UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

For the quarterly period ended September 30, 2019

OR

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

For the transition period from _____ to _____

Commission File Number: 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

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 [   ]
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [X]
Smaller reporting company [X]
Emerging growth company [  ]
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]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, $.01 par value per share, 22,748,38522,336,235 shares outstanding as of November 7, 2019.13, 2020.


Form 10-Q

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX

Part I.
Financial Information
Page
 
 
 
Item 1:
Financial Statements (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of
September 30, 20192020 and March 31, 2019
2020
2
 
 
 
 
Consolidated Statements of Income for the
Three and Six monthsMonths Ended September 30, 2020 and 2019 and 2018
3
 
 
 
 
Consolidated Statements of Comprehensive Income for the
Three and Six monthsMonths Ended September 30, 2020 and 2019 and 2018
4
 
 
 
 
Consolidated Statements of Shareholders’ Equity for the
Three and Six monthsMonths Ended September 30, 20192020 and 20182019
5
 
 
 
 
Consolidated Statements of Cash Flows for the
Six monthsMonths Ended September 30, 2020 and 2019 and 2018
6
 
 
 
 
Notes to Consolidated Financial Statements
7
 
 
 
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
26
 
 
 
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
4143
Item 4: 
Controls and Procedures 
43
 
 
 
Item 4:
Controls and Procedures
41
Part II.
Other Information
42-4344-45
 
 
 
Item 1:
Legal Proceedings
Item 1A:Risk Factors
Item 1A:
2: 
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 2:
3: 
Unregistered Sales of Equity
Defaults Upon Senior Securities and Use of Proceeds
Item 4: 
Mine Safety Disclosures
 
   
Item 3:
Defaults Upon Senior Securities
Item 4:
Mine Safety Disclosures
Item 5:
Other Information 
   
Item 6:
Exhibits 
   
SIGNATURES
4446
   
Certifications  
Exhibit 31.1
Exhibit 31.2
Exhibit 32



Forward-Looking Statements

As used in this Form 10-Q, 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-Q, the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could,” or similar 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.economic performance and projections of financial items. 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 or implied by our forward-looking statements, including, but not limited to: the effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on Riverview’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; 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; uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks; 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; increases in premiums for deposit insurance; the Company’s ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company’s assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on the Company’s 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 anyframes; future goodwill charges related thereto;impairment due to changes in Riverview’s business, changes in market conditions, including as a result of the COVID-19 pandemic or other factors; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the Company’s ability to pay dividends on its common stock and interest or principal payments on its junior subordinated debentures;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; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services;services including as a result of COVID-19; and the other risks described from time to time in our filings with the U.S. Securities and Exchange Commission.Commission (“SEC”).

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 20202021 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.



1

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

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 20192020 AND MARCH 31, 20192020

(In thousands, except share and per share data) (Unaudited) 
September 30,
2019
  March 31, 2019  
September 30,
2020
  
March 31,
2020
 
ASSETS            
Cash and cash equivalents (including interest-earning accounts of $32,632 and $5,844)$48,888 $22,950 
Cash and cash equivalents (including interest-earning accounts of $226,583 and $27,866)$238,016 $41,968 
Certificates of deposit held for investment 249  747  249  249 
Loans held for sale 310  909  -  275 
Investment securities:            
Available for sale, at estimated fair value 163,682  178,226  126,273  148,291 
Held to maturity, at amortized cost (estimated fair value of $32 and $35) 31  35 
Loans receivable (net of allowance for loan losses of $11,436 and $11,457) 869,880  864,659 
Held to maturity, at amortized cost (estimated fair value of $24 and $28) 24  28 
Loans receivable (net of allowance for loan losses of $18,866 and $12,624) 956,308  898,885 
Prepaid expenses and other assets 8,136  4,596  16,018  7,452 
Accrued interest receivable 3,827  3,919  5,341  3,704 
Federal Home Loan Bank stock (“FHLB”), at cost 1,380  3,644  2,620  1,420 
Premises and equipment, net 15,490  15,458  17,296  15,570 
Financing lease right-of-use assets (“ROU”) 1,470  1,508 
Deferred income taxes, net 3,296  4,195  3,076  3,277 
Mortgage servicing rights, net 247  296  128  191 
Goodwill 27,076  27,076  27,076  27,076 
Core deposit intangible (“CDI”), net 839  920  689  759 
Bank owned life insurance (“BOLI”) 29,688  29,291  30,587  30,155 
TOTAL ASSETS$1,173,019 $1,156,921 $1,425,171 $1,180,808 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY            
            
LIABILITIES:            
Deposits$982,275 $925,068 $1,199,972 $990,448 
Accrued expenses and other liabilities 17,502  12,536  16,087  11,783 
Advanced payments by borrowers for taxes and insurance 1,117  631  1,011  703 
FHLB advances -  56,586  30,000  - 
Junior subordinated debentures 26,619  26,575  26,705  26,662 
Finance lease liability 2,387  2,403  2,350  2,369 
Total liabilities 1,029,900  1,023,799  1,276,125  1,031,965 
            
COMMITMENTS AND CONTINGENCIES (See Note 14)
            
            
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            
September 30, 2019 – 22,748,385 shares issued and outstanding 227  226 
March 31, 2019 – 22,607,712 shares issued and outstanding      
September 30, 2020 – 22,336,235 shares issued and outstanding 222  225 
March 31, 2020 – 22,748,385 shares issued and 22,544,285 shares outstanding      
Additional paid-in capital 65,559  65,094  63,420  64,649 
Retained earnings 77,112  70,428  82,666  81,870 
Accumulated other comprehensive income (loss) 221  (2,626)
Accumulated other comprehensive income 2,738  2,099 
Total shareholders’ equity 143,119  133,122  149,046  148,843 
      
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,173,019 $1,156,921 $1,425,171 $1,180,808 

See accompanying notes to consolidated financial statements.


2

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 2019 AND 2018

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 2020 AND 2019

 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
(In thousands, except share and per share data) (Unaudited) 2019  2018 2019  2018  2020
  2019
  2020
  2019
 
INTEREST AND DIVIDEND INCOME:                      
Interest and fees on loans receivable$11,893 $11,119 $23,447 $22,079  $11,346  $11,893  $22,874  $23,447 
Interest on investment securities – taxable 860 1,116 1,738  2,314  505  860  1,160  1,738 
Interest on investment securities – nontaxable 36 36 73  73  17  36  35  73 
Other interest and dividends 93  118  180  211   81   93   118   180 
Total interest and dividend income 12,882 12,389 25,438  24,677  11,949  12,882  24,187  25,438 
                      
INTEREST EXPENSE:                      
Interest on deposits 660 259 1,011  519  657  660  1,515  1,011 
Interest on borrowings 503  352  1,238  710   228   503   480   1,238 
Total interest expense 1,163  611  2,249  1,229   885   1,163   1,995   2,249 
Net interest income 11,719 11,778 23,189  23,448  11,064  11,719  22,192  23,189 
Provision for loan losses -  250  -  50   1,800   -   6,300   - 
Net interest income after provision for loan losses 11,719 11,528 23,189  23,398  9,264  11,719  15,892  23,189 
                      
NON-INTEREST INCOME:                      
Fees and service charges 1,752 1,514 3,389  3,086  1,663  1,752  3,061  3,389 
Asset management fees 1,090 943 2,233  1,869  883  1,090  1,857  2,233 
Net gains on sales of loans held for sale 46 44 142  196  -  46  28  142 
BOLI 204 174 397  353  242  204  432  397 
Other, net 77  165  144  205   31   77   64   144 
Total non-interest income, net 3,169 2,840 6,305  5,709  2,819  3,169  5,442  6,305 
                      
NON-INTEREST EXPENSE:                      
Salaries and employee benefits 5,697 5,283 11,412  10,861  5,379  5,697  10,571  11,412 
Occupancy and depreciation 1,277 1,351 2,597  2,710  1,457  1,277  2,907  2,597 
Data processing 669 622 1,349  1,253  697  669  1,358  1,349 
Amortization of CDI 41 46 81  92  35  41  70  81 
Advertising and marketing 298 266 508  458  110  298  239  508 
FDIC insurance premium - 85 80  161  84  -  132  80 
State and local taxes 174 182 369  350  204  174  408  369 
Telecommunications 76 88 162  181  85  76  171  162 
Professional fees 263 387 588  671  321  263  641  588 
Other 508  605  1,051  1,197   464   508   1,024   1,051 
Total non-interest expense 9,003  8,915  18,197  17,934   8,836   9,003   17,521   18,197 
                      
INCOME BEFORE INCOME TAXES 5,885 5,453 11,297  11,173  3,247  5,885  3,813  11,297 
PROVISION FOR INCOME TAXES 1,351  1,224  2,571  2,502   704   1,351   790   2,571 
NET INCOME$4,534 $4,229 $8,726 $8,671  $2,543  $4,534  $3,023  $8,726 
                      
Earnings per common share:                      
Basic$0.20 $0.19 $0.39 $0.38  $0.11  $0.20  $0.14  $0.39 
Diluted 0.20 0.19 0.38  0.38  0.11  0.20  0.14  0.38 
Weighted average number of common shares outstanding:                      
Basic 22,643,103 22,579,839 22,631,406  22,575,009  22,261,709  22,643,103  22,259,201  22,631,406 
Diluted 22,702,696 22,658,737 22,694,067  22,655,297  22,276,312  22,702,696  22,276,308  22,694,067 

See accompanying notes to consolidated financial statements.


