject to the limitations in Subsections 7(c)(3)(A), 7(c)(3)(D), and 7(c)(3)(E) above.
(2)
Commencement of Payment.  The Transition Payment is payable after the Separation Agreement is effective, but no later than sixty (60) days following the Termination date; notwithstanding the foregoing to the contrary, where Executive’s Termination Date occurs after November 1 of a calendar year, assuming Company receives a fully executed Separation Agreement within sixty (60) days following the Termination Date, the Transition Payment shall be made as soon as practicable after the beginning of the next following calendar year but in no event later than March 15 of such calendar year.
(3)
Transition Benefits.  If Executive becomes disabled as defined in Subsection 6(a) above, Executive’s employment will terminate and the Company will, if reasonably possible, continue Executive’s life, medical, dental, and disability coverage on the policies in existence before Executive’s termination for disability until the earliest of the
(A)
Executive’s full-time employment with another employer;
(B)
Executive’s death; or
(C)
The 12 month anniversary of the Termination Date.
8.
Cooperation Following Termination .   Executive agrees that when Executive’s employment ends, whether voluntarily or involuntarily, Executive will cooperate fully with Company in all matters relating to the completion of pending work, the orderly transfer of any such pending work to other employees, the return of all property, and in any business or legal matters in which participation is requested.    Executive further agrees to preserve the attorney-client privilege regarding any legal matters to which Executive was privy during Executive’s employment with Company.  If Company asks Executive to assist in any litigation after employment ends, Executive agrees to cooperate by assisting Company’s counsel in the preparation and execution of sworn declarations, appearing voluntarily without subpoena, and testifying truthfully in declarations, depositions, and at any arbitrations, administrative hearings or trials.  If requested by Company to provide such assistance, Executive shall be reimbursed for any reasonable out-of-pocket expenses.
9.
Restrictive Covenants .

(a)
Confidential Information.

(1)
Executive’s Obligations.   For an indefinite period, Executive shall protect and preserve as confidential all of Company’s Confidential Information (defined below in Subsection 9(a)(2)) at any time known to Executive or in Executive’s
9



possession or control with not less than the diligence, care and effort which a prudent owner would use to protect his or her own most sensitive information.  Executive shall neither disclose to third parties, use, nor allow others to use any Confidential Information for any purpose other than for the sole benefit of Company and as specifically approved in writing in advance by Company’s Board in each instance.  Executive acknowledges and agrees that the covenants contained in this Subsection 9(a) shall supplement, rather than replace or contradict, any other rights or remedies that Company may have under applicable law.  If a dispute arises, Executive has the burden to show that information is not Company’s Confidential Information.  If anyone tries to compel Executive to disclose any of Company’s Confidential Information by subpoena or otherwise, Executive will promptly notify the Board or the CEO so that Company may take any actions it deems necessary to protect its interests.  This Subsection 9(a) shall survive the termination of this Agreement.


(2)
Definition of Confidential Information.   “Confidential Information” means information which (a) derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy.  Confidential Information also includes proprietary or secret information belonging to Company that was disclosed to or known by Executive as a consequence of Executive’s employment with Company and not otherwise publicly known, whether or not received prior to the Effective Date, whether or not marked confidential or labeled as Confidential Information, and whether or not considered a trade secret under applicable law.  Confidential Information may consist of verbal, written, or electronically stored information, and may be tangible or merely remembered.

(A)
Examples of Confidential Information.  Company provides the following list of Confidential Information by way of example, but this list is not intended to be exhaustive: inventions; technical information; algorithms, designs, concepts, systems, techniques, methods, models, procedures, or processes; know-how or methodologies; manuals, contracts, or reports; purchasing or accounting information; regulatory information and communications related thereto; financial history or projections; legal affairs; formulae; compositions; software or computer programs; research projects; business modes and information; the identity of all vendors, vendor lists, and vendor contact information; the identity of customers, customer lists, and customer contact information; pricing data; financial data; sources of supply; marketing plans and/or strategies, including price strategies, marketing, sales, technology, research and development, production, or merchandising systems or plans; and information pertaining to any aspect of any activity or business of Company or its vendors, suppliers, distributors or customers, including information entrusted to Company by third parties (including vendors, customers and prospective vendors or customers), or any trade secrets, proprietary or confidential matter of Company or of such third parties.
10


(B)
Excluded Confidential Information.   Confidential Information does not include information that Executive can prove (a) was known by or in the possession of Executive prior to employment with Company through means other than as a result of past relationships or business dealings between Executive and Company or its vendors, suppliers or customers; (b) consists in whole or in part of any Prior Intellectual Property (defined below in Section 10); or (c) is known to or readily discoverable by others not under an obligation of confidentiality.

(C)
DTSA Disclosure.  Pursuant to the Defend Trade Secrets Act of 2016, Executive will not have criminal or civil liability under any federal or state trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, if Executive files a lawsuit for retaliation against the Company for reporting a suspected violation of law, Executive may disclose the trade secret to Executive’s attorney and may use the trade secret information in the court proceeding, if Executive files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

(b)
Noncompetition.   Executive acknowledges and agrees that due to Executive’s position and responsibilities with the Company, Executive will have access to trade secrets and Confidential Information.  Because of the Company’s protectable interest, and the good and valuable consideration offered to Executive during the Employment Term, for the Employment Term, and for a period of one (1) year following the Termination Date (unless Company terminates Executive without Cause (as defined in Subsection 6(b) (1) ), Executive resigns for Good Reason (as defined in Subsection 6(c)(1)), or Company terminates Executive because of disability (as defined under Subsection 6(a)), Executive agrees and covenants not to, directly or indirectly, engage in any “ Prohibited Activity ” in any city, town, or county in which the Company or Company’s affiliates have an office or branch or has filed an application for regulatory approval to establish an office or branch.  For the sake of clarity, this noncompetition restriction shall not extend beyond Executive’s Employment Term if Executive’s employment is terminated by Company without Cause (as defined under Subsection 6(b)(1), Executive Resigns for Good Reason (as defined under Subsection 6(c)(1), or Company terminates Executive because of disability (as defined under Subsection 6(a)).  Prohibited Activity is defined as an activity Executive engages in or which Executive contributes Executive’s knowledge, directly or indirectly, in whole or in part, as an employee, employer, operator, manager, advisor, consultant, contractor, agent, partner, director, stockholder, officer, volunteer, intern, or any other similar capacity, in the same or similar business of Company, including, without limitation, the business of providing depository or lending services.  Prohibited Activity also includes activity that may require or inevitably require disclosure of trade secrets, proprietary information, or Confidential Information.  Nothing herein shall prohibit Executive from purchasing or owning less than five percent (5%) of the publicly traded securities of any corporation, provided that such ownership represents a passive investment and that Executive is not a controlling person of, or a member of a group that controls, such corporation.  Provided Executive’s Termination Date occurs during the
11



term of this Agreement, including any extension, this Subsection 9(b) shall survive the termination of this Agreement.


(c)
Nonsolicitation.

(1)
During the Employment Term and for a twelve (12) month period following the Termination Date, whether terminated for any reason whatsoever, by Executive or Company, Executive will not, directly or indirectly, solicit, call on, induce or encourage Customers or Business Partners (defined below) to terminate or limit their relationship with Company or to send their business elsewhere or assist any person, group or entity in doing so or attempting to do so.  This Subsection 9(c) shall survive the termination of this Agreement.

(2)
Customers ” are:

(A)
All customers serviced by the Company or any of the Company’s affiliates at any time within 12 months before the Termination Date;

(B)
All customers and potential customers whom the Company or the Company’s affiliates, with the knowledge or participation of Executive, actively solicited at any time during the 12 months before the Termination Date; and

(C)
All successors, owners, directors, partners and management personnel of the Customers described in Subsection (A) or (B) above.

(3)
Business Partners ” are suppliers, vendors, investors, financial institutions, and other persons and entities with whom Company currently conducts or has conducted business during the 12 months before the Termination Date.

(d)
Nonraiding of Employees.   Executive recognizes that the workforce of the Company and its affiliates are a vital part of the Company’s business.  Therefore, Executive agrees that during the Employment Term and for a twelve (12) month period following the Termination Date, whether terminated for any reason whatsoever, by Executive or Company, Executive will not directly or indirectly recruit or solicit any Company Employee to: (i) breach or modify any provision of such employee’s employment agreement with Company; (ii) reduce or change the quality or quantity or availability of such employee’s services to Company; or (iii) terminate such employee’s employment with Company or any Company Party.  Executive also agrees not to disclose or identify any Company employee as a potential candidate to a third party; however, this does not restrict general solicitations, such as help-wanted ads or job postings, so long as those solicitations are not specifically directed to individuals who are known to be currently employed by Company.  For purposes of this Subsection, “ Company Employees ” means all employees working for the Company as of the Termination date.  This Subsection 9(d) shall survive the termination of this Agreement.

(e)
Injunctive Relief.   Executive acknowledges that it is impossible to measure in money the damages that the Company will incur if Executive fails to observe the covenants in this Section 9 (the “ Restrictive Covenants ”) and, therefore, Executive agrees that:
12


(1)
The Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any breach or threatened breach of the Restrictive Covenants;

(2)
If the Company is required to post a bond in order to secure an injunction or other equitable remedy, that bond shall be no more than a nominal amount;

(3)
Executive waives any claim or defense that an adequate remedy at law is available to the Company; and

(4)
These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity.

(f)
Reasonableness.   The parties agree that:

(1)
This Agreement in its entirety, and in particular the Restrictive Covenants, is reasonable both as to time and scope;

(2)
The Restrictive Covenants are necessary for the protection of the Company’s business and goodwill;

(3)
The Restrictive Covenants are not any greater than are reasonably necessary to secure the Company’s business and goodwill;

(4)
The degree of injury to the public due to the loss of the service and skill of Executive or the restrictions placed upon Executive’s opportunity to make a living with Executive’s skills upon enforcement of those covenants, does not and will not warrant non-enforcement of those restraints; and

(5)
If the scope of the Restrictive Covenants is adjudged too broad to be capable of enforcement, then the parties authorize that court or arbitrator to narrow the Restrictive Covenants so as to make them capable of enforcement, given all relevant circumstances, and to enforce them to the fullest extent allowed.
10.
Protection of Intellectual Property .

(a)
Company’s Ownership.   Company owns all Inventions and Works (as defined below in Subsection 10(b)) that Executive makes, conceives, develops, discovers, reduces to practice or fixes in a tangible medium of expression, alone or with others, either (a) during Executive’s employment by Company (including the Employment Term and past employment, and whether or not during working hours), or (b) within one (1) year after the Termination Date in each case, if the Invention or Works results from any work Executive performed for Company or involves the use or assistance of Company’s facilities, equipment, materials, personnel or Confidential Information.  If Executive has any pre-existing Invention or Work that Executive requests to exclude from Company ownership (“ Prior Intellectual Property ”), Executive shall make full written disclosure to Company by submitting an attachment to this Agreement listing the Prior Intellectual Property (the “ Prior Intellectual Property Disclosure ”).  If Executive does not attach a Prior Intellectual Property Disclosure to this Agreement, Executive represents and warrants that Executive owns no Prior Intellectual Property that Executive requests to exclude from Company ownership.
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(b)
Definitions of Invention and Works.   “Inventions” means discoveries, developments, concepts, ideas, improvements to existing technology, processes, procedures, machines, products, compositions of matter, trade secrets, formulas, algorithms, computer programs and techniques, custom software, and all other matters ordinarily intended by the word “invention,” whether or not patentable or copyrightable.  “Inventions” also includes all records and expressions of those matters. “Works” means original works of authorship, including interim work product, modifications and derivative works, and all similar matters, whether or not copyrightable.

(c)
Disclosure and Assignment.   Executive will promptly disclose to Company, will hold in trust for Company’s sole benefit, will assign to Company, and hereby does assign to Company all Inventions and Works described in Subsections 10(a) and 10(b), including all copyrights, patent rights, and trade secret rights, vested and contingent, except those pre-existing Inventions identified on the Prior Intellectual Property Disclosure.  To the extent that such Inventions and Works may be considered “works made for hire” under the copyright act, they are hereby agreed to be works made for hire; otherwise, Executive hereby irrevocably assigns and conveys all such rights, title and interest to Company, subject to no liens, claims or reserved rights.  Executive will waive and hereby does waive any moral rights Executive has or may have in the Inventions and Works described in Subsections   10(a) and 10(b).  Executive further agrees that if the foregoing waiver is not effective, Executive agrees not to assert any such moral rights.  To the extent that Executive cannot assign the rights contemplated in Subsections 10(a) and 10(b), including moral rights, Executive hereby grants to Company a fully-paid, royalty free, worldwide, perpetual, exclusive license to use, create and own derivative works of and otherwise exploit such rights.  At Company’s direction and expense, Executive will execute all documents and take all actions necessary or convenient for Company to document, obtain, maintain or assign its rights to these Inventions and Works.  Company shall have full control over all applications for patents or other legal protection of these Inventions and Works.

(d)
Disclaimer Regarding Inventions Developed Entirely on Executive’s Own Time.   Pursuant to RCW 49.44.140(3), Subsection 10(c) of this Agreement regarding the assignment of certain inventions to Company does not apply to an Invention for which no equipment, supplies, facilities, or trade secret information of Company was used and which was developed entirely on Executive's own time, unless (a) the Invention relates (i) directly to Company’s business, or (ii) to Company’s actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by Executive for Company.
11.
Non-Disparagement .   Executive agrees and covenants that Executive will not at any time make, publish or communicate to any person or entity or in any public forum any defamatory or disparaging remarks, comments, or statements concerning the Company or its affiliates, or any of its employees, officers, investors, known customers, or other associated third parties.  Provided, however, that nothing in this Agreement shall preclude Executive from making truthful statements that are required by applicable law, regulation, or legal process.
12.
Return of Company Property .   Executive will safeguard and return to Company when Executive’s employment ends, or sooner if Company requests, all documents and property in Executive’s care, custody or control relating to Executive’s employment or Company’s business and customers (including but not limited to Confidential Information (defined above), keys, pass
14


cards, identification cards ), or any reproductions thereof, whether such information is reduced to writing, existing in hard copies or electronic form, and whether residing on Company’s computers, Executive’s own personal computer, laptop, tablet, or mobile device, or other electronic media used for Company business.  After employment ends, or sooner if Company requests, Executive must disclose all computer user identifications and passwords used by Executive in the course of employment or necessary for accessing information on the Company’s computer system, and Executive will not retain copies of any Confidential Information or other materials belonging to Company unless expressly authorized in writing by Company.  The obligations in this Section include the return of documents and other materials that may be in Executive’s desk at work, Executive’s car or place of residence, or in any other location under Executive’s control.

13.
Dispute Resolution .

(a)
Arbitration .

(1)
The parties agree to submit any dispute arising under this Agreement or Executive’s employment with Company, regardless of the nature of the dispute or the legal concepts involved, to final, binding, and private arbitration. Disputes subject to arbitration include not only disputes involving the negotiation, meaning, or performance of this Agreement, but also claims Executive may have against Company, Company’s affiliates, or against any of their officers, directors, supervisors, managers, employees or agents for violation of any federal, state, or local statute arising out of Executive’s employment relationship with Company.  Executive and Company intend and agree that class action and representative action procedures are hereby waived and shall not be asserted, nor will they apply, in any arbitration pursuant to this Agreement.  The Parties also agree that the following claims are not subject to arbitration: (a) claims that cannot be subject to arbitration as a matter of law; (b) claims for workers’ compensation or unemployment compensation; and (c) claims under an Employee Benefit Plan that specifies a different procedure.

(2)
All claims subject to arbitration shall be settled by final and binding arbitration in accordance with the employment dispute resolution rules of the American Arbitration Association (“ AAA ”) in effect at the time the demand for arbitration is made (“ Rules and Procedures ”), which are available online at https://www.adr.org/sites/default/files/Employment%20Rules.pdf. Accordingly, the Parties are not permitted to pursue court action regarding claims that are subject to arbitration.  Such arbitration shall be filed with the AAA and shall be heard before a single neutral arbitrator who is experienced in employment law, who shall be selected as provided in AAA’s Rules and Procedures.  The aggrieved Party must file the arbitration complaint with AAA and provide all other parties against whom or which a claim is brought written notice no later than the expiration of the statute of limitations that the law prescribes for the claim.  Otherwise, the claim shall be deemed waived.  The arbitration complaint and written notice must identify and describe all claims, the facts upon which such claims are based, and the relief or remedy sought.  Any arbitration shall be heard in Vancouver, Washington; provided, however, if arbitration in Vancouver, Washington is impractical because Executive’s employment for Company is located more than 100 miles from Vancouver, Washington, the arbitration may
15



be held in the county and state where Executive last worked during Executive’s employment for Company.


(3)
Company shall be responsible for the arbitrator’s fees and expenses in excess of any reasonable filing fee with the AAA; provided, however, each party shall pay its own costs and attorneys’ fees, if any.  The arbitrator shall issue a written decision that contains the essential findings and conclusions on which the decision is based.  The arbitrator’s decision shall be final, binding and conclusive upon the Parties.  Suit may be brought to compel arbitration or to enforce any arbitration award in a court of competent jurisdiction.

(4)
Neither this agreement to arbitrate nor any demand for arbitration shall waive or otherwise affect Company’s right to obtain any provisional remedy, including, without limitation, injunctive relief for unfair competition, the use or unauthorized disclosure or misappropriation of trade secrets, the disclosure of any other Confidential Information or the violation of the confidentiality or other provisions of Section 9 of this Agreement.  This Agreement also does not prohibit Executive from filing an administrative charge or complaint with any governmental agency.
14.
Miscellaneous .

(a)
Notices.   Any notice to be delivered under this Agreement shall be given in writing and shall be deemed delivered three days after mailing by certified mail, postage prepaid, addressed to the Company’s Chair of the Board or to Executive at Executive’s last known address on the record of the Company.  Either party may designate an address for notices by written notice to the other.

(b)
Governing Law; Venue & Jurisdiction.   Executive acknowledges that Company maintains its headquarters in Vancouver, Washington.  The Parties therefore agree that this Agreement shall be governed by and construed in accordance with the laws of the State of Washington, without giving effect to the rules governing the conflicts of laws, and without the aid of any canon, custom, or rule of law requiring construction against the drafter, and regardless of whether a party changes domicile or residence.  Executive hereby waives the right to argue to the contrary.  In the event such election is invalid, then the court shall apply the law of the state or states in which Executive performs services for Company.  Executive consents to the exercise of personal jurisdiction by a court of competent jurisdiction in the State of Washington and agrees that venue for any action not subject to arbitration shall be in Clark County, Washington, and hereby waives the right to argue to the contrary.

(c)
Amendment/Waiver.

(1)
This Agreement may not be amended, released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed by each of the Parties hereto; provided, however, the Board may extend the Employment Term of this Agreement in writing without the signature of Executive as provided under Section 2.
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(2)
The failure of any Party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of any Party to enforce each and every such provision. No waiver or any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.

(d)
Severability.   If any provision of this Agreement is held by a court or arbitrator to be invalid or unenforceable, the remaining provisions shall continue to be fully effective.  If any part of this Agreement is held to be unenforceable as written, it shall be enforced to the maximum extent allowed by applicable law.  The unenforceability of any provision in this Agreement in any jurisdiction shall not affect the enforceability of any provision of this Agreement in any other jurisdiction.

(e)
Entire Agreement.   This Agreement represents the entire agreement between the Parties regarding the matters addressed in this Agreement and together with the Company’s Employment Policies governs the terms of Executive’s employment.  Where there is a conflict between this Agreement and the Company’s Employment Policies, the terms of this Agreement shall govern. This Agreement supersedes any other prior oral or written employment agreements between the Parties. This Agreement does not supersede any incentive compensation agreement (including stock option or other equity incentive agreement agreements) and/or the Change in Control Agreement entered into separately by the parties to this Agreement.

(f)
Code Section 409A Compliance.   For purposes of this Agreement, a termination of employment will be determined consistent with the rules relating to a “separation from service” as defined in Section 409A of the Code and the regulations thereunder (“Section 409A”).  The Parties intend that this Agreement, to the extent possible, will be administered in accordance with Section 409A and the Treasury Regulations and other applicable regulatory guidance issued thereunder, and will be interpreted in a manner so that no payments made to Executive under this Agreement constitute a deferral of compensation or, if so, will constitute a deferral for which the payment and other terms are compliant with Section 409A so as to avoid imposition of any additional tax to Executive under Section 409A.  Company makes no representation or warranty as to compliance with Section 409A and shall have no liability to the Executive or any other person for any adverse consequences arising under Section 409A.  Notwithstanding anything else provided herein, to the extent any payments provided under this Agreement in connection with Executive’s termination of employment constitute deferred compensation subject to Section 409A, and Executive is deemed at the time of such termination of employment to be a “specified Executive” under Section 409A, then such payment shall not be made or commence until the earlier of (i) the expiration of the 6-month period measured from Executive’s separation from service from Company or (ii) the date of Executive’s death following such a separation from service; provided, however, that such deferral shall only be effected to the extent required to avoid adverse tax treatment to Executive including, without limitation, the additional tax for which Executive would otherwise be liable under Section 409A(a)(1)(B) in the absence of such a deferral.  The first payment thereof will include a catch-up payment covering the amount that would have otherwise been paid during the period between Executive’s termination of employment and the first payment date but for the application of this provision, and the balance of the installments (if any) will be payable in accordance with their original schedule.  Except as otherwise expressly provided herein, to the extent any
17



expense reimbursement or the provision of any in-kind benefit under this Agreement is determined to be subject to Section 409A of the Code, the amount of any such expenses eligible for reimbursement, or the provision of any in-kind benefit, in one calendar year shall not affect the expenses eligible for reimbursement in any other taxable year (except for any lifetime or other aggregate limitation applicable to medical expenses), in no event shall any expenses be reimbursed after the last day of the calendar year following the calendar year in which the Executive incurred such expenses, and in no event shall any right to reimbursement or the provision of any in-kind benefit be subject to liquidation or exchange for another benefit.


(g)
Assignment; Death; Binding Effect.

(1)
Executive shall not assign or transfer any of Executive’s rights under this Agreement, wholly or partially, to any other person or to delegate the performance of the Executive’s duties under the terms of this Agreement.

(2)
Upon Executive’s death, no death benefit is payable under this Agreement other than benefits that were already in pay status at the date of death.  Executive’s rights under this Agreement with respect to any benefits earned before the date of death shall inure to Executive’s heirs, executors, administrators or personal representatives.

(3)
The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of the Company, regardless of the manner in which the successors or assigns succeed to the interests or assets of the Company.  This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company, by any merger, consolidation or acquisition where the Company is not the surviving corporation, by any transfer of all or substantially all of the Company’s assets, or by any other change in the Company’s structure or the manner in which the Company’s business or assets are held.  Executive’s employment shall not be deemed terminated upon the occurrence of one of the foregoing events. In the event of any merger, consolidation or transfer of assets, this Agreement shall be binding upon and shall inure to the benefit of the surviving entity or the entity to which the assets are transferred.