3

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 20192020 AND 2018

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
(In thousands) (Unaudited) 2019  2018  2019  2018 
             
Net income$4,534 $4,229 $8,726 $8,671 
             
Other comprehensive income (loss):            
Net unrealized holding gain (loss) from available for sale investment securities arising            
during the period, net of tax of ($223), $313, ($898) and $539, respectively 712  (1,018) 2,847  (1,754)
             
Total comprehensive income, net$5,246 $3,211 $11,573 $6,917 
2019


  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
(In thousands) (Unaudited) 2020
  2019
  2020
  2019
 
Net income $2,543  $4,534  $3,023  $8,726 
                 
Other comprehensive income (loss):                
Net unrealized holding gain (loss) from available for sale investment securities arising                
during the period, net of tax of $8, ($223), ($201) and ($898), respectively  (24)  712   639   2,847 
                 
Total comprehensive income, net $2,519  $5,246  $3,662  $11,573 
                 
See accompanying notes to consolidated financial statements.







4

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019

 Common Stock             
(In thousands, except share data) (Unaudited) Shares  Amount  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
                   
For the three months ended September 30, 2018
                  
                   
Balance July 1, 2018  22,570,179  $226  $64,882  $60,204  $(5,484) $119,828 
                         
Net income  -   -   -   4,229   -   4,229 
Cash dividends on common stock ($0.035 per share)  -   -   -   (791)  -   (791)
Exercise of stock options  28,533   -   151   -   -   151 
Stock-based compensation expense  -   -   11   -   -   11 
Other comprehensive loss, net  -   -   -   -   (1,018)  (1,018)
Balance September 30, 2018  22,598,712  $226  $65,044  $63,642  $(6,502) $122,410 
                         
For the six months ended September 30, 2018
                        
                         
Balance April 1, 2018  22,570,179  $226  $64,871  $56,552  $(4,748) $116,901 
                         
Net income  -   -   -   8,671   -   8,671 
Cash dividends on common stock ($0.070 per share)  -   -   -   (1,581)  -   (1,581)
Exercise of stock options  28,533   -   151   -   -   151 
Stock-based compensation expense  -   -   22   -   -   22 
Other comprehensive loss, net  -   -   -   -   (1,754)  (1,754)
Balance September 30, 2018  22,598,712  $226  $65,044  $63,642  $(6,502) $122,410 
(In thousands, except share and per share data) (Unaudited)Common Stock  
Additional
Paid-In
  Retained  
Accumulated
Other
Comprehensive
  Total 
 Shares  Amount   Capital   Earnings   Income (Loss)   
                   
For the three months ended September 30, 2019
                  
                   
Balance July 1, 2019 22,705,385 $226 $65,326 $73,602 $(491)$138,663 
                   
Net income -  -  -  4,534  -  4,534 
Cash dividends on common stock ($0.045 per share) -  -  -  (1,024) -  (1,024)
Exercise of stock options 43,000  1  164  -  -  165 
Stock-based compensation expense -  -  69  -  -  69 
Other comprehensive income, net -  -  -  -  712  712 
Balance September 30, 2019 22,748,385 $227 $65,559 $77,112 $221 $143,119 
                   
For the six months ended September 30, 2019
                  
                   
Balance April 1, 2019 22,607,712 $226 $65,094 $70,428 $(2,626)$133,122 
                   
Net income -  -  -  8,726  -  8,726 
Cash dividends on common stock ($0.090 per share) -  -  -  (2,042) -  (2,042)
Exercise of stock options 58,000  1  216  -  -  217 
Restricted stock grants 82,673  -  -  -  -  - 
Stock-based compensation expense -  -  249  -  -  249 
Other comprehensive income, net -  -  -  -  2,847  2,847 
Balance September 30, 2019 22,748,385 $227 $65,559 $77,112 $221 $143,119 


For the three months ended September 30, 2019
                  
For the three months ended September 30, 2020
                  
                                    
Balance July 1, 2019 22,705,385  $226  $65,326  $73,602  $(491) $138,663 
Balance July 1, 2020 22,245,472 $222 $63,254 $81,240 $2,762 $147,478 
                                    
Net income -  -  -  4,534  -  4,534  -  -  -  2,543  -  2,543 
Cash dividends on common stock ($0.045 per share) -  -  -  (1,024) -  (1,024)
Cash dividends on common stock ($0.05 per share) -  -  -  (1,117) -  (1,117)
Restricted stock grants 90,763  -  -  -  -  - 
Stock-based compensation expense -  -  166  -  -  166 
Other comprehensive loss, net -  -  -  -  (24) (24)
Balance September 30, 2020 22,336,235 $222 $63,420 $82,666 $2,738 $149,046 
                  
                  
For the six months ended September 30, 2020
                  
                  
Balance April 1, 2020 22,544,285 $225 $64,649 $81,870 $2,099 $148,843 
                  
Net income -  -  -  3,023  -  3,023 
Cash dividends on common stock ($0.10 per share) -  -  -  (2,227) -  (2,227)
Exercise of stock options 43,000  1  164  -  -  165  5,000  -  9  -  -  9 
Stock repurchased (295,900) (3) (1,444) -  -  (1,447)
Restricted stock grants 90,763  -  -  -  -  - 
Restricted stock cancelled (7,913) -  -  -  -  - 
Stock-based compensation expense -  -  69  -  -  69  -  -  206  -  -  206 
Other comprehensive income, net  -   -   -   -   712   712  -  -  -  -  639  639 
Balance September 30, 2019  22,748,385  $227  $65,559  $77,112  $221  $143,119 
                  
                  
For the six months ended September 30, 2019
                  
                  
Balance April 1, 2019 22,607,712  $226  $65,094  $70,428  $(2,626) $133,122 
                  
Net income -  -  -  8,726  -  8,726 
Cash dividends on common stock ($0.090 per share) -  -  -  (2,042) -  (2,042)
Exercise of stock options 58,000  1  216  -  -  217 
Restricted stock grants 82,673  -  -  -  -  - 
Stock-based compensation expense -  -  249  -  -  249 
Other comprehensive income, net  -   -   -   -   2,847   2,847 
Balance September 30, 2019  22,748,385  $227  $65,559  $77,112  $221  $143,119 
Balance September 30, 2020 22,336,235 $222 $63,420 $82,666 $2,738 $149,046 

See accompanying notes to consolidated financial statements.


5

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019

(In thousands) (Unaudited) 2019  2018  2020 2019 
           
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income $8,726  $8,671 $3,023 $8,726 
Adjustments to reconcile net income to net cash provided by operating activities:             
Depreciation and amortization  1,496   1,404  1,513 1,496 
Purchased loans amortization, net  181   9  122 181 
Provision for loan losses  -   50  6,300 - 
Stock-based compensation expense  249   22  206 249 
Increase in deferred loan origination fees, net of amortization  96   506  2,351 96 
Origination of loans held for sale  (4,786)  (6,110) (913) (4,786)
Proceeds from sales of loans held for sale  5,477   6,419  1,214 5,477 
Net gains on sales of loans held for sale and sales of premises and equipment  (216)  (198)
Net gains on loans held for sale and sales of premises and equipment (23) (216)
Income from BOLI  (397)  (353) (432) (397)
Changes in certain other assets and liabilities:              
Prepaid expenses and other assets  2,001   (1,307) (2,752) 2,001 
Accrued interest receivable  92   (194) (1,637) 92 
Accrued expenses and other liabilities  (677)  4,303  (1,429) (677)
Net cash provided by operating activities  12,242   13,222  7,543 12,242 
             
CASH FLOWS FROM INVESTING ACTIVITIES:             
Loan repayments (originations), net  1,530   (21,874) (62,370) 1,530 
Purchases of loans receivable  (6,992)  (16,350) (3,826) (6,992)
Principal repayments on investment securities available for sale  14,515   14,496  19,105 14,515 
Proceeds from calls of investment securities available for sale  3,000   5,000  3,000 3,000 
Principal repayments on investment securities held to maturity  4   4  4 4 
Purchases of premises and equipment and capitalized software  (599)  (194) (2,338) (599)
Redemption of certificates of deposit held for investment  498   1,983  - 498 
Redemption of FHLB stock, net  2,264   - 
Redemption (purchases) of FHLB stock, net (1,200) 2,264 
Proceeds from sales of real estate owned (“REO”) and premises and equipment  81   326  -  81 
Net cash provided by (used in) investing activities  14,301   (16,609) (47,625) 14,301 
             
CASH FLOWS FROM FINANCING ACTIVITIES:             
Net increase (decrease) in deposits  57,217   (13,384)
Net increase in deposits 209,524 57,217 
Dividends paid  (1,923)  (1,467) (2,245) (1,923)
Proceeds from borrowings  214,897   59,740  30,000 214,897 
Repayment of borrowings  (271,483)  (59,740) - (271,483)
Net increase in advance payments by borrowers for taxes and insurance  486   413  308 486 
Principal payments on finance lease liability  (16)  (13) (19) (16) 
Proceeds from exercise of stock options  217   151  9 217 
Net cash used in financing activities  (605)  (14,300)
Repurchase of common stock (1,447) - 
Net cash provided by (used in) financing activities 236,130  (605)
              
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  25,938   (17,687)
NET INCREASE IN CASH AND CASH EQUIVALENTS 196,048  25,938 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD  22,950   44,767  41,968  22,950 
CASH AND CASH EQUIVALENTS, END OF PERIOD $48,888  $27,080 $238,016 $48,888 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:             
Cash paid during the period for:             
Interest $2,202  $1,183 $1,901 $2,202 
Income taxes  1,482   4,591  2,292 1,482 
             
NONCASH INVESTING AND FINANCING ACTIVITIES:             
Dividends declared and accrued in other liabilities $1,023  $791 $1,117 $1,023 
Other comprehensive income (loss)  3,745   (2,293)
Income tax effect related to other comprehensive income (loss)  (898)  539 
Right-of-use lease assets obtained in exchange for operating lease liabilities  5,603   - 
Net unrealized holding gain from available for sale investment securities 840 3,745 
Income tax effect related to other comprehensive income (201) (898)
ROU lease assets obtained in exchange for operating lease liabilities 5,833 5,603 

See accompanying notes to consolidated financial statements.



6



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

1.BASIS OF PRESENTATION

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

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Riverview Bancorp, Inc. Annual Report on Form 10-K for the year ended March 31, 20192020 (“20192020 Form 10-K”). The unaudited consolidated results of operations for the six months ended September 30, 20192020 are not necessarily indicative of the results which may be expected for the entire fiscal year ending March 31, 2020.2021.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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.PRINCIPLES OF CONSOLIDATION

The accompanying unaudited consolidated financial statements include the accounts of Riverview Bancorp, Inc.; its wholly-owned subsidiary, Riverview Community Bank (the “Bank”); the Bank’s wholly-owned subsidiary, Riverview Services, Inc., and the Bank’s wholly-owned subsidiaries, Riverview Services, Inc. andmajority-owned subsidiary, Riverview Trust Company (the “Trust Company”) (collectively referred to as the “Company”). All inter-company transactions and balances have been eliminated in consolidation. For the period from April 1, 2017 through December 2019, the Trust Company was a wholly-owned subsidiary of the Bank. In December 2019, the Trust Company issued 1,500 shares of Trust Company stock in conjunction with the exercise of 1,500 Trust Company stock options by the Trust Company’s President and Chief Executive Officer. As a result of this transaction, the Bank’s ownership in the Trust Company decreased from 100% to 98%, resulting in a noncontrolling interest. The noncontrolling interest was $112,000 as of September 30, 2020, and net income attributable to the noncontrolling interest was $2,000 and $5,000 for the three and six months ended September 30, 2020, respectively. These amounts are not presented separately in the accompanying consolidated financial statements due to their insignificance.

3.STOCK PLANS AND STOCK-BASED COMPENSATION

Stock Option Plans – 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 2003 Plan; however, any awards granted prior to their respective expiration dates remain outstanding subject to their terms. Each option granted under the 2003 Plan has an exercise price equal to the fair market value of the Company’s common stock on the date of 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. The 2003 Plan and the 2017 Plan are collectively referred to as “the Stock Option Plans”.

As of September 30, 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 both the three and six months ended September 30, 2019 and 2018, the Trust Company incurred $11,000 and $22,000, respectively, of stock-based compensation expense related to these options. No Trust Company stock options were exercised as of September 30, 2019 and 2018.

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 toconsidering 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 under the 2017 Stock Option Plan during the three and six months ended September 30, 20192020 and 2018.



7

2019. As of September 30, 2019,2020, all outstanding stock options were fully vested and there was no remaining unrecognized compensation expense related to stock options

7
granted under the Stock Option Plans. Unrecognized compensation expense related to the Trust Company stock options totaled $66,000 as of September 30, 2019. There was no stock-based compensation expense related to stock options for the three and six months ended September 30, 20192020 and 20182019 under the Stock Option Plans.

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

 
Six Months Ended
September 30, 2019
 
Six Months Ended
September 30, 2018
 
 
Number of
Shares
  
Weighted
Average
Exercise
Price
 
Number of
Shares
  
Weighted
Average
Exercise
Price
 
Balance, beginning of period101,332 $3.26 141,365 $3.77 
Options exercised(58,000) 3.69 (28,533) 5.30 
Expired-  - (2,500) 8.12 
Balance, end of period43,332 $2.69 110,332 $3.27 
 
Six Months Ended
September 30, 2020
 
Six Months Ended
September 30, 2019
 
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Balance, beginning of period43,332 $2.69 101,332 $3.26 
Options exercised(5,000) 1.97 (58,000) 3.69 
Balance, end of period38,332 $2.78 43,332 $2.69 

The following table presents information on stock options outstanding, under the Stock Option Plansless estimated forfeitures, as of September 30, 20192020 and 2018:2019:

          
 2019 2018  2020 2019 
Stock options fully vested and expected to vest:          
Number 43,332 110,332  38,332 43,332 
Weighted average exercise price$2.69 $3.27 $2.78 $2.69 
Aggregate intrinsic value (1)
$203,000 $614,000 $52,000 $203,000 
Weighted average contractual term of options (years) 3.30 2.70  2.60 3.30 
Stock options fully vested and currently exercisable:          
Number 43,332 110,332  38,332 43,332 
Weighted average exercise price$2.69 $3.27 $2.78 $2.69 
Aggregate intrinsic value (1)
$203,000 $614,000 $52,000 $203,000 
Weighted average contractual term of options (years) 3.30 2.70  2.60 3.30 
            
(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.
(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.
(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 under the Stock Option Plans was $238,000$17,000 and $118,000$238,000 for the six months ended September 30, 2020 and 2019, and 2018, respectively.respectively, under the Stock Option Plans.

During the sixthree months ended SeptemberJune 30, 2019, the Company granted 82,673 shares of restricted stock pursuant to the 2017 Plan. Plan of which vesting for 49,298 shares of restricted stock were time based and vesting for 33,375 shares of restricted stock were performance based subject to attaining certain performance metrics. The Company cancelled 7,913 shares of performance-based restricted stock during the quarter ended June 30, 2020 due to not achieving the underlying performance metrics. During the three months ended September 30, 2020, the Company granted 90,763 shares of restricted stock pursuant to the 2017 Plan of which vesting for 19,453 shares of restricted stock were time based and vesting for 71,310 shares of restricted stock were performance based subject to attaining certain performance metrics. Any potential cancellations of the 71,310 shares of performance-based restricted stock due to not achieving performance metrics will be determined at the end of fiscal year 2021.

The fair value of restricted stock awards is equal to the fair value of the Company’s stock on the date of grant. Stock-basedThe related stock-based compensation expense is recorded over the requisite service period. Stock-based compensation related to restricted stock grants was $155,000 and $58,000 for the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation related to restricted stock grants was $184,000 and $227,000 for the three and six months ended September 30, 2019. There was no stock-based compensation related to restricted stock for the three2020 and six months ended September 30, 2018.2019, respectively. The unrecognized stock-based compensation related to restricted stock was $463,000$516,000 at September 30, 2019.2020. The weighted average vesting period for the restricted stock was 2.232.12 years at September 30, 2019.2020.