(h)
Survival .  If any benefits provided to Executive under this Agreement are still owed, or claims under the Agreement are still pending at the time of the Termination Date, this Agreement shall continue in force with respect to those obligations or claims, until those benefits are paid in full or those claims are resolved in full.  The covenants in Section 8, Section 9, and Section 10, and the dispute resolution provisions in Section 13 of this Agreement shall survive the termination of this Agreement and shall be enforceable regardless of any claim the Parties may have against one another; provided, however, Subsection 9(b) shall not survive this Agreement if Executive’s Termination Date occurs after the term of this Agreement, including any extension, expires.
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(i)
Board’s Authority.

(1)
The Board has the authority to interpret and construe the provisions of this Agreement, including the attached Separation Agreement.  However, with respect to any decision of the Board regarding Executive’s benefits under this Agreement or the attached Separation Agreement (including eligibility for benefits, the calculation of benefits or the forfeiture of benefits), the burden of proof shall be on the Board and that decision shall be:

(A) Subject to the duty of good faith and fair dealing;


(B) Supported by a preponderance of the evidence; and


(C)
Made by the affirmative vote of at least three fourths of the Board.

(2)
An arbitrator or a court reviewing such a decision by the Board shall make its own independent decision and not grant deference to the Board’s decision.

(j)
Actions by Banking Regulatory Authorities .

(1)
If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (the “ FDIA ”), 12 U.S.C. § 1818(e)(3) and (g)(1), the Company’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, the Company may in its discretion:

(A)
Pay Executive all or part of the payments under this Agreement that were withheld while its obligations under this Agreement were suspended; and/or

(B)
Reinstate in whole or in part any of its obligations which were suspended.

(2)
If Executive is removed and/or permanently prohibited from participating in the conduct of the Company’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. § 1818(e)(4) and (g)(1), Executive shall be terminated for Cause as of the effective date of the order.

(3)
If the Company is in default (as defined in Section 3(x)(1) of the FDIA, 12 U.S.C. § 1813(x)(1)), all further obligations under this Agreement shall terminate as of the date of default.

(4)
This Agreement may be terminated entirely or suspended for a period of time by the applicable banking regulatory authority, or as otherwise required by law, if:

(A)
The Federal Deposit Insurance Corporation (“ FDIC ”) enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the FDIA, 12 U.S.C. § 1823(c);
19


(B)
The applicable banking regulatory authority approves a supervisory merger to resolve problems related to the operation of the Company; or

(C)
The applicable banking regulatory authority determines the Company is in an unsafe or unsound condition.

(5)
The Severance Benefit and the indemnification rights granted under Section 5(f) are subject to and conditioned upon their compliance with 12 U.S.C. § 1828(k) and FDIC regulation 12 C.F.R. Part 359, “Golden Parachute and Indemnification Payments.”

(k)
Attorneys’ Fees and Costs.   In any dispute arising out of or relating to this Agreement, including in compelling arbitration, or enforcing or collecting an arbitration award, the prevailing party shall be entitled to recover from the non-prevailing party its own reasonable attorneys’ fees, filing and services fees, witness fees, arbitrator’s fees, and any other reasonably incurred expenses and costs, to the extent not expressly prohibited by applicable law.

(l)
Headings, Captions.  The headings and captions used in this Agreement are for convenience only and shall not affect the meaning or interpretation of the Agreement.

(m)
Counterparts.  For the convenience of the Parties, this Agreement may be executed by facsimile and in any number of counterparts, all of which when taken together shall constitute one and the same Agreement.

15.
Advice of Counsel .   Executive acknowledges that Executive has had adequate time to consult legal counsel and financial advisors before signing this Agreement.  Executive understands that Company makes no representations as to the tax consequences of any payments under this Agreement.  Both Parties have participated and had an equal opportunity to participate in the drafting of this Agreement.  No ambiguity shall be construed against any Party upon a claim that such party drafted the ambiguous language.

[ Signature page to follow ]


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EXECUTIVE:
 
___________________________________________________
 
 
     
_______________
 
 
     
Date:_______________________________________________
 
 


RIVERVIEW COMMUNITY BANK
 
RIVERVIEW BANCORP, INC.
     
By:  ________________________________________________   By:  ________________________________________________
     
Title: _______________________________________________
  Title: _______________________________________________
 
 
 
Date:_______________________________________________
 
Date:_______________________________________________
 





21


Exhibit A
EMPLOYMENT SEPARATION AGREEMENT AND RELEASE OF CLAIMS
This is a confidential separation agreement (this “ Separation Agreement ”) between you, ____________ , and us, Riverview Community Bank (the “ Bank ”) and Riverview Bancorp, Inc. (“ Bancorp ”) (Bancorp and the Bank are collectively referred to as “ Riverview ”). This Separation Agreement is dated for reference purposes ____________ , 20 ____ , which is the date we delivered this Separation Agreement to you for your consideration.
1.
Termination of Employment.   Your employment terminates (or was terminated) on ____________ , 20 ____ (the “ Separation Date ”).
2.
Payments.   In exchange for your agreeing to the release of claims and other terms in this Separation Agreement, we will pay you the Severance Benefit specified in Section 7 of the Employment Agreement between you and Riverview dated ____________ (the “ Employment Agreement ”), which is incorporated herein by reference.  You acknowledge that we are not obligated to make these payments to you unless you enter this Separation Agreement, comply with the Restrictive Covenants in Section 9 of the Employment Agreement, and otherwise comply and continue to comply with the material terms of the Employment Agreement and of this Separation Agreement.
3.
COBRA Continuation Coverage.   Your normal employee participation in Riverview’s group health coverage will terminate on the Separation Date or, if provided under the group health plan, the last day of the month in which the Separation Date occurs.  Continuation of group health coverage thereafter will be made available to you and your dependents pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 or any applicable state health insurance continuation law (collectively, “ COBRA ”).  You understand and agree that your right to benefits under Riverview’s health and welfare benefit program, if any, shall be limited to those set forth under COBRA and continuation of group health coverage after the Separation Date is entirely at your expense, as provided under COBRA, unless Section 7 of the Employment Agreement provides otherwise.
4.
Full Payment and Entitlement to Leave.   You acknowledge having received full payment of all compensation of any kind (including but not limited to wages, salary, bonuses, paid time off, sick leave, reimbursable expenses, and incentive compensation) that you earned as a result of your employment by us and that was owing to you as of the Separation Date.  Any and all agreements to pay you bonuses or other incentive compensation are terminated.  You understand and agree that you have no right to receive any further payments for bonuses or other incentive compensation, except the payments as described in Section 2 of this Agreement (above).  You also acknowledge you have taken and have not been deprived of any leave to which you were legally entitled prior to the Separation date.
5.
Release of Claims.

(a)
You hereby release:

(1)
Riverview and its parent companies, divisions, subsidiaries, and affiliates, and each of their benefit plans (each, including Riverview, a “ Riverview Affiliate ”);
A-1


(2)
Each of the Riverview Affiliates’ past and present shareholders, executives, directors, members, officers, agents, employees, representatives, administrators, fiduciaries and attorneys; and

(3)
The predecessors, successors, transferees and assigns of each of such persons and entities, from any and all claims of any kind, known or unknown, that arose on or before the date you signed this Separation Agreement.

(b)
The claims you are releasing include, without limitation, wrongful termination, constructive discharge, breach of contract, violations arising under federal, state or local laws or ordinances prohibiting discrimination or harassment on the basis of age, race, color, national origin, religion, sex, gender, disability, marital status, sexual orientation or any other protected status, failure to accommodate a disability or religious practice, violation of public policy, retaliation, failure to hire, wage and hour violations, including overtime claims, tortious interference with contract or expectancy, fraud or negligent misrepresentation, breach of privacy, defamation, intentional or negligent infliction of emotional distress, unfair labor practices, breach of a right to stock or stock options or other equity interests, attorneys’ fees or costs, and any other claims that are based on any legal obligations that arise out of or are related to your Employment Agreement and your employment relationship with us.

(c)
You specifically waive any rights or claims that you may have under Title 49 of the Revised Code of Washington, the Civil Rights Act of 1964 (including Title VII of that Act), the Civil Rights Act of 1991, the Rehabiliation Act of 1973, the Age Discrimination in Employment Act of 1967 (ADEA), the Older Workers Benefit Protection Act (OWBPA), the Americans with Disabilities Act of 1990 (ADA), the Equal Pay Act of 1963 (EPA), the Genetic Information Nondiscrimination Act of 2008 (GINA), the Fair Labor Standards Act of 1938 (FLSA), the Family and Medical Leave Act of 1993 (FMLA), the Occupational Safety and Health Act (OSHA), the Sarbanes-Oxley Act of 2002, the Fair Credit Reporting Act (FCRA), the Uniformed Services Employment and Reemployment Rights Act of 1994, the Worker Adjustment and Retraining Notification Act (WARN), the Employee Retirement Income Security Act of 1974 (ERISA), the National Labor Relations Act (NLRA), the Washington Law Against Discrimination (WLAD), the Washington Industrial Welfare Act, the Washington Family Leave Act, the Washington Minimum Wage Act, the Washington Wage Payment Act, the Washington Rebate Act and all similar federal, state and local laws.  The aforementioned claims are examples, not a complete list, of the released claims.  It is the Parties’ intent that you release any and all claims arising from or related to your employment, your contract of employment, and separation of employment, of whatever kind or nature, known or unknown, to the greatest degree allowed by law, against us, which arose or occurred on or before the date you sign this Separation Agreement .

(d)
You agree not to seek any personal recovery (of money damages, injunctive relief or otherwise) for the claims you are releasing in this Separation Agreement, either through any complaint to any governmental agency or otherwise, whether individually or through a class action.  You agree never to start or participate as a plaintiff in any lawsuit or arbitration asserting any of the claims you are releasing in this Separation Agreement.  You represent and warrant that you have not initiated any complaint, charge, lawsuit or arbitration involving any of the claims you are releasing in this Separation Agreement.
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(e)
Should you apply for future employment with a Riverview Affiliate, the Riverview Affiliate has no obligation to consider you for future employment.

(f)
You represent and warrant that you have all necessary authority to enter into this Separation Agreement (including, if you are married, on behalf of your marital community) and that you have not transferred any interest in any claims to your spouse or to any third party.

(g)
This Separation Agreement does not affect your rights arising under any of Riverview’s benefit plans through the Separation Date or afterwards under the terms of those plans to receive pension plan benefits, medical plan benefits, unemployment compensation benefits or workers’ compensation benefits.

(h)
This Separation Agreement also does not affect your rights under agreements, bylaw provisions, insurance or otherwise, to be indemnified, defended or held harmless in connection with claims that may be asserted against you by third parties.

(i)
This Separation Agreement also does not affect your rights to file a charge or complaint with or participate in an investigation by the Equal Employment Opportunity Commission or other government agency.  But, you give up any right to recover or receive any personal relief or benefit from any such charge, complaint, or investigation, or from any lawsuit or administrative action filed by any government agency which is the result of any such charge, complaint, or participation by you.  Personal relief or benefit includes attorneys’ fees, monetary damages, and reinstatement.  Nothing in this Agreement is intended to prevent you from reporting potential violations of the law, cooperating or participating in any investigation by the Equal Employment Opportunity Commission, SEC, or other government agency concerning any Riverview Affiliate, or from testifying truthfully in any legal proceeding resulting from any government agency’s enforcement actions.

(j)
You understand that you are releasing potentially unknown claims, and that you have limited knowledge with respect to some of the claims being released.  You acknowledge that there is a risk that, after signing this Separation Agreement, you may learn information that might have affected your decision to enter into this Separation Agreement.  You assume this risk and all other risks of any mistake in entering into this Separation Agreement.

(k)
You agree that this release is fairly and knowingly made.
6.
No Admission of Liability.   Neither this Separation Agreement nor the payments made under this Separation Agreement are an admission of liability or wrongdoing by any Riverview Affiliate.
7.
Riverview Materials.   You represent and warrant that you have, or no later than the Separation Date will have, returned all keys, credit cards, documents, Confidential Information (as defined in Section 9 of the Employment Agreement), and other materials that belong to us, and disclosed all computer user identifications and passwords used by you in the course of your employment or necessary for accessing information on our computer system, in accordance with Section 12 of the Employment Agreement, which is incorporated herein by reference.
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8.
Nondisclosure.   You will comply with the covenant regarding confidential information in Section 9(a) of the Employment Agreement, which covenant is incorporated herein by reference.  You also agree to keep the terms of this Separation Agreement in strict confidence and not to disclose the same to any other person or entity except as may be required by law. Except for litigation arising out of the breach of or attempt to enforce this Separation Agreement, this Separation Agreement shall not be admissible as evidence in any legal proceeding.
9.
Non-Disparagement and Non-Incitement.   You agree not to make, publish, or communicate (or causing others to make, publish, or communicate) any public or private disparaging statements concerning any Riverview Affiliate or their current or former officers, directors, members, shareholders, employees, agents, customers, suppliers, or investors, including without limitation statements made to employees of any Riverview Affiliate or statements made on internet blogs, social media sites, and review sites; provided, however, that nothing in this Separation Agreement shall preclude you from making truthful statements that are required by applicable law, regulation, or legal process.  You may not disparage any Riverview Affiliate or its business or products, and may not encourage any third parties to sue a Riverview Affiliate.
10.
Cooperation Regarding Other Claims.   If any claim is asserted by or against a Riverview Affiliate as to which you have relevant knowledge, you will reasonably cooperate with us in the prosecution or defense of that claim, including by providing truthful information and testimony as reasonably requested by us.
11.
Noncompetition; Nonsolicitation; No Interference.   You will comply with Section 9(b), 9(c) and 9(d) of the Employment Agreement, incorporated herein by reference, and Riverview will have the right to enforce those provisions under the terms of Section 9(e) of the Employment Agreement, incorporated herein by reference.  Following the expiration of the covenants referenced in the preceding sentence, you will not, apart from good faith competition, interfere with any Riverview Affiliate’s relationships with customers, employees, vendors, or others.
12.
Liquidated Damages.  Any breach by you of provisions set out in Sections 7 through 11 above shall be a material breach of this Separation Agreement for which we agree that Riverview or one of its affiliates would suffer irreparable harm and damage to its reputation, and for which liquidated damages in the amount of the Severance Benefit specified in Section 7 of the Employment Agreement or actual damages, whichever is greater, shall be assessed. The foregoing shall not be interpreted to preclude any additional remedy available to Riverview at law or in equity, including but not limited to injunctive relief.
13.
Independent Legal Counsel.   You are advised and encouraged to consult with an attorney before signing this Separation Agreement.  You acknowledge that you have had an adequate opportunity to do so.
14.
Consideration Period.   You have 21 days from the date this Separation Agreement is given to you to consider this Separation Agreement before signing it.  You may use as much or as little of this 21-day period as you wish before signing.  If you do not sign and return this Separation Agreement within this 21-day period, you will not be eligible to receive the benefits described in this Separation Agreement.
15.
Revocation Period and Effective Date.   You have 7 calendar days after signing this Separation Agreement to revoke it.  To revoke this Separation Agreement after signing it, you must deliver a written notice of revocation to Riverview’s Chief Executive Officer or the Chairman of the Board before the 7-day period expires.  This Separation Agreement shall not become effective until the
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8th calendar day after you sign it (the “ Effective Date ”).  If you revoke this Separation Agreement, it will not become effective or enforceable, and you will not be entitled to the benefits described in this Separation Agreement.

16.
Knowing and Voluntary Waivers under the ADEA.   You acknowledges that you understand this is a full release of all existing claims whether currently known or unknown including, but not limited to, claims for age discrimination under the Age Discrimination in Employment Act.  You agree and acknowledges that you have read and understood this Separation Agreement, and that you have consulted with an attorney regarding the meaning and application of this Separation Agreement, or, if you have not consulted with an attorney, you have been advised to do so and have had ample opportunity to do so.  You enter into this Separation Agreement knowingly, voluntarily, free from duress, and as a result of your own free will and with the intention to waive, settle, and release all claims you have or may have against each Riverview Affiliate.
17.
Governing Law.   This Separation Agreement is governed by the laws of the State of Washington that apply to contracts executed and to be performed entirely within the State of Washington.
18.
Dispute Resolution.   Any dispute arising under this Agreement shall be subject to arbitration in accordance with Section 13 of the Employment Agreement, which Sections are specifically incorporated by reference, in their entirety, in this Agreement.
19.
Saving Provision.   If any part of this Separation Agreement is held to be unenforceable, it shall not affect any other part, except if the release in Section 5 is determined to be invalid or unenforceable, this Separation Agreement shall be voidable by Riverview for a period of sixty (60) days following receipt of written notice of the invalidity or unenforceability.
20.
Final and Complete Agreement.   Except for the Employment Agreement and/or the Change in Control Agreement, which are expressly incorporated herein by reference, this Separation Agreement is the final and complete expression of all agreements between us on all subjects related to your employment or its termination and supersedes and replaces all prior discussions, representations, agreements, policies and practices.  You acknowledge you are not signing this Separation Agreement relying on anything not set out herein.
21.
Miscellaneous.   This Separation Agreement may be signed in counterparts, both of which shall be deemed an original, but both of which, taken together shall constitute the same instrument.  A signature made on a faxed or electronically mailed copy of the Separation Agreement or a signature transmitted by facsimile or electronic shall have the same effect as the original signature.  The Section headings used in this Separation Agreement are intended solely for convenience of reference and shall not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions hereof.  This Separation Agreement was the result of the negotiations between the parties.  In the event of vagueness, ambiguity or uncertainty, the Separation Agreement shall not be construed against the party preparing it, but shall be construed as if both parties prepared it jointly.  If you or Riverview fails to enforce this Separation Agreement or to insist on performance of any term, that failure does not mean a waiver of that term or of the Separation Agreement.  This Separation Agreement remains in full force and effect anyway.

[ Signature page to follow ]

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Riverview Community Bank
By:  ___________________________________
Title: __________________________________  
Date:  __________________________________


Riverview Bancorp, Inc.
By:  ___________________________________
Title: __________________________________  
Date:  __________________________________


I, the undersigned, having been advised to consult with an attorney, hereby agree to be bound by this Separation Agreement and confirm that I have read and understood each part of it.

_____________________________________________

_____________________________________________
Printed Name
 

_____________________________________________
Date


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Exhibit 10.2







RIVERVIEW BANCORP, INC.

RIVERVIEW COMMUNITY BANK


CHANGE IN CONTROL AGREEMENT

FOR


____________






RIVERVIEW BANCORP, INC.

RIVERVIEW COMMUNITY BANK

CHANGE IN CONTROL AGREEMENT

FOR

____________




This CHANGE IN CONTROL AGREEMENT (“ Agreement ”) is entered by and between RIVERVIEW BANCORP, INC., a registered savings and loan holding company (“ Bancorp ”), RIVERVIEW COMMUNITY BANK, a federally chartered savings bank (the “ Bank ”), which is a wholly owned subsidiary of Bancorp (Bancorp and the Bank are collectively referred to as the “ Company ”), and _____________ (“ Executive ”), and is dated December 31, 2018 (the “ Effective Date ”).  The Company and Executive are referred to herein individually as a “ Party ” and, collectively, as the “ Parties .”

1.            Term; Extensions .


(a)
Term.   The term of this Agreement begins on the Effective Date and shall continue until the one (1) year anniversary thereof, unless Executive’s employment is terminated earlier (the “ Term ”).


(b)
Extensions.   At any time during the Term of this Agreement, the Company’s Board of Directors (the “ Board ”) may elect in writing to extend the Term of this Agreement on the same terms and conditions for one (1) additional year beyond the current Term.  This Agreement may be extended in writing any number of times in the same manner.


(c)
At-Will Employment .  Notwithstanding the Term of this Agreement or anything else contained herein, the Bank employs Executive on an “at will” basis, which means the Company may terminate Executive’s employment at any time for any lawful reason or for no reason at all, subject to the provisions of this Agreement.

2.
Definitions .


(a)
Cause .”


(1)
Definition.  Cause for termination of employment means the occurrence of any one or more of the following:


(A)
Conviction of any felony, a misdemeanor involving moral turpitude, or of any crime in connection with Executive’s duties;


(B)
Removal of Executive from office or permanent prohibition of Executive from participating in the conduct of the Company’s affairs by an order issued by a bank regulatory authority;


(C)
Conduct involving dishonesty, embezzlement, misappropriation, fraud, or a material breach of a fiduciary duty in the performance of Executive’s duties;

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(D)
Participation in any incident compromising Executive’s reputation and as a consequence materially diminishing Executive’s ability to represent Company with the public;


(E)
Conduct significantly harmful to the Company, including but not limited to public disparagement of the Company or any affiliate of the Company, intentional or reckless violation of law or of any significant policy or procedure of the Company;


(F)
Willful misfeasance, gross negligence, or refusal or failure to act in accordance with any lawful stipulation, requirement or directive of the Board or the Company’s Chief Executive Officer (the “ CEO ”);


(G)
Material breach of any material obligations under this Agreement or any other written policies or rules of the Company;


(H)
Sexual harassment, as defined by the Company’s internal written policies;


(I)
Willful unauthorized disclosure of trade secrets and Confidential Information (as defined below in Section 5); or


(J)
Chronic drug or alcohol abuse to an extent that materially impairs Executive’s performance of Executive’s duties.


(2)
Procedure for Termination for Cause.   Termination for Cause will be automatic upon the occurrence of an incident under Subsections (2)(a)(1)(A) or (B) above.  Otherwise, the Board may not terminate Executive’s employment for Cause unless:


(A)
With respect to incidents under Subsections (2)(a)(1)(C), (D), (E), (F), (G), (H), (I), or (J):


(i)
Executive is given reasonable written notice (in no event less than five (5) business days’ notice) of the Board meeting called to make that determination; and


(ii)
Executive and Executive’s legal counsel are given the opportunity to address the incident(s) at that meeting.


(B)
In addition, with respect to incidents under Subsections 2(a)(1)(F) or (G) only, Executive is first given:


(i)
Written notice by the Board or CEO specifying in detail the performance issues; and


(ii)
A reasonable opportunity to cure the issues specified in the notice; provided, however, if Company reasonably expects irreparable injury from a delay in termination, Company may terminate Executive without an opportunity to cure.


(iii)
If an opportunity to cure is provided, Company’s Board shall also determine, in its sole discretion, whether Executive has in fact cured

2




the cause and done so in a timely manner.


(b)
Good Reason ."