The following table presents the activity related to restricted stock as of September 30, 2019:2020:

Time Based Performance Based Total Time Based Performance Based Total 
Number of
Unvested
Shares
 
Weighted Average
Market
Price
 
Number of
Unvested
Shares
  
Weighted
Average
Market
Price
 
Number of
Unvested
Shares
 
Weighted
Average
Market
Price
 
Number of
Unvested
Shares
 
Weighted
Average
Market Price
 
Number of
Unvested
Shares
 
Weighted
Average
Market Price
 
Number of
Unvested
Shares
 
Weighted
Average
Market Price
 
Balance, beginning of period- $- - $- - $- 49,298 $8.35 33,375 $8.35 82,673 $8.35 
Granted49,298 8.35 33,375  8.35 82,673 8.35 19,453 4.17 71,310  4.17 90,763 4.17 
Forfeited- - -  - - - - - -  - - - 
Vested- - -  - - - (23,135) 8.35 -  - (23,135) 8.35 
Cancelled- - (7,913) 8.35 (7,913) 8.35 
Balance, end of period49,298 $8.35 33,375 $8.35 82,673 $8.35 45,616 $6.57 96,772 $5.27 142,388 $5.69 



8
Trust Company Stock Options – At September 30, 2020 and 2019, there were 1,000 and 2,500 Trust Company stock options outstanding, respectively, which had been granted to the President and Chief Executive Officer of the Trust Company. During each of the three and six months ended September 30, 2020 and 2019, the Trust Company incurred $11,000 and $22,000, respectively of stock-based compensation expense related to these options. No Trust Company stock options were exercised during the six months ended September 30, 2020 and 2019. There were no Trust Company stock options granted during the six months ended September 30, 2020 and 2019. Unrecognized compensation expense related to the Trust Company stock options totaled $22,000 as of September 30, 2020.

4.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. Nonvested shares of restricted stock are included in the computation of basic EPS because the holder has voting rights and shares in non-forfeitable dividends during the vesting period. 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 and assumed vesting of restricted stock.options. For the three and six months ended September 30, 20192020 and 2018,2019, there were no stock options excluded in computing diluted EPS.

In February 2020, the Company’s Board of Directors adopted a stock repurchase program (the “repurchase program”). Under the repurchase program, the Company may repurchase up to 500,000 shares of the Company’s outstanding shares of common stock, in the open market based on prevailing market prices, or in private negotiated transactions, during the period from March 12, 2020 until the earlier of the completion of the repurchase of 500,000 shares of the Company’s common stock or the next six months, depending on market conditions. As of April 17, 2020, the Company had repurchased the 500,000 shares under the repurchase program at an average price of $4.89 per share. The Company did not repurchase any shares of its common stock during the fiscal year ended March 31, 2019 or any interim period within that fiscal year.

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

 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
Basic EPS computation:                      
Numerator-net income$4,534,000 $4,229,000 $8,726,000 $8,671,000 $2,543,000 $4,534,000 $3,023,000 $8,726,000 
Denominator-weighted average common shares
outstanding
 22,643,103  22,579,839  22,631,406  22,575,009  22,261,709  22,643,103  22,259,201  22,631,406 
Basic EPS$0.20 $0.19 $0.39 $0.38 $0.11 $0.20 $0.14 $0.39 
Diluted EPS computation:                      
Numerator-net income$4,534,000 $4,229,000 $8,726,000 $8,671,000 $2,543,000 $4,534,000 $3,023,000 $8,726,000 
Denominator-weighted average common shares
outstanding
 22,643,103 22,579,839  22,631,406  22,575,009  22,261,709 22,643,103  22,259,201  22,631,406 
Effect of dilutive stock options and restricted stock 59,593  78,898  62,661  80,288 
Effect of dilutive stock options 14,603  59,593  17,107  62,661 
Weighted average common shares and common
stock equivalents
 22,702,696  22,658,737  22,694,067  22,655,297  22,276,312  22,702,696  22,276,308  22,694,067 
Diluted EPS$0.20 $0.19 $0.38 $0.38 $0.11 $0.20 $0.14 $0.38 






9

5.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
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
September 30, 2019
            
September 30, 2020
        
Available for sale:                    
Municipal securities $8,807  $236  $-  $9,043 $4,733 $277 $- $5,010
Agency securities 9,429  76  (26) 9,479  3,006 4 (8) 3,002
Real estate mortgage investment conduits (1)
 36,135  242  (37) 36,340  36,312 811 - 37,123
Residential mortgage-backed securities (1)
 69,849  204  (395) 69,658  48,302 1,399 - 49,701
Other mortgage-backed securities (2)
  39,172   204   (214)  39,162  30,318  1,201  (82) 31,437
Total available for sale $163,392  $962  $(672) $163,682 $122,671 $3,692 $(90)$126,273
                    
Held to maturity:                    
Residential mortgage-backed securities (3)
 $31  $1  $-  $32 $24 $- $- $24
                    
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 Federal Home Loan Mortgage Corporation (“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.
 

9
March 31, 2020
           
Available for sale:           
Municipal securities$4,740 $137 $- $4,877
Agency securities 6,009  17  (10) 6,016
Real estate mortgage investment conduits (1)
 42,663  1,128  -  43,791
Residential mortgage-backed securities (1)
 58,700  1,415  (30) 60,085
Other mortgage-backed securities (2)
 33,417  256  (151) 33,522
Total available for sale$145,529 $2,953 $(191)$148,291
            
Held to maturity:           
Residential mortgage-backed securities (3)
$28 $- $- $28
 
(1) Comprised of Federal Home Loan Mortgage Corporation (“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.

The contractual maturities of investment securities as of September 30, 20192020 are as follows (in thousands):

 Available for Sale  Held to Maturity  Available for Sale  Held to Maturity 
 
Amortized
Cost
  
Estimated
Fair Value
  
Amortized
Cost
  
Estimated
Fair Value
  
Amortized
Cost
  
Estimated
Fair Value
  
Amortized
Cost
  
Estimated
Fair Value
 
Due in one year or less$728 $727 $- $- $1,000 $1,004 $- $- 
Due after one year through five years 9,556 9,581  28  29  6,650 6,760  21  21 
Due after five years through ten years 47,240 47,583  3  3  28,333 29,193  3  3 
Due after ten years 105,868  105,791  -  -  86,688  89,316  -  - 
Total$163,392 $163,682 $31 $32 $122,671 $126,273 $24 $24 

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 Less than 12 months   12 months or longer   Total 
 
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
�� 
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
  
Estimated
Fair Value
  
Unrealized
Losses
 
September 30, 2019
                  
September 30, 2020
                 
                                  
Available for sale:                                  
Municipal securities $1,183  $-  $-  $-  $1,183  $- 
Agency securities 1,998  (13) 2,987  (13) 4,985  (26)$- $- $1,998 $(8)$1,998 $(8)
Real estate mortgage investment conduits (1)
 6,990  (10) 4,703  (27) 11,693  (37) 31  - -  - 31  - 
Residential mortgage-backed securities (1)
 8,391  (6) 33,311  (389) 41,702  (395)
Other mortgage-backed securities (2)
  14,734   (68)  9,230   (146)  23,964   (214) -  -  4,536  (82) 4,536  (82)
Total available for sale $33,296  $(97) $50,231  $(575) $83,527  $(672)$31 $- $6,534 $(90)$6,565 $(90)
                 
(1) Comprised of GNMA issued securities.
(1) Comprised of GNMA issued securities.
(2) Comprised of SBA issued securities.
(2) Comprised of SBA issued securities.

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)
                         
(1) Comprised of FHLMC, FNMA and GNMA issued securities.
 
(2) Comprised of SBA issued and CRE secured securities issued by FNMA.
 



10

 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, 2020
                  
                   
Available for sale:                  
Agency securities$1,998 $(10)$- $- $1,998 $(10)
Residential mortgage-backed securities (1)
 2,509  (22) 409  (8) 2,918  (30)
Other mortgage-backed securities (2)
 11,726  (58) 4,911  (93) 16,637  (151)
Total available for sale$16,233 $(90)$5,320 $(101)$21,553 $(191)
                   
(1) Comprised of FHLMC and FNMA issued securities.
(2) Comprised of SBA and CRE secured securities issued by FNMA.

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. The Company has the ability and intent to hold the investments until the fair value recovers. 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 three and six months ended September 30, 20192020 and 2018.2019. Investment securities available for sale with an amortized cost of $5.3$6.0 million and $5.8$6.6 million and an estimated fair value of $5.4$6.2 million and $5.7$6.8 million at September 30, 20192020 and March 31, 2019,2020, respectively, were pledged as collateral for government public funds held by the Bank. There were no held to maturity securities pledged as collateral for government public funds held by the Bank at September 30, 20192020 and March 31, 2019.


10
2020.