(1)
Definition.  Subject to Subsection (2) below, Good Reason for Executive’s resignation means any one or more of the following occurring without Executive’s consent:


(A)
A material reduction of Executive’s base salary as in effect immediately prior to the Change in Control (as defined in Subsection 2(c) below);


(B)
A relocation or transfer of Executive’s principal place of employment that would require Executive to commute on a regular basis more than twenty-five (25) miles each way from the main business office of the Company as of the Effective Date of this Agreement or outside the State of Washington;


(C)
A change in Executive’s position of employment such that Executive’s authority, duties or responsibilities are materially changed; or


(D)
Any other action or inaction that constitutes a material breach of this Agreement by Company.


(2)
Procedure for Resignation for Good Cause To resign for “Good Reason,” Executive must give the Company:


(A)
Written notice of the intended resignation and a detailed description of the Good Reason not more than thirty (30) days after Executive becomes aware of the initial existence of the Good Reason; and



(B)
A reasonable opportunity of at least thirty (30) days in which to cure those circumstances.


(C)
Good Reason shall not exist if Executive (a) fails to provide such notice within the thirty (30) day notice period, or (b) the Company cures the specified condition within the thirty (30) day cure period.


(c)
Change in Control means the occurrence of any of the following:


(1)
Bank or Bancorp merges or consolidates with another entity and, as a result, less than 51% of the combined voting power of the resulting entity immediately after the merger or consolidation is held by persons who were the holders of Bank or Bancorp’s voting securities immediately before the merger or consolidation.  A Change of Control will be deemed to occur on the date the applicable transaction closes;


(2)
Any person, entity, or group of persons or entities, other than through merger or consolidation, acquires a majority of the Bank or Bancorp’s outstanding common stock or substantially all of the Bank’s or Bancorp’s assets; provided, that, a Change in Control shall not occur if any person, entity, or group already owns more than a majority of the Bank or Bancorp’s outstanding common stock and acquires additional stock.  A Change of Control will be deemed to occur on the date that any person, entity, or group first becomes the majority owner of the Bank or Bancorp’s

3



common stock or acquires substantially all of the Bank’s or Bancorp’s assets;


(3)
A majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election.  A Change in Control will be deemed to occur on the date members of the incumbent board first cease to constitute at least a majority of the Board; or


(4)
Approval by Bancorp’s or the Bank’s shareholders of the Bank’s complete liquidation, dissolution or sale to another entity.  A Change of Control will be deemed to occur on the date the applicable transaction closes.

3 .
Change in Control Benefits .


(a)
Benefit Entitlement and Amount.


(1)
Double Trigger.  Subject to the limitations under Subsection 3(a)(2) below, if Executive’s employment with the Bank is: (i) terminated by the Company without Cause or is terminated by Executive with Good Reason; and (ii) the Executive’s employment termination takes place within the time period of six (6) months prior to a Change in Control and twenty-four (24) months after a Change in Control (the “ Change in Control Window ”), the Company shall pay Executive a severance benefit (the “ Change in Control Benefit ”) equal to:


(A)
_______________ years of Executive’s annual base salary (based on the higher of Executive’s base salary as of the Change in Control or as of the date of termination of employment);


(B)
________________ years of Executive’s target annual incentive compensation (based on the higher of the Executive’s target annual incentive compensation for the year in which the Change in Control occurs or as of the date of the termination of employment);


(C)
Any unpaid incentive compensation earned from the Company’s Annual Incentive Plan and/or any successor incentive compensation plans (“ Incentive Compensation ”) based upon the fiscal year that ended immediately before the date of the termination;


(D)
Prorated Incentive Compensation for the fiscal year in which the termination occurs based on the Executive’s target annual Incentive Compensation through the month ended before the date of termination; and


(E)
If Executive timely and properly elects health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 or any applicable state health insurance continuation law (“ COBRA ”), the Company shall directly pay or reimburse Executive for the monthly COBRA premium paid by Executive for Executive and Executive’s dependents.  Executive shall be eligible to receive such reimbursement until the earliest of: (i) the eighteen (18) month anniversary of the date Executive’s employment is terminated; (ii) the date the Executive is no longer eligible to receive COBRA continuation coverage; or (iii) the date on which Executive becomes eligible to receive substantially similar coverage

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from another employer or other source.  Notwithstanding the foregoing, if the Company’s payments under this Section 3(a)(1)(E) would violate the nondiscrimination rules applicable to non-grandfathered plans under the Affordable Care Act (the “ ACA ”), or result in the imposition of penalties under the ACA and the related regulations and guidance promulgated thereunder, the Parties agree to reform this Section 3(a)(1)(E) in a manner as is necessary to comply with the ACA.

In addition to the payments set forth above, all stock options and restricted stock shall become one-hundred percent (100%) vested.


(2)
Code Section 280G .


(A)
Reduction.   Notwithstanding any other provision of this Agreement or any other plan, arrangement or agreement to the contrary, if any of the payments or benefits provided or to be provided by the Company or its affiliates to the Executive or for the Executive's benefit pursuant to the terms of this Agreement or otherwise (" Covered Payments ") constitute parachute payments (" Parachute Payments ") within the meaning of Section 280G of Internal Revenue Code of 1986, as amended (the “ Code ”), but for this Subsection 3(a)(2), be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any similar tax imposed by state or local law or any interest or penalties with respect to such taxes (collectively, the " Excise Tax "), then the Covered Payments shall be reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax.


(B)
Order of Reduction.   Any such reduction shall be made in accordance with Section 409A of the Code and the following:


(i)
The Covered Payments which do not constitute nonqualified deferred compensation subject to Section 409A of the Code shall be reduced first; and


(ii)
All other Covered Payments shall then be reduced as follows: (i) cash payments shall be reduced before non-cash payments; and (ii) payments to be made on a later payment date shall be reduced before payments to be made on an earlier payment date.


(C)
Determinations.   Any determination required under this Subsection, including whether any payments or benefits are Parachute Payments, shall be made by the Company in its sole discretion. The Executive shall provide the Company with such information and documents as the Company may reasonably request in order to make a determination under this Subsection. The Company's determination shall be final and binding on the Executive.


(3)
The Change in Control Benefit shall be subject to any withholding and payroll deduction requirements.

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(b) Payment of Benefit.


(1)
Payment Timing.  Subject to Subsection 3(b)(2) below, the Change in Control Benefit under Subsection 3(a)(1)(A), (B), (C), and (D) will be paid in a lump sum within thirty (30) days of termination of Executive’s employment during the Change in Control Window or, if later, within seven (7) days after the expiration of the Separation Agreement’s revocation period as described in Section 4(a) below.  If the combined consideration and revocation periods (as defined in Sections 14 and 15 of the Separation Agreement) overlap two calendar years, the payment will be made in the later of the two years (irrespective of the year in which the Separation Agreement is effective and irrevocable) resulting in taxation to Executive in the second calendar year.  The COBRA benefit will be paid as described under Subsection 3(a)(1)(E).


(2)
Section 409A Compliance.   If the Change in Control Benefit is subject to § 409A of the Code and Executive is deemed to be a “specified employee” within the meaning of Code Section 409A(a)(2)(B)(i), the lump-sum payment will not be made until the seventh month following termination of employment.

4.
Limitations on Change in Control Benefits .


(a)
Release of Claims.   Executive’s receipt of the Change in Control Benefit and the additional benefits under Section 3 is conditioned on Executive having executed a separation agreement in substantially the form attached hereto as Exhibit A (the “ Separation Agreement ”) and the revocation period having expired without revocation.  Executive must execute the Separation Agreement and the revocation period must expire within sixty (60) days of the date of Executive’s termination of employment with Company.


(b)
Compliance with Material Terms.  Receipt of the Change in Control Benefit is further conditioned on Executive not being in violation of any material term of this Agreement, including without limitation the restricted covenants in Section 5, or in violation of any material term of the Separation Agreement.


(c)
Regulatory Limitation.   Notwithstanding the foregoing, the Company shall make no payment of any benefit provided for under this Agreement to the extent that the payment would be prohibited by applicable banking regulations or any regulatory order.  If such payment is so prohibited, the Company shall use its best efforts to secure the consent of the banking regulator to make the payments in the highest amount permissible, up to the amount provided for in this Agreement.

5.
Restrictive Covenants .


(a)
Confidential Information.

(1)
Executive’s Obligations For an indefinite period, Executive shall protect and preserve as confidential all of Company’s Confidential Information (defined below in Subsection 5(a)(2)) at any time known to Executive or in Executive’s possession or control with not less than the diligence, care and effort which a prudent owner would use to protect his or her own most sensitive information.  Executive shall neither disclose to third parties, use, nor allow others to use any Confidential Information for any purpose other than for the sole benefit of Company and as specifically approved in writing in advance by Company’s Board in each instance.
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Executive acknowledges and agrees that the covenants contained in this Subsection 5(a) shall supplement, rather than replace or contradict, any other rights or remedies that Company may have under applicable law.  If a dispute arises, Executive has the burden to show that information is not Company’s Confidential Information.  If anyone tries to compel Executive to disclose any of Company’s Confidential Information by subpoena or otherwise, Executive will promptly notify the Board or the CEO so that Company may take any actions it deems necessary to protect its interests.


(2)
Definition of Confidential Information.   “Confidential Information” means information which (a) derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy.  Confidential Information also includes proprietary or secret information belonging to Company that was disclosed to or known by Executive as a consequence of Executive’s employment with Company and not otherwise publicly known, whether or not received prior to the Effective Date, whether or not marked confidential or labeled as Confidential Information, and whether or not considered a trade secret under applicable law.  Confidential Information may consist of verbal, written, or electronically stored information, and may be tangible or merely remembered.


(A)
Examples of Confidential Information.  Company provides the following list of Confidential Information by way of example, but this list is not intended to be exhaustive: inventions; technical information; algorithms, designs, concepts, systems, techniques, methods, models, procedures, or processes; know-how or methodologies; manuals, contracts, or reports; purchasing or accounting information; regulatory information and communications related thereto; financial history or projections; legal affairs; formulae; compositions; software or computer programs; research projects; business modes and information; the identity of all vendors, vendor lists, and vendor contact information; the identity of customers, customer lists, and customer contact information; pricing data; financial data; sources of supply; marketing plans and/or strategies, including price strategies, marketing, sales, technology, research and development, production, or merchandising systems or plans; and information pertaining to any aspect of any activity or business of Company or its vendors, suppliers, distributors or customers, including information entrusted to Company by third parties (including vendors, customers and prospective vendors or customers), or any trade secrets, proprietary or confidential matter of Company or of such third parties.

(B)
Excluded Confidential Information Confidential Information does not include information that Executive can prove (a) was known by or in the possession of Executive prior to employment with Company through means other than as a result of past relationships or business dealings between Executive and Company or its vendors, suppliers or customers; (b) consists in whole or in part of any Prior Intellectual Property (defined below in Section 6); or (c) is known to or readily discoverable by others not under an obligation of confidentiality.
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(C)
DTSA Disclosure.   Pursuant to the Defend Trade Secrets Act of 2016, Executive will not have criminal or civil liability under any federal or state trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, if Executive files a lawsuit for retaliation against the Company for reporting a suspected violation of law, Executive may disclose the trade secret to Executive’s attorney and may use the trade secret information in the court proceeding, if Executive files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

(b)
Nonsolicitation.

(1)
During employment and for a one-year period following termination of Executive’s employment for any reason whatsoever, Executive will not, directly or indirectly, solicit, call on, induce or encourage Customers or Business Partners (defined below) to terminate or limit their relationship with Company or to send their business elsewhere or assist any person, group or entity in doing so or attempting to do so.

(2)
Customers ” are:

(A)
All customers serviced by the Company or any of the Company’s affiliates at any time within 12 months before the date of termination of Executive’s employment;

(B)
All customers and potential customers whom the Company or the Company’s affiliates, with the knowledge or participation of Executive, actively solicited at any time during the 12 months before the termination of Executive’s employment; and

(C)
All successors, owners, directors, partners and management personnel of the Customers described in Subsection (A) or (B) above.


(3)
Business Partners ” are suppliers, vendors, investors, financial institutions, and other persons and entities with whom Company currently conducts or has conducted business during the 12 months prior to Executive’s termination of employment.


(c)
Nonraiding of Employees.


(1)
Executive recognizes that the workforce of the Company and its affiliates are a vital part of the Company’s business.  Therefore, Executive agrees that, for 12 months following termination of Executive’s employment for any reason whatsoever, Executive will not directly or indirectly recruit or solicit any Company Employee to: (i) breach or modify any provision of such employee’s employment agreement with Company; (ii) reduce or change the quality or quantity or availability of such employee’s services to Company; or (iii) terminate such employee’s employment with Company or any Company Party.  Executive also agrees not to disclose or identify any Company employee as a potential candidate to a third party; however, this does not restrict general solicitations, such as help-wanted ads or job postings, 

8



so long as those solicitations are not specifically directed to individuals who are known to be currently employed by Company.  For purposes of this Subsection, “ Company Employees ” means all employees working for the Company as of the date of Executive’s termination from Company.


(d)
Injunctive Relief.   Executive acknowledges that it is impossible to measure in money the damages that the Company will incur if Executive fails to observe the covenants in this Section 5 (the “Restrictive Covenants”) and, therefore, the Executive agrees that:

(1)
The Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any breach or threatened breach of the Restrictive Covenants;

(2)
If the Company is required to post a bond in order to secure an injunction or other equitable remedy, that bond shall be no more than a nominal amount;

(3)
Executive waives any claim or defense that an adequate remedy at law is available to the Company; and

(4)
These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity.

(e)
Reasonableness .  The parties agree that:

(1)
This Agreement in its entirety, and in particular the Restrictive Covenants, is reasonable both as to time and scope;

(2)
The Restrictive Covenants are necessary for the protection of the Company’s business and goodwill;

(3)
The Restrictive Covenants are not any greater than are reasonably necessary to secure the Company’s business and goodwill;

(4)
The degree of injury to the public due to the loss of the service and skill of Executive or the restrictions placed upon Executive’s opportunity to make a living with Executive’s skills upon enforcement of those covenants, does not and will not warrant non-enforcement of those restraints; and

(5)
If the scope of the Restrictive Covenants is adjudged too broad to be capable of enforcement, then the parties authorize that court or arbitrator to narrow the Restrictive Covenants so as to make them capable of enforcement, given all relevant circumstances, and to enforce them to the fullest extent allowed.

(f)
Survival.   This Section shall survive the termination of this Agreement.
6.
Protection of Intellectual Property .

(a)
Company’s Ownership.   Company owns all Inventions and Works (as defined below in Subsection 6(b)) that Executive makes, conceives, develops, discovers, reduces to practice or fixes in a tangible medium of expression, alone or with others, either (a) during Executive’s employment by Company (including past and future employment, and whether or not during working hours), or (b) within one (1) year after the termination of Executive’s employment in each case, if the Invention or Works results from any work Executive
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performed for Company or involves the use or assistance of Company’s facilities, equipment, materials, personnel or Confidential Information.  If Executive has any pre-existing Invention or Work that Executive requests to exclude from Company ownership (“ Prior Intellectual Property ”), Executive shall make full written disclosure to Company by submitting an attachment to this Agreement listing the Prior Intellectual Property (the “ Prior Intellectual Property Disclosure ”).  If Executive does not attach a Prior Intellectual Property Disclosure to this Agreement, Executive represents and warrants that Executive owns no Prior Intellectual Property that Executive requests to exclude from Company ownership.


(b)
Definitions of Invention and Works.   “Inventions” means discoveries, developments, concepts, ideas, improvements to existing technology, processes, procedures, machines, products, compositions of matter, trade secrets, formulas, algorithms, computer programs and techniques, custom software, and all other matters ordinarily intended by the word “invention,” whether or not patentable or copyrightable.  “Inventions” also includes all records and expressions of those matters. “Works” means original works of authorship, including interim work product, modifications and derivative works, and all similar matters, whether or not copyrightable.

(c)
Disclosure and Assignment.   Executive will promptly disclose to Company, will hold in trust for Company’s sole benefit, will assign to Company, and hereby does assign to Company all Inventions and Works described in Subsections 6(a) and 6(b), including all copyrights, patent rights, and trade secret rights, vested and contingent, except those pre-existing Inventions identified on the Prior Intellectual Property Disclosure.  To the extent that such Inventions and Works may be considered “works made for hire” under the copyright act, they are hereby agreed to be works made for hire; otherwise, Executive hereby irrevocably assigns and conveys all such rights, title and interest to Company, subject to no liens, claims or reserved rights.  Executive will waive and hereby does waive any moral rights Executive has or may have in the Inventions and Works described in Subsections   6(a) and 6(b).  Executive further agrees that if the foregoing waiver is not effective, Executive agrees not to assert any such moral rights.  To the extent that Executive cannot assign the rights contemplated in Subsections 6(a) and 6(b), including moral rights, Executive hereby grants to Company a fully-paid, royalty free, worldwide, perpetual, exclusive license to use, create and own derivative works of and otherwise exploit such rights.  At Company’s direction and expense, Executive will execute all documents and take all actions necessary or convenient for Company to document, obtain, maintain or assign its rights to these Inventions and Works.  Company shall have full control over all applications for patents or other legal protection of these Inventions and Works.

(d)
Disclaimer Regarding Inventions Developed Entirely on Executive’s Own Time.   Pursuant to RCW 49.44.140(3), Subsection 6(c) of this Agreement regarding the assignment of certain inventions to Company does not apply to an Invention for which no equipment, supplies, facilities, or trade secret information of Company was used and which was developed entirely on Executive's own time, unless (a) the Invention relates (i) directly to Company’s business, or (ii) to Company’s actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by Executive for Company.
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7.
Return of Company Property .   Executive will safeguard and return to Company when Executive’s employment ends, or sooner if Company requests, all documents and property in Executive’s care, custody or control relating to Executive’s employment or Company’s business and customers (including but not limited to Confidential Information (defined above), keys, pass cards, identification cards ), or any reproductions thereof, whether such information is reduced to writing, existing in hard copies or electronic form, and whether residing on Company’s computers, Executive’s own personal computer, laptop, tablet, or mobile device, or other electronic media used for Company business.  After employment ends, or sooner if Company requests, Executive must disclose all computer user identifications and passwords used by Executive in the course of employment or necessary for accessing information on the Company’s computer system, and Executive will not retain copies of any Confidential Information or other materials belonging to Company unless expressly authorized in writing by Company.  The obligations in this Section include the return of documents and other materials that may be in Executive’s desk at work, Executive’s car or place of residence, or in any other location under Executive’s control.
8.
Dispute Resolution .

(a)
Arbitration.

(1)
The parties agree to submit any dispute arising under this Agreement or Executive’s employment with Company, regardless of the nature of the dispute or the legal concepts involved, to final, binding, and private arbitration. Disputes subject to arbitration include not only disputes involving the negotiation, meaning, or performance of this Agreement, but also claims Executive may have against Company, Company’s affiliates, or against any of their officers, directors, supervisors, managers, employees or agents for violation of any federal, state, or local statute arising out of Executive’s employment relationship with Company.  Executive and Company intend and agree that class action and representative action procedures are hereby waived and shall not be asserted, nor will they apply, in any arbitration pursuant to this Agreement.  The Parties also agree that the following claims are not subject to arbitration: (a) claims that cannot be subject to arbitration as a matter of law; (b) claims for workers’ compensation or unemployment compensation; and (c) claims under an employee benefit or pension plan that specifies a different procedure.

(2)
All claims subject to arbitration shall be settled by final and binding arbitration in accordance with the employment dispute resolution rules of the American Arbitration Association (“ AAA ”) in effect at the time the demand for arbitration is made (“ Rules and Procedures ”), which are available online at https://www.adr.org/sites/default/files/Employment%20Rules.pdf. Accordingly, the Parties are not permitted to pursue court action regarding claims that are subject to arbitration.  Such arbitration shall be filed with the AAA and shall be heard before a single neutral arbitrator who is experienced in employment law, who shall be selected as provided in AAA’s Rules and Procedures.  The aggrieved Party must file the arbitration complaint with AAA and provide all other parties against whom or which a claim is brought written notice no later than the expiration of the statute of limitations that the law prescribes for the claim.  Otherwise, the claim shall be deemed waived.  The arbitration complaint and written notice must identify and describe all claims, the facts upon which such claims are based, and the relief or remedy sought.  Any arbitration shall be heard in Vancouver, Washington; provided, however, if arbitration in Vancouver, Washington is impractical because Executive’s employment for Company is located more than 100 miles from
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Vancouver, Washington, the arbitration may be held in the county and state where Executive last worked during Executive’s employment for Company.


(3)
Company shall be responsible for the arbitrator’s fees and expenses in excess of any reasonable filing fee with the AAA; provided, however, each party shall pay its own costs and attorneys’ fees, if any.  The arbitrator shall issue a written decision that contains the essential findings and conclusions on which the decision is based.  The arbitrator’s decision shall be final, binding and conclusive upon the Parties.  Suit may be brought to compel arbitration or to enforce any arbitration award in a court of competent jurisdiction.

(4)
Neither this agreement to arbitrate nor any demand for arbitration shall waive or otherwise affect Company’s right to obtain any provisional remedy, including, without limitation, injunctive relief for unfair competition, the use or unauthorized disclosure or misappropriation of trade secrets, the disclosure of any other Confidential Information or the violation of the confidentiality or other provisions of Section 5 of this Agreement.  This Agreement also does not prohibit Executive from filing an administrative charge or complaint with any governmental agency.
9.
Miscellaneous .

(a)
Notices .  Any notice to be delivered under this Agreement shall be given in writing and shall be deemed delivered three days after mailing by certified mail, postage prepaid, addressed to the Company’s Chair of the Board or to Executive at Executive’s last known address on the record of the Company.  Either party may designate an address for notices by written notice to the other.


(b)
Governing Law; Venue & Jurisdiction Executive acknowledges that Company maintains its headquarters in Vancouver, Washington.  The Parties therefore agree that this Agreement shall be governed by and construed in accordance with the laws of the State of Washington, without giving effect to the rules governing the conflicts of laws, and without the aid of any canon, custom, or rule of law requiring construction against the drafter, and regardless of whether a party changes domicile or residence.  Executive hereby waives the right to argue to the contrary.  In the event such election is invalid, then the court shall apply the law of the state or states in which Executive performs services for Company.  Executive consents to the exercise of personal jurisdiction by a court of competent jurisdiction in the State of Washington and agrees that venue for any action not subject to arbitration shall be in Clark County, Washington, and hereby waives the right to argue to the contrary.


(c)
Amendment/Waiver.

(1)
This Agreement may not be amended, released, discharged, abandoned, changed, or modified in any manner, except by an instrument in writing signed by each of the Parties hereto.

(2)
The failure of any Party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of any Party to enforce each and every such provision. No waiver or any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.
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(d)
Severability.   If any provision of this Agreement is held by a court or arbitrator to be invalid or unenforceable, the remaining provisions shall continue to be fully effective.  If any part of this Agreement is held to be unenforceable as written, it shall be enforced to the maximum extent allowed by applicable law.  The unenforceability of any provision in this Agreement in any jurisdiction shall not affect the enforceability of any provision of this Agreement in any other jurisdiction.