6.LOANS RECEIVABLE

Loans receivable as of September 30, 2019 and March 31, 2019 are reported net of deferred loan fees. At September 2020, deferred loan fees totalingtotaled $6.5 million of which $2.8 million were related to the SBA’s Paycheck Protection Program (“PPP”) loans. At March 31, 2020, deferred loan fees totaled $4.1 million and $4.0 million, respectively.of which there were no deferred loan fees related to SBA PPP loans. Loans receivable are also reported net of discounts and premiums totaling $1.3 million$871,000 and $1.6$1.3 million, respectively, as of September 30, 2019,2020, compared to $1.5$1.1 million and $1.8$1.5 million, respectively, as of March 31, 2019.2020. Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated (in thousands):


 
September 30,
2019
  
March 31,
2019
September 30,
2020
 
March 31,
2020
 
Commercial and construction           
Commercial business(1)$167,782 $162,796$281,670 $179,029 
Commercial real estate 471,571  461,432 525,977  507,871 
Land 14,166  17,027 14,531  14,026 
Multi-family 55,978  51,570 49,878  58,374 
Real estate construction 83,174  90,882 28,308  64,843 
Total commercial and construction 792,671  783,707 900,364  824,143 
           
Consumer           
Real estate one-to-four family 82,578  84,053 71,940  83,150 
Other installment (1)
 6,067  8,356 2,870  4,216 
Total consumer 88,645  92,409 74,810  87,366 
           
Total loans 881,316  876,116 975,174  911,509 
           
Less: Allowance for loan losses 11,436  11,457 18,866  12,624 
Loans receivable, net$869,880 $864,659$956,308 $898,885 
           
(1) Includes purchased automobile loans totaling $3.4 million and $5.8 million at September 30, 2019 and March 31, 2019, respectively.
(1) SBA PPP loans totaled $110.8 million and none at September 30, 2020 and March 31, 2020, respectively.
(1) SBA PPP loans totaled $110.8 million and none at September 30, 2020 and March 31, 2020, respectively.
 

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 September 30, 2019,2020, loans carried at $502.4$516.2 million were pledged as collateral to the Federal Home Loan Bank of Des Moines (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) pursuant to borrowing agreements.

MostSubstantially all of the Bank’s business activity is with customers located in the states of Washington and Oregon. Loans and extensions of credit outstanding at one time to one borrower are generally limited by federal regulation to 15% of the Bank’s shareholders’ equity, excluding accumulated other comprehensive income (loss). As of September 30, 20192020 and March 31, 2019,2020, the Bank had no loans to any one borrower in excess of the regulatory limit.


11

7.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 a 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.

11

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.

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.

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

Three months ended
September 30, 2019
 Commercial  Business  
Commercial
Real Estate
  Land  
Multi-
Family
  Real Estate Construction  Consumer  Unallocated  Total 
Three months ended
September 30, 2020
 Commercial Business  
Commercial
Real Estate
  Land  
Multi-
Family
  Real Estate Construction  Consumer  Unallocated  Total 
                                               
Beginning balance$2,113 $4,889 $244 $699 $1,506 $1,346 $645 $11,442  $2,011  $11,323  $243  $879  $692  $1,281  $647  $17,076 
Provision for (recapture of)
loan losses
 (62) 149  (25) 80  (125) 7  (24) -  169  1,886  2  (134) 28  (116) (35) 1,800 
Charge-offs -  -  -  -  - (13) -  (13) -  -  -  -  -  (23) -  (23)
Recoveries -  -  -  -  -  7  -  7   -   -   -   -   -   13   -   13 
Ending balance$2,051 $5,038 $219 $779 $1,381 $1,347 $621 $11,436  $2,180  $13,209  $245  $745  $720  $1,155  $612  $18,866 

Six months ended
September 30, 2019
                        
                         
Beginning balance$1,808 $5,053 $254 $728 $1,457 $1,447 $710 $11,457 
Provision for (recapture of)
  loan losses
 246  (15) (35) 51  (76) (82) (89) - 
Charge-offs (3) -  -  -  -  (54) -  (57)
Recoveries -  -  -  -  -  36  -  36 
Ending balance$2,051 $5,038 $219 $779 $1,381 $1,347 $621 $11,436 

Three months ended
September 30, 2018
 Commercial  Business  
Commercial
Real Estate
  Land  
Multi-
Family
  Real Estate Construction  Consumer  Unallocated  Total 
                         
Beginning balance$1,799 $5,139 $258 $781 $855 $1,788 $729 $11,349 
Provision for (recapture of)
  loan losses
 59  222  (21) (85) 152  (61) (16) 250 
Charge-offs -  -  -  -  -  (92) -  (92)
Recoveries -  -  -  -  -  6  -  6 
Ending balance$1,858 $5,361 $237 $696 $1,007 $1,641 $713 $11,513 

Six months ended
September 30, 2018
                        
                         
Beginning balance$1,668 $4,914 $220 $822 $618 $1,809 $715 $10,766 
Provision for (recapture of)
  loan losses
 190  (376) 17  (126) 389  (42) (2) 50 
Charge-offs -  -  -  -  -  (184) -  (184)
Recoveries -  823  -  -  -  58  -  881 
Ending balance$1,858 $5,361 $237 $696 $1,007 $1,641 $713 $11,513 


12
Six months ended
September 30, 2020
 Commercial Business  
Commercial
Real Estate
  Land  
Multi-
Family
  Real Estate Construction  Consumer  Unallocated  Total 
                         
Beginning balance $2,008  $6,421  $230  $854  $1,149  $1,363  $599  $12,624 
Provision for (recapture of) loan losses  162   6,788   15   (109)  (429)  (140)  13   6,300 
Charge-offs  -   -   -   -   -   (88)  -   (88)
Recoveries  10   -   -   -   -   20   -   30 
Ending balance $2,180  $13,209  $245  $745  $720  $1,155  $612  $18,866 

Three months ended
September 30, 2019
                        
                         
Beginning balance $2,113  $4,889  $244  $699  $1,506  $1,346  $645  $11,442 
Provision for (recapture of) loan losses  (62)  149   (25)  80   (125)  7   (24)  - 
Charge-offs  -   -   -   -   -   (13)  -   (13)
Recoveries  -   -   -   -   -   7   -   7 
Ending balance $2,051  $5,038  $219  $779  $1,381  $1,347  $621  $11,436 

Six months ended
September 30, 2019
                        
                         
Beginning balance $1,808  $5,053  $254  $728  $1,457  $1,447  $710  $11,457 
Provision for (recapture of) loan losses  246   (15)  (35)  51   (76)  (82)  (89)  - 
Charge-offs  (3)  -   -   -   -   (54)  -   (57)
Recoveries  -   -   -   -   -   36   -   36 
Ending balance $2,051  $5,038  $219  $779  $1,381  $1,347  $621  $11,436 

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  Allowance for Loan Losses  Recorded Investment in Loans 
September 30, 2019
 
Individually
Evaluated for Impairment
  
Collectively
Evaluated for Impairment
  Total  
Individually
Evaluated for Impairment
  
Collectively
Evaluated for Impairment
  Total 
September 30, 2020
 
Individually
Evaluated for Impairment
  
Collectively
Evaluated for Impairment
  Total  
Individually
Evaluated for Impairment
  
Collectively
Evaluated for Impairment
  Total 
                                 
Commercial business$- $2,051 $2,051 $150 $167,632 $167,782  $-  $2,180  $2,180  $129  $281,541  $281,670 
Commercial real estate - 5,038 5,038  2,408 469,163 471,571  -  13,209  13,209  2,349  523,628  525,977 
Land - 219 219  720 13,446 14,166  -  245  245  714  13,817  14,531 
Multi-family - 779 779  1,571 54,407 55,978  -  745  745  1,553  48,325  49,878 
Real estate construction - 1,381 1,381  - 83,174 83,174  -  720  720  -  28,308  28,308 
Consumer 10 1,337 1,347�� 448 88,197 88,645  10  1,145  1,155  546  74,264  74,810 
Unallocated -  621  621  -  -  -   -   612   612   -   -   - 
Total$10 $11,426 $11,436 $5,297 $876,019 $881,316  $10  $18,856  $18,866  $5,291  $969,883  $975,174 

March 31, 2019
              
March 31, 2020
                  
                                 
Commercial business$- $1,808 $1,808 $160 $162,636 $162,796  $-  $2,008  $2,008  $139  $178,890  $179,029 
Commercial real estate - 5,053 5,053  2,482 458,950 461,432  -  6,421  6,421  2,378  505,493  507,871 
Land - 254 254  728 16,299 17,027  -  230  230  714  13,312  14,026 
Multi-family - 728 728  1,598 49,972 51,570  -  854  854  1,549  56,825  58,374 
Real estate construction - 1,457 1,457  - 90,882 90,882  -  1,149  1,149  -  64,843  64,843 
Consumer 22 1,425 1,447  697 91,712 92,409  12  1,351  1,363  432  86,934  87,366 
Unallocated -  710  710  -  -  -   -   599   599   -   -   - 
Total$22 $11,435 $11,457 $5,665 $870,451 $876,116  $12  $12,612  $12,624  $5,212  $906,297  $911,509 

Non-accrual loans:  Loans are reviewed regularly and it is the Company’s general policy that a loan is past due when it is 30 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. Interest income foregone on non-accrual loans was $36,681$35,000 and $47,000$37,000 for the six months ended September 30, 20192020 and 2018,2019, respectively.