(e)
Entire Agreement .  This Agreement represents the entire agreement between the Parties regarding the matters addressed in this Agreement.  This Agreement supersedes any other prior oral or written employment agreements between the Parties.  Provided, however, this Agreement does not supersede any incentive compensation agreement (including stock option or other equity incentive agreements)

(f)
Code Section 409A Compliance.   For purposes of this Agreement, a termination of employment will be determined consistent with the rules relating to a “separation from service” as defined in Section 409A of the Code and the regulations thereunder (“Section 409A”).  The Parties intend that this Agreement, to the extent possible, will be administered in accordance with Section 409A and the Treasury Regulations and other applicable regulatory guidance issued thereunder, and will be interpreted in a manner so that no payments made to Executive under this Agreement constitute a deferral of compensation or, if so, will constitute a deferral for which the payment and other terms are compliant with Section 409A so as to avoid imposition of any additional tax to Executive under Section 409A.  Company makes no representation or warranty as to compliance with Section 409A and shall have no liability to the Executive or any other person for any adverse consequences arising under Section 409A.  Notwithstanding anything else provided herein, to the extent any payments provided under this Agreement in connection with Executive’s termination of employment constitute deferred compensation subject to Section 409A, and Executive is deemed at the time of such termination of employment to be a “specified Executive” under Section 409A, then such payment shall not be made or commence until the earlier of (i) the expiration of the 6-month period measured from Executive’s separation from service from Company or (ii) the date of Executive’s death following such a separation from service; provided, however, that such deferral shall only be effected to the extent required to avoid adverse tax treatment to Executive including, without limitation, the additional tax for which Executive would otherwise be liable under Section 409A(a)(1)(B) in the absence of such a deferral.  The first payment thereof will include a catch-up payment covering the amount that would have otherwise been paid during the period between Executive’s termination of employment and the first payment date but for the application of this provision, and the balance of the installments (if any) will be payable in accordance with their original schedule.
(g)           Assignment; Death; Binding Effect.

(1)
Executive shall not assign or transfer any of Executive’s rights under this Agreement, wholly or partially, to any other person or to delegate the performance of the Executive’s duties under the terms of this Agreement.

(2)
Upon Executive’s death, no death benefit is payable under this Agreement other than benefits that were already in pay status at the date of death.  Executive’s rights under this Agreement with respect to any benefits earned before the date of death shall inure to Executive’s heirs, executors, administrators or personal representatives.

13


(3)
The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of the Company, regardless of the manner in which the successors or assigns succeed to the interests or assets of the Company.  This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company, by any merger, consolidation or acquisition where the Company is not the surviving corporation, by any transfer of all or substantially all of the Company’s assets, or by any other change in the Company’s structure or the manner in which the Company’s business or assets are held.  Executive’s employment shall not be deemed terminated upon the occurrence of one of the foregoing events. In the event of any merger, consolidation or sale or transfer of assets, this Agreement shall be binding upon and shall inure to the benefit of the surviving business or the business entity to which the assets are transferred.

(h)
Survival.   If any benefits provided to Executive under this Agreement are still owed, or claims under the Agreement are still pending at the time of termination of this Agreement, this Agreement shall continue in force with respect to those obligations or claims, until those benefits are paid in full or those claims are resolved in full.  The covenants in Section 5 and Section 6, and the dispute resolution provisions in Section 8 of this Agreement shall survive the termination of this Agreement and shall be enforceable regardless of any claim Executive may have against the Company.

(i)
Board of Director’s Authority.


(1)
Bancorp’s Board of Directors has the authority to interpret and construe the provisions of this Agreement, including the attached Separation Agreement.


(2)
Bancorp’s Board of Directors has the authority to decide matters relating to termination for Cause or Good Reason, the violation of the Restrictive Covenants and the calculation of benefits.


(3)
In a decision under Subsection (1) or (2) above, the burden of proof shall be on that Board of Directors and that decision shall be:


(A)
Subject to the duty of good faith and fair dealing;


(B)
Supported by clear and convincing evidence; and


(C)
Made by the affirmative vote of at least three fourths of that Board of Directors.


(4)
An arbitrator or a court reviewing such a decision by that Board of Directors shall make its own independent decision and not grant deference to the that Board of Director’s decision.


(j)
Joint and Several Obligation. Bancorp and the Bank will be jointly and severally liable for the payment obligations under this Agreement.


(k)
Actions by Banking Regulatory Authorities.


(1)
If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company’s affairs by a notice served under Section 8(e)(3) or (g)(1)

14



of the FDIA, 12 U.S.C. § 1818(e)(3) and (g)(1), the Company’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, the Company may in its discretion:


(A)
Pay Executive all or part of the payments under this Agreement that were withheld while its obligations under this Agreement were suspended; and/or


(B)
Reinstate in whole or in part any of its obligations which were suspended.


(2)
If Executive is removed and/or permanently prohibited from participating in the conduct of the Company’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. § 1818(e)(4) and (g)(1), Executive shall be terminated for Cause as of the effective date of the order.


(3)
If the Company is in default (as defined in Section 3(x)(1) of the FDIA, 12 U.S.C. § 1813(x)(1)), all further obligations under this Agreement shall terminate as of the date of default.


(4)
This Agreement may be terminated entirely or suspended for a period of time by the applicable banking regulatory authority, or as otherwise required by law, if:


(A)
The Federal Deposit Insurance Corporation (“ FDIC ”) enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the FDIA, 12 U.S.C. § 1823(c);


(B)
The applicable banking regulatory authority approves a supervisory merger to resolve problems related to the operation of the Company; or


(C)
The applicable banking regulatory authority determines the Company is in an unsafe or unsound condition.


(5)
The Change in Control Benefit is subject to and conditioned upon its compliance with 12 U.S.C. § 1828(k) and FDIC regulation 12 C.F.R. Part 359, “Golden Parachute and Indemnification Payments.”


(l)
Attorneys’ Fees and Costs.   In any dispute arising out of or relating to this Agreement, including in compelling arbitration, or enforcing or collecting an arbitration award, the prevailing party shall be entitled to recover from the non-prevailing party its own reasonable attorneys’ fees, filing and services fees, witness fees, arbitrator’s fees, and any other reasonably incurred expenses and costs, to the extent not expressly prohibited by applicable law.


(m)
Headings, Captions.  The headings and captions used in this Agreement are for convenience only and shall not affect the meaning or interpretation of the Agreement.


(n)
Counterparts.  For the convenience of the Parties, this Agreement may be executed by facsimile and in any number of counterparts, all of which when taken together shall constitute one and the same Agreement.

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10.
Advice of Counsel .   Executive acknowledges that Executive has had adequate time to consult legal counsel and financial advisors before signing this Agreement.  Executive understands that Company makes no representations as to the tax consequences of any payments under this Agreement.  Both Parties have participated and had an equal opportunity to participate in the drafting of this Agreement.  No ambiguity shall be construed against any Party upon a claim that such party drafted the ambiguous language.





[ Signature page to follow ]



16

EXECUTIVE



___________________________________________________
 
 
     
_______________
 
 
     
Date:_______________________________________________
 
 


RIVERVIEW COMMUNITY BANK
 
RIVERVIEW BANCORP, INC.
     
By:  ________________________________________________   By:  ________________________________________________
     
Title: _______________________________________________
  Title: _______________________________________________
 
 
 
Date:_______________________________________________
 
Date:_______________________________________________
 

17

Exhibit A

EMPLOYMENT SEPARATION AGREEMENT AND RELEASE OF CLAIMS

This is a confidential separation agreement (this “ Separation Agreement ”) between you, ____________, and us, Riverview Community Bank (the “ Bank ”) and Riverview Bancorp, Inc. (“ Bancorp ”) (Bancorp and the Bank are collectively referred to as “ Riverview ”). This Separation Agreement is dated for reference purposes ____________, 20____, which is the date we delivered this Separation Agreement to you for your consideration.

1.
Termination of Employment.   Your employment terminates (or was terminated) on ____________, 20____ (the “ Separation Date ”), which was within the number of months of a Change in Control as specified in Section 3(a)(1) in the Change in Control Agreement between you and Riverview dated ____________, 20____ (the “ CIC Agreement ”), which is incorporated herein by reference.

2.
Payments.   In exchange for your agreeing to the release of claims and other terms in this Separation Agreement, we will pay you the Change in Control Benefit and other payments in Section 3 of the CIC Agreement.  You acknowledge that we are not obligated to make these payments to you unless you enter this Separation Agreement, comply with the Restrictive Covenants in Section 5 of the CIC Agreement, and otherwise comply and continue to comply with the material terms of the CIC Agreement and of this Separation Agreement.

3.
COBRA Continuation Coverage .  Your normal employee participation in Riverview’s group health coverage will terminate on the Separation Date or, if provided under the group health plan, the last day of the month in which the Separation Date occurs.  Continuation of group health coverage thereafter will be made available to you and your dependents pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 or any applicable state health insurance continuation law (collectively, “ COBRA ”).  You understand and agree that your right to benefits under Riverview’s health and welfare benefit program, if any, shall be limited to those set forth under COBRA and continuation of group health coverage after the Separation Date is entirely at your expense, as provided under COBRA, unless Section 3 of the CIC provides otherwise.

4.
Full Payment and Entitlement to Leave.   You acknowledge having received full payment of all compensation of any kind (including but not limited to wages, salary, bonuses, paid time off, sick leave, reimbursable expenses, and incentive compensation) that you earned as a result of your employment by us and that was owing to you as of the Separation Date.  Any and all agreements to pay you bonuses or other incentive compensation are terminated.  You understand and agree that you have no right to receive any further payments for bonuses or other incentive compensation, except the payments as described in Section 2 of this Agreement (above).  You also acknowledge you have taken and have not been deprived of any leave to which you were legally entitled prior to the Separation date.

5.             Release of Claims.


(a)
You hereby release:


(1)
Riverview and its parent companies, divisions, subsidiaries, and affiliates, and each of their benefit plans (each, including Riverview, a “ Riverview Affiliate ”);


(2)
Each of the Riverview Affiliates’ past and present shareholders, executives, directors, members, officers, agents, employees, representatives, administrators, fiduciaries and attorneys; and

A-1


(3)
The predecessors, successors, transferees and assigns of each of such persons and entities, from any and all claims of any kind, known or unknown, that arose on or before the date you signed this Separation Agreement.


(b)
The claims you are releasing include, without limitation, wrongful termination, constructive discharge, breach of contract, violations arising under federal, state or local laws or ordinances prohibiting discrimination or harassment on the basis of age, race, color, national origin, religion, sex, gender, disability, marital status, sexual orientation or any other protected status, failure to accommodate a disability or religious practice, violation of public policy, retaliation, failure to hire, wage and hour violations, including overtime claims, tortious interference with contract or expectancy, fraud or negligent misrepresentation, breach of privacy, defamation, intentional or negligent infliction of emotional distress, unfair labor practices, breach of a right to stock or stock options or other equity interests, attorneys’ fees or costs, and any other claims that are based on any legal obligations that arise out of or are related to your employment relationship with us.