13
The following tables present an analysis of loans by aging category at the dates indicated (in thousands):

September 30, 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 $187  $-  $243  $430  $167,352  $167,782 
Commercial real estate  -   -   1,026   1,026   470,545   471,571 
Land  -   -   -   -   14,166   14,166 
Multi-family  -   -   -   -   55,978   55,978 
Real estate construction  -   -   -   -   83,174   83,174 
Consumer  171   -   216   387   88,258   88,645 
Total $358  $-  $1,485  $1,843  $879,473  $881,316 

March 31, 2019
                  
September 30, 2020 
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  $-  $-  $191  $191  $281,479  $281,670 
Commercial real estate -  -  1,081  1,081  460,351  461,432  -  -  1,005  1,005  524,972  525,977 
Land -  -  -  -  17,027  17,027  -  -  -  -  14,531  14,531 
Multi-family -  -  -  -  51,570  51,570  -  -  -  -  49,878  49,878 
Real estate construction -  -  -  -  90,882  90,882  -  -  -  -  28,308  28,308 
Consumer  345   3   210   558   91,851   92,409   193   -   79   272   74,538   74,810 
Total $345  $3  $1,516  $1,864  $874,252  $876,116  $193  $-  $1,275  $1,468  $973,706  $975,174 

March 31, 2020
                  
                   
Commercial business $-  $-  $201  $201  $178,828  $179,029 
Commercial real estate  -   -   1,014   1,014   506,857   507,871 
Land  -   -   -   -   14,026   14,026 
Multi-family  -   -   -   -   58,374   58,374 
Real estate construction  -   -   -   -   64,843   64,843 
Consumer  271   -   180   451   86,915   87,366 
Total $271  $-  $1,395  $1,666  $909,843  $911,509 

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

13

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.

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.


14

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):

September 30, 2019
 Pass  
Special
Mention
  Substandard  Doubtful  Loss  Total Loans
Receivable
September 30, 2020
 Pass  
Special
Mention
  Substandard  Doubtful  Loss  
Total Loans
Receivable
 
                                   
Commercial business$164,196 $1,817 $1,769 $- $- $167,782 $281,036  $443  $191  $-  $-  $281,670 
Commercial real estate 469,963  -  1,608  -  -  471,571 485,377  36,030  4,570  -  -  525,977 
Land 13,446  -  720  -  -  14,166 14,531  -  -  -  -  14,531 
Multi-family 55,457  501  20  -  -  55,978 49,804  41  33  -  -  49,878 
Real estate construction 83,174  -  -  -  -  83,174 25,755  2,553  -  -  -  28,308 
Consumer 88,429  -  216  -  -  88,645  74,731   -   79   -   -   74,810 
Total$874,665 $2,318 $4,333 $- $- $881,316 $931,234  $39,067  $4,873  $-  $-  $975,174 

March 31, 2019
                 
                  
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



14
March 31, 2020
                  
                   
Commercial business $177,399  $1,282  $348  $-  $-  $179,029 
Commercial real estate  506,794   63   1,014   -   -   507,871 
Land  14,026   -   -   -   -   14,026 
Multi-family  58,295   45   34   -   -   58,374 
Real estate construction  64,843   -   -   -   -   64,843 
Consumer  87,186   -   180   -   -   87,366 
Total $908,543  $1,390  $1,576  $-  $-  $911,509 

Impaired loans and troubled debt restructurings (“TDRs”): 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 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 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.

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

September 30, 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 $150  $-  $150  $178  $- 
Commercial real estate  2,408   -   2,408   3,403   - 
Land  720   -   720   756   - 
Multi-family  1,571   -   1,571   1,678   - 
Consumer  303   145   448   563   10 
Total $5,152  $145  $5,297  $6,578  $10 
                     
March 31, 2019
                    
                     
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 

 
Three months ended
September 30, 2019
  
Three months ended
September 30, 2018
  
Average
Recorded
Investment
  
Interest
Recognized on
Impaired Loans
   
Average
Recorded
Investment
  
Interest
Recognized on
Impaired Loans
             
Commercial business$153 $-  $170 $-
Commercial real estate 2,424  16   2,576  16
Land 722  10   745  -
Multi-family 1,577  23   1,625  22
Consumer 451  7   1,064  10
Total$5,327 $56  $6,180 $48


September 30, 2020 
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 $129  $-  $129  $164  $- 
Commercial real estate  2,349   -   2,349   3,433   - 
Land  714   -   714   749   - 
Multi-family  1,553   -   1,553   1,657   - 
Consumer  416   130   546   660   10 
Total $5,161  $130  $5,291  $6,663  $10 
March 31, 2020
                    
                     
Commercial business $139  $-  $139  $170  $- 
Commercial real estate  2,378   -   2,378   3,405   - 
Land  714   -   714   748   - 
Multi-family  1,549   -   1,549   1,662   - 
Consumer  295   137   432   543   12 
Total $5,075  $137  $5,212  $6,528  $12 


15

Six months ended
September 30, 2019
  
Six months ended
September 30, 2018
 
Three months ended
September 30, 2020
  
Three months ended
September 30, 2019
 
 
Average
Recorded
Investment
  
Interest
Recognized on
Impaired Loans
   
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$155 $-  $448 $- $132  $-  $153  $- 
Commercial real estate 2,444 31   2,678  32 2,356  15  2,424  16 
Land 724 20   751  - 714  10  722  10 
Multi-family 1,584 45   1,632  44 1,552  22  1,577  23 
Consumer 533  15   1,185  26  485   10   451   7 
Total$5,440 $111  $6,694 $102 $5,239  $57  $5,327  $56 

  
Six months ended
September 30, 2020
  
Six months ended
September 30, 2019
 
  
Average
Recorded
Investment
  
Interest
Recognized on
Impaired Loans
  
Average
Recorded
Investment
  
Interest
Recognized on
Impaired Loans
 
             
Commercial business $134  $-  $155  $- 
Commercial real estate  2,364   30   2,444   31 
Land  714   20   724   20 
Multi-family  1,551   44   1,584   45 
Consumer  467   16   533   15 
Total $5,230  $110  $5,440  $111 

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

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 above.

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

September 30, 2019  March 31, 2019  September 30, 2020  March 31, 2020 
 Accrual  Nonaccrual  Total  Accrual  Nonaccrual  Total  Accrual  Nonaccrual  Total  Accrual  Nonaccrual  Total 
                                  
Commercial business$- $150 $150 $- $160 $160  $-  $129  $129  $-  $139  $139 
Commercial real estate 1,382  1,026 2,408  1,401  1,081 2,482  1,344  1,005  2,349  1,364  1,014  2,378 
Land 720  - 720  728  - 728  714  -  714  714  -  714 
Multi-family 1,571  - 1,571  1,598  - 1,598  1,553  -  1,553  1,549  -  1,549 
Consumer 422  26  448  697  -  697   546   -   546   432   -   432 
Total$4,095 $1,202 $5,297 $4,424 $1,241 $5,665  $4,157  $1,134  $5,291  $4,059  $1,153  $5,212 

At September 30, 2019,2020, the Company had no commitments to lend additional funds on TDR loans. At September 30, 2019,2020, all of the Company’s TDRs were paying as agreed except for one commercial business loan totaling $150,000 and two commercial real estate loans totaling $1.0 million.loan for $851,000.

There was one new TDR for the three and six months ended September 30, 2019.2020. The new TDR is a consumer real estate loan secured by a 1-4one-to-four family property located in Northwest Oregon whereby the Company granted a three month payment deferral which extended the maturity date by three months. The recorded investment in the loan prior to modification and at September 30, 2020 was $129,000. There was one new TDR for the three and six months ended September 30, 2019. This TDR is a consumer real estate loan secured by a one-to-four family property located in Southwest Washington, whereby the Company granted a rate reduction to market interest rates and extended the maturity date by 10 years. The recorded investment in the loan prior to modification and at September 30, 2019 was $27,000 and $26,000, respectively. There were no new TDRs

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act and related regulatory guidance provides that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be accounted for as a TDR. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Accordingly, the threeCompany does not account for such loan modifications as TDRs. For additional information on these loan modifications, see Note 12 – New Accounting Pronouncements and six months ended September 30, 2018.“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Recent Developments Related to COVID-19-Loan Modifications.”



16

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.


16

8.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, 20182019 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 necessaryAs a result of the effects of the COVID-19 pandemic and its impacts on the financial markets and economy, the Company completed a qualitative assessment of goodwill as of September 30, 2019 due to2020, and concluded that it is more likely than not that the amount by whichfair value of the Bank (the reporting unit), exceeds its carrying value. If adverse economic conditions or the recent decrease in the Company’s common stock price and market capitalization as a result of the COVID-19 pandemic were sustained in the future rather than temporary, it may significantly affect the fair value of the reporting unit exceeded the carrying value asand may trigger future goodwill impairment charges. Any impairment charge could have a material adverse effect on our results of the most recent valuation,operations 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.financial condition.

9.FEDERAL HOME LOAN BANK ADVANCES

FHLB advances are summarized as followsat the dates indicated (dollars in thousands):


 
September 30,
2019
  
March 31,
2019
  
September 30,
2020
  
March 31,
2020
 
FHLB advances (1)
 $-  $56,586  $30,000  $- 
Weighted average interest rate on FHLB advances (2)(1)
 2.54% 2.58% 0.31% 2.54%
            
(1) Consisted of overnight borrowings.
(2) Computed based on the borrowing activity for the six months ended September 30, 2019 and the fiscal year ended March 31, 2019, respectively.
 
(1) Computed based on the borrowing activity for the six months ended September 30, 2020 and the fiscal year ended March 31, 2020, respectively.
(1) Computed based on the borrowing activity for the six months ended September 30, 2020 and the fiscal year ended March 31, 2020, respectively.
 

The Bank has a credit line with the FHLB equal to 45% of total assets, limited by available collateral. At September 30, 2020, based on collateral values, the Bank had additional borrowing capacity of $205.2 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 September 30, 2020, loans carried at $399.1 million were pledged as collateral to the FHLB.



17

10.JUNIOR SUBORDINATED DEBENTURES

The Company has three 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$26.7 million at both September 30, 20192020 and March 31, 2019,2020, 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 September 30, 20192020 and March 31, 2019,2020, is included in prepaid expenses and other assets in the accompanying consolidated balance sheets. The Company records interest expense on the Debentures in the consolidated statements of income.


17

The following table is a summary of the terms and the amounts outstanding of the Debentures at September 30, 20192020 (dollars in thousands):

Issuance TrustIssuance Trust 
Issuance
Date
  
Amount
Outstanding
 Rate Type 
Initial
Rate
 
Current
Rate
 
Maturity
Date
 
Issuance
Date
 
Amount
Outstanding
 Rate Type 
Initial
Rate
 
Current
Rate
 
Maturity
Date
                          
Riverview Bancorp Statutory Trust IRiverview Bancorp Statutory Trust I 12/2005 $7,217 
Variable (1)
 5.88%3.48%3/2036 12/2005 $7,217 
Variable (1)
 5.88%1.61%3/2036
Riverview Bancorp Statutory Trust IIRiverview Bancorp Statutory Trust II 06/2007  15,464 
Variable (2)
 7.03%3.47%9/2037 06/2007  15,464 
Variable (2)
 7.03%1.60%9/2037
Merchants Bancorp Statutory Trust I (4)
Merchants Bancorp Statutory Trust I (4)
 06/2003  5,155 
Variable (3)
 4.16%5.21%6/2033 06/2003  5,155 
Variable (3)
 4.16%3.33%6/2033
    27,836            27,836        
Fair value adjustment (4)
Fair value adjustment (4)
    (1,217)           (1,131)       
Total DebenturesTotal Debentures   $26,619           $26,705        
                          
(1) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.36%.
(1) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.36%.
(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%.
(2) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.35%.
(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%.
(3) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 3.10%.
(3) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 3.10%.
             
(4) Amount, net of accretion, attributable to the purchase and assumption transaction of Merchants Bancorp’s trust preferred security on February 17, 2017.
(4) Amount, net of accretion, attributable to a prior year’s business combination.
(4) Amount, net of accretion, attributable to a prior year’s business combination.

11.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.




18

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    Estimated Fair Value Measurements Using 
September 30, 2019
Total Estimated
Fair Value
  Level 1  Level 2  Level 3
September 30, 2020
 
Total Estimated
Fair Value
  Level 1  Level 2  Level 3 
                   
Investment securities available for sale:                       
Municipal securities$9,043 $- $9,043 $- $5,010  $-  $5,010  $- 
Agency securities 9,479  -  9,479  - 3,002  -  3,002  - 
Real estate mortgage investment conduits 36,340  -  36,340  - 37,123  -  37,123  - 
Residential mortgage-backed securities 69,658  -  69,658  - 49,701  -  49,701  - 
Other mortgage-backed securities 39,162  -  39,162  -  31,437   -   31,437   - 
Total assets measured at fair value on a recurring basis$163,682 $- $163,682 $- $126,273  $-  $126,273  $- 




18




      Estimated Fair Value Measurements Using
March 31, 2019
Total Estimated
Fair Value
  Level 1  Level 2  Level 3
March 31, 2020
      
                   
Investment securities available for sale:                       
Municipal securities$8,881 $- $8,881 $- $4,877  $-  $4,877  $- 
Agency securities 12,341  -  12,341  - 6,016  -  6,016  - 
Real estate mortgage investment conduits 40,162  -  40,162  - 43,791  -  43,791  - 
Residential mortgage-backed securities 75,821  -  75,821  - 60,085  -  60,085  - 
Other mortgage-backed securities 41,021  -  41,021  -  33,522   -   33,522   - 
Total assets measured at fair value on a recurring basis$178,226 $- $178,226 $- $148,291  $-  $148,291  $- 

There were no transfers of assets into or out of Levels 1, 2 or 3 for the six months ended September 30, 20192020 and the year ended March 31, 2019.2020.

The following methods were used to estimate the fair value of financial instruments above:

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.



19

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   Estimated Fair Value Measurements Using 
September 30, 2019
Total Estimated
Fair Value
 Level 1 Level 2  Level 3
September 30, 2020
Total Estimated
Fair Value
 Level 1 Level 2 Level 3 
                     
Impaired loans$135 $- $- $135 $120  $-  $-  $120 

March 31, 2019
       
March 31, 2020
        
                     
Impaired loans$394 $- $- $394 $125  $-  $-  $125 

The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a nonrecurring basis at September 30, 20192020 and March 31, 2019:2020:

  Valuation Technique Significant Unobservable Inputs Range
       
Impaired loans 
Appraised value
 
Discounted cash flows
 
Adjustment for market conditions
 
Discount rate
 
N/A(1)
 
6.25% to 8.00%8.0%
       
(1) There were no adjustments to appraised values of impaired loans as of September 30, 20192020 and March 31, 2019.2020.

For information regarding the Company’s method for estimating the fair value of impaired loans, see Note 7 – Allowance for Loan Losses.


19

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.

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.




20
The carrying amount and estimated fair value of financial instruments is as follows at the dates indicated (in thousands):

September 30, 2019
Carrying
Amount
 Level 1  Level 2  Level 3  
Estimated
Fair Value
September 30, 2020
 
Carrying
Amount
  Level 1  Level 2  Level 3  
Estimated
Fair Value
 
Assets:                             
Cash and cash equivalents$48,888 $48,888 $- $- $48,888 $238,016  $238,016  $-  $-  $238,016 
Certificates of deposit held for investment 249  -  255  -  255 249  -  264  -  264 
Loans held for sale 310  -  310  -  310
Investment securities available for sale 163,682  -  163,682  -  163,682 126,273  -  126,273  -  126,273 
Investment securities held to maturity 31  -  32  -  32 24  -  24  -  24 
Loans receivable, net 869,880  -  -  866,748  866,748 956,308  -  -  946,171  946,171 
FHLB stock 1,380  -  1,380  -  1,380 2,620  -  2,620  -  2,620 
                             
Liabilities:                             
Certificates of deposit 121,177  -  121,469  -  121,469 131,309  -  133,063  -  133,063 
FHLB advances 30,000  -  30,000  -  30,000 
Junior subordinated debentures 26,619  -  -  13,145  13,145 26,705  -  -  12,559  12,559 
Finance lease liability 2,387  -  2,387  -  2,387

           
Carrying
Amount
  Level 1  Level 2  Level 3  
Estimated
Fair Value
 
Carrying
Amount
 Level 1  Level 2  Level 3  
Estimated
Fair Value
March 31, 2019
          
March 31, 2020
               
Assets:                              
Cash and cash equivalents$22,950 $22,950 $- $- $22,950 $41,968  $41,968  $-  $-  $41,968 
Certificates of deposit held for investment 747  -  746  -  746 249  -  258  -  258 
Loans held for sale 909  -  909  -  909 275  -  275  -  275 
Investment securities available for sale 178,226  -  178,226  -  178,226 148,291  -  148,291  -  148,291 
Investment securities held to maturity 35  -  35  -  35 28  -  28  -  28 
Loans receivable, net 864,659  -  -  862,429  862,429 898,885  -  -  889,398  889,398 
FHLB stock 3,644  -  3,644  -  3,644 1,420  -  1,420  -  1,420 
                             
Liabilities:                             
Certificates of deposit 86,006  -  84,455  -  84,455 134,941  -  136,997  -  136,997 
FHLB advances 56,586  -  56,586  -  56,586
Junior subordinated debentures 26,575  -  -  15,468  15,468 26,662  -  -  12,127  12,127 
Finance lease liability 2,403  -  2,403  -  2,403

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.