(c)
You specifically waive any rights or claims that you may have under Title 49 of the Revised Code of Washington, the Civil Rights Act of 1964 (including Title VII of that Act), the Civil Rights Act of 1991, the Rehabiliation Act of 1973, the Age Discrimination in Employment Act of 1967 (ADEA), the Older Workers Benefit Protection Act (OWBPA), the Americans with Disabilities Act of 1990 (ADA), the Equal Pay Act of 1963 (EPA), the Genetic Information Nondiscrimination Act of 2008 (GINA), the Fair Labor Standards Act of 1938 (FLSA), the Family and Medical Leave Act of 1993 (FMLA), the Occupational Safety and Health Act (OSHA), the Sarbanes-Oxley Act of 2002, the Fair Credit Reporting Act (FCRA), the Uniformed Services Employment and Reemployment Rights Act of 1994, the Worker Adjustment and Retraining Notification Act (WARN), the Employee Retirement Income Security Act of 1974 (ERISA), the National Labor Relations Act (NLRA), the Washington Law Against Discrimination (WLAD), the Washington Industrial Welfare Act, the Washington Family Leave Act, the Washington Minimum Wage Act, the Washington Wage Payment Act, the Washington Rebate Act and all similar federal, state and local laws.  The aforementioned claims are examples, not a complete list, of the released claims.  It is the Parties’ intent that you release any and all claims arising from or related to your employment, your contract of employment, and separation of employment, of whatever kind or nature, known or unknown, to the greatest degree allowed by law, against us, which arose or occurred on or before the date you sign this Separation Agreement .


(d)
You agree not to seek any personal recovery (of money damages, injunctive relief or otherwise) for the claims you are releasing in this Separation Agreement, either through any complaint to any governmental agency or otherwise, whether individually or through a class action.  You agree never to start or participate as a plaintiff in any lawsuit or arbitration asserting any of the claims you are releasing in this Separation Agreement.  You represent and warrant that you have not initiated any complaint, charge, lawsuit or arbitration involving any of the claims you are releasing in this Separation Agreement.


(e)
Should you apply for future employment with a Riverview Affiliate, the Riverview Affiliate has no obligation to consider you for future employment.


(f)
You represent and warrant that you have all necessary authority to enter into this Separation Agreement (including, if you are married, on behalf of your marital community) and that you have not transferred any interest in any claims to your spouse or to any third party.

A-2


(g)
This Separation Agreement does not affect your rights arising under any of Riverview’s benefit plans through the Separation Date or afterwards under the terms of those plans to receive pension plan benefits, medical plan benefits, unemployment compensation benefits or workers’ compensation benefits.


(h)
This Separation Agreement also does not affect your rights under agreements, bylaw provisions, insurance or otherwise, to be indemnified, defended or held harmless in connection with claims that may be asserted against you by third parties.


(i)
This Separation Agreement also does not affect your rights to file a charge or complaint with or participate in an investigation by the Equal Employment Opportunity Commission or other government agency.  But, you give up any right to recover or receive any personal relief or benefit from any such charge, complaint, or investigation, or from any lawsuit or administrative action filed by any government agency which is the result of any such charge, complaint, or participation by you.  Personal relief or benefit includes attorneys’ fees, monetary damages, and reinstatement.  Nothing in this Agreement is intended to prevent you from reporting potential violations of the law, cooperating or participating in any investigation by the Equal Employment Opportunity Commission, SEC, or other government agency concerning any Riverview Affiliate, or from testifying truthfully in any legal proceeding resulting from any government agency’s enforcement actions.


(j)
You understand that you are releasing potentially unknown claims, and that you have limited knowledge with respect to some of the claims being released.  You acknowledge that there is a risk that, after signing this Separation Agreement, you may learn information that might have affected your decision to enter into this Separation Agreement.  You assume this risk and all other risks of any mistake in entering into this Separation Agreement.


(k)
You agree that this release is fairly and knowingly made.

6.
No Admission of Liability.   Neither this Separation Agreement nor the payments made under this Separation Agreement are an admission of liability or wrongdoing by any Riverview Affiliate.

7.
Riverview Materials.   You represent and warrant that you have, or no later than the Separation Date will have, returned all keys, credit cards, documents, Confidential Information (as defined in Section 5 of the CIC Agreement), and other materials that belong to us, and disclosed all computer user identifications and passwords used by you in the course of your employment or necessary for accessing information on our computer system, in accordance with Section 7 of the CIC Agreement, which is incorporated herein by reference.

8.
Nondisclosure Agreement.   You will comply with the covenant regarding confidential information in Section 5(a) of the CIC Agreement, which covenant is incorporated herein by reference.  You also agree to keep the terms of this Separation Agreement in strict confidence and not to disclose the same to any other person or entity except as may be required by law. Except for litigation arising out of the breach of or attempt to enforce this Separation Agreement, this Separation Agreement shall not be admissible as evidence in any legal proceeding.

9.
Non-Disparagement and Non-Incitement .  You agree not to make, publish, or communicate (or causing others to make, publish, or communicate) any public or private disparaging statements concerning any Riverview Affiliate or their current or former officers, directors, members, shareholders, employees, agents, customers, suppliers, or investors, including without limitation statements made to employees of any Riverview Affiliate or statements made on internet blogs, social media sites, and review sites; provided, however, that nothing in this Separation Agreement

A-3


shall preclude you from making truthful statements that are required by applicable law, regulation, or legal process.  You may not disparage any Riverview Affiliate or its business or products, and may not encourage any third parties to sue a Riverview Affiliate.

10.
Cooperation Regarding Other Claims.   If any claim is asserted by or against a Riverview Affiliate as to which you have relevant knowledge, you will reasonably cooperate with us in the prosecution or defense of that claim, including by providing truthful information and testimony as reasonably requested by us.

11.
Nonsolicitation; No Interference.   You will comply with Sections 5(b) and 5(c) of the CIC Agreement, incorporated herein by reference, and Riverview will have the right to enforce those provisions under the terms of Section 5(d) of the CIC Agreement, incorporated herein by reference.  Following the expiration of the covenants referenced in the preceding sentence, you will not, apart from good faith competition, interfere with any Riverview Affiliate’s relationships with customers, employees, vendors, or others.

12.
Liquidated Damages.  Any breach by you of provisions set out in Sections 7 through 11 above shall be a material breach of this Separation Agreement for which we agree that Riverview or one of its affiliates would suffer irreparable harm and damage to its reputation, and for which liquidated damages in the amount of the Change in Control Benefit specified in Section 3 of the CIC Agreement or actual damages, whichever is greater, shall be assessed. The foregoing shall not be interpreted to preclude any additional remedy available to Riverview at law or in equity, including but not limited to injunctive relief.

13.
Independent Legal Counsel.   You are advised and encouraged to consult with an attorney before signing this Separation Agreement.  You acknowledge that you have had an adequate opportunity to do so.

14.
Consideration Period.   You have 21 days from the date this Separation Agreement is given to you to consider this Separation Agreement before signing it.  You may use as much or as little of this 21‑day period as you wish before signing.  If you do not sign and return this Separation Agreement within this 21-day period, you will not be eligible to receive the benefits described in this Separation Agreement.

15.
Revocation Period and Effective Date.   You have 7 calendar days after signing this Separation Agreement to revoke it.  To revoke this Separation Agreement after signing it, you must deliver a written notice of revocation to Riverview’s Chief Executive Officer or the Chairman of the Board before the 7-day period expires.  This Separation Agreement shall not become effective until the 8th calendar day after you sign it (the “ Effective Date ”).  If you revoke this Separation Agreement, it will not become effective or enforceable, and you will not be entitled to the benefits described in this Separation Agreement.

16.
Knowing and Voluntary Waivers under the ADEA.   You acknowledges that you understand this is a full release of all existing claims whether currently known or unknown including, but not limited to, claims for age discrimination under the Age Discrimination in Employment Act.  You agree and acknowledges that you have read and understood this Separation Agreement, and that you have consulted with an attorney regarding the meaning and application of this Separation Agreement, or, if you have not consulted with an attorney, you have been advised to do so and have had ample opportunity to do so.  You enter into this Separation Agreement knowingly, voluntarily, free from duress, and as a result of your own free will and with the intention to waive, settle, and release all claims you have or may have against each Riverview Affiliate.

A-4

17.
Governing Law.   This Separation Agreement is governed by the laws of the State of Washington that apply to contracts executed and to be performed entirely within the State of Washington.

18.
Dispute Resolution.   Any dispute arising under this Agreement shall be subject to arbitration in accordance with Section 8 of the CIC Agreement, which Sections are specifically incorporated by reference, in their entirety, in this Agreement.

19.
Saving Provision.   If any part of this Separation Agreement is held to be unenforceable, it shall not affect any other part, except if the release in Section 5 is determined to be invalid or unenforceable, this Separation Agreement shall be voidable by Riverview for a period of sixty (60) days following receipt of written notice of the invalidity or unenforceability.

20.
Final and Complete Agreement.   Except for the CIC Agreement and/or the Employment Agreement, which are expressly incorporated herein by reference, this Separation Agreement is the final and complete expression of all agreements between us on all subjects relating to your employment or its termination and supersedes and replaces all prior discussions, representations, agreements, policies and practices.  You acknowledge you are not signing this Separation Agreement relying on anything not set out herein.

21.
Miscellaneous.   This Separation Agreement may be signed in counterparts, both of which shall be deemed an original, but both of which, taken together shall constitute the same instrument.  A signature made on a faxed or electronically mailed copy of the Separation Agreement or a signature transmitted by facsimile or electronic shall have the same effect as the original signature.  The section headings used in this Separation Agreement are intended solely for convenience of reference and shall not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions hereof.  This Separation Agreement was the result of the negotiations between the parties.  In the event of vagueness, ambiguity or uncertainty, the Separation Agreement shall not be construed against the party preparing it, but shall be construed as if both parties prepared it jointly.  If you or Riverview fails to enforce this Separation Agreement or to insist on performance of any term, that failure does not mean a waiver of that term or of the Separation Agreement.  This Separation Agreement remains in full force and effect anyway.





[ Signature page to follow ]


A-5

Riverview Community Bank

By:______________________________

Title:  ____________________________

Date:  ____________________________



Riverview Bancorp, Inc.

By:______________________________

Title:  ____________________________

Date:  ____________________________



I, the undersigned, having been advised to consult with an attorney, hereby agree to be bound by this Separation Agreement and confirm that I have read and understood each part of it.


 
_________________________________


_________________________________
Print Name


_________________________________
Date:  

A-6


Exhibit 23
 
Consent of Independent Registered Public Accounting Firm


We consent to the incorporation by reference in Registration Statement No. 333-217276 on Form S-3 and Registration Statements No. 333-38887 and No. 333-109894 on Form S-8 of Riverview Bancorp, Inc. of our report dated June 14, 2019, with respect to the consolidated financial statements of Riverview Bancorp, Inc. and Subsidiary (collectively, "Riverview"), and the effectiveness of Riverview's internal control over financial reporting, included in Riverview's Annual Report (Form 10-K) for the year ended March 31, 2019.

/s/ Delap LLP

Lake Oswego, Oregon
June 14, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
110


Exhibit 31.1
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 officer(s) 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 officer(s) 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 weaknesses in the design or operation of internal controls over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial 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 14, 2019
/S/ Kevin J. Lycklama
 
Kevin J. Lycklama
 
Chief Executive Officer
 
 

 
111
Exhibit 31.2
Certification Required
By Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934

I, David Lam, 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 officer(s) 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 officer(s) 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 weaknesses in the design or operation of internal controls over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial 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 14, 2019
/S/ David Lam
 
David Lam
 
Chief Financial Officer
 
 
 
 
 
112



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/ Kevin J. Lycklama
/S/ David Lam
Kevin J. Lycklama
David Lam
Chief Executive Officer Chief Financial Officer
 
 
Dated: June 14, 2019
Dated: June 14, 2019

 
 
 
 
 
 
113