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12.NEW ACCOUNTING PRONOUNCEMENTS

In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 created FASB Accounting Standards Codification (“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. 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 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 adopted 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 elected 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 also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. See Note 15 for additional discussion.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-05.2019-11. 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 purchased credit impaired debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. As a SEC “smaller reporting company” filer, ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, pending issuance of the final ASU after the FASB Board Meeting decision on October 16, 2019 when the new effective date was approved for smaller reporting companies, such as the Company.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 of 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 itsmanagement’s 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

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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, 2019.2022. 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.

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In August 2018,December 2019, the FASB issued ASU 2018-13, “Fair Value Measurement2019-12, “Income Taxes (Topic 820): Disclosure Framework – Changes740), Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing, among other things (1) the exception to the Disclosure Requirementsincremental approach for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removedintra-period tax allocation when there is a loss from ASC Topic 820 – Fair Value Measurement: (1) the amount ofcontinuing operations and reasons for transfers between Level 1income or a gain from other items, and Level 2 of the fair value hierarchy; (2) the policygeneral methodology for timingcalculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also requires that an entity reflect the effect of transfers between levels; and (3)an enacted change in tax laws or rates in the valuation processes for Level 3 fair value measurements.annual effective tax rate computation in the interim period that includes the enactment date. 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 2018-132019-12 is effective for fiscal years beginning after December 15, 2019,2020, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-132019-12 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018,March 2020, the FASB issued ASU 2018-15, “Intangibles - Goodwill2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. ASU 2020-04 permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. The Company’s current interest rates on its junior subordinated debentures are based upon the three-month LIBOR plus a spread. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has not adopted ASU 2020-04 as of September 30, 2020. The adoption of ASU 2020-04 is not expected to have a material impact on the Company’s future consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, “Receivables – Nonrefundable Fees and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred inCosts” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). The amendments in ASU 2018-15 broadencallable debt security is within 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 requirementsparagraph FASB Accounting Standards Codification (“ASC”) 310-20-35-33 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 ineach reporting period. 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 2018-152020-08 is effective for fiscal years beginning after December 15, 2019,2020, including interim periods within those fiscal years. The adoption of ASU 2018-152020-08 is not expected to have a material impact on the Company'sCompany’s future consolidated financial statements.

13.REVENUE FROM CONTRACTS WITH CUSTOMERS
The CARES Act, signed into law on March 27, 2020, amended GAAP with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the national emergency by the President or (b) December 31, 2020. As of September 30, 2020, the Company’s modifications totaled 13 loans related to the COVID-19 pandemic with an outstanding loan balance, net of deferred fees, totaling $49.7 million. Loan modifications in accordance with the CARES Act are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.


13.REVENUE FROM CONTRACTS WITH CUSTOMERS

In accordance with ASC Topic 606 Revenues“Revenues from Contracts with CustomersCustomers” (“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.income.

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

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Company is generally the principal in these contracts, with the exception of interchangesinterchange 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 ourthe Company’s systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.



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Disaggregation of Revenue

The following table includes the Company’s non-interest income, net disaggregated by type of service for the periods shown (in thousands):


  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
  2020  2019  2020  2019 
             
Asset management fees $883  $1,090  $1,857  $2,233 
Debit card and ATM fees  816   825   1,516   1,645 
Deposit related fees  398   573   751   1,132 
Loan related fees  294   179   529   272 
BOLI (1)
  242   204   432   397 
Net gains on sales of loans held for sale (1)
  -   46   28   142 
FHLMC loan servicing fees (1)
  21   39   49   82 
Other, net  165   213   280   402 
Total non-interest income $2,819  $3,169  $5,442  $6,305 
                 
(1) Not within the scope of ASC 606
                

For the three and six months ended September 30, 20192020 and 2018 (in thousands):


 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
  2019  2018  2019  2018
            
Asset management fees$1,090 $943 $2,233 $1,869
Debit card and ATM fees 825  778  1,645  1,583
Deposit related fees 573  434  1,132  877
Loan related fees 179  139  272  299
BOLI (1)
 204  174  397  353
Net gains on sales of loans held for sale (1)
 46  44  142  196
FHLMC loan servicing fees (1)
 39  34  82  61
Other, net 213  294  402  471
Total non-interest income$3,169 $2,840 $6,305 $5,709
            
(1) Not within the scope of ASC 606
           

For the six months ended September 30, 2019, and 2018, substantially all of the Company’s revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date.point in time.

Revenues recognized within 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 card 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.

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 September 30, 2019,2020, 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.




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14.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.


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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 at September 30, 20192020 are listed below (in thousands):


 
Contract or
Notional Amount
 
Contract or
Notional Amount
 
Commitments to originate loans:     
Adjustable-rate$15,303 $14,263 
Fixed-rate 13,627 24,988 
Standby letters of credit 2,070 2,055 
Undisbursed loan funds and unused lines of credit 134,513  121,298 
Total$165,513 $162,604 

At September 30, 2019,2020, the Company had firmno commitments to sell $660,000 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 September 30, 2019,2020, loans under warranty totaled $107.5$82.9 million, which substantially represents the unpaid principal balance of the Company’s loans serviced for the FHLMC. At September 30, 2020, the Company had no commitments to sell residential loans to the FHLMC as the Company has transitioned to a model where mortgage loan originations are brokered to third-party mortgage companies. The Company believes that the potential for loss under these arrangements is remote. At September 30, 2019,2020, the Company had an allowance for FHLMC loans of $12,000.

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 six months ended September 30, 20192020 and 2018.2019.

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.

15.LEASES

The Company has a finance lease for the shell of the building constructed as the Company's operations center which expires in November 2039. The Company is also obligated under various noncancelable operating lease agreements for land, buildings and equipment that require future minimum rental payments. For operating each lease, the Company records an operating lease right-of-use asset (representing the right to use the underlying asset for the lease term) and an operating lease liability (representing the obligation to make lease payments required under the terms of the lease). Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate – derived from information available at the lease commencement date – as the discount rate when determining the present value of lease payments. The Company does not have any operating leases with an initial term of 12 months or less. Certain operating leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Certain operating leases provide the Company with the option to extend the lease term one or more times

24
following expiration of the initial term. Lease extensions are not reasonably certain and the Company generally does not recognizeinclude payments occurring during option periods in the calculation of its operating lease right-of-use assets and operating lease liabilities. The Company adopted the requirements of ASC Topic 842 effective April 1, 2019, which required the Company to record in the consolidated balance sheet an operating lease right-of-use assetassets and an operating lease liabilityliabilities for leases with an initial term of more than 12 months for leases that existed as of April 1, 2019. The periods prior to the date of adoption are accounted for under superseded ASC Topic 840; therefore, the following disclosures include only the period for which ASC Topic 842 was effective.

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 September 30, 2019, the remaining deferred gain was $617,000 and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.


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The table below presents the lease right-of-use assets and lease liabilities recorded in the consolidated balance sheet at September 30, 2019for the periods indicated (in thousands):

LeasesClassification in the consolidated balance sheets
Finance lease right-of-use asset$1,547Premises and equipment, net
Finance lease liability$2,387Finance lease liability
Finance lease remaining lease term20.18 years
Finance lease discount rate7.16%
Operating lease right-of-use assets$4,705Prepaid expenses and other assets
Operating lease liabilities$4,795Accrued expenses and other liabilities
Operating lease weighted-average remaining lease term4.40 years
Operating lease weighted-average discount rate2.77%
Leases
September 30,
2020
  
March 31,
2020
  
Classification in the consolidated
balance sheets
Finance lease ROU assets$1,470  $1,508  Financing lease ROU assets
Finance lease liability$2,350  $2,369  Finance lease liability
Finance lease remaining lease term 19.18 years  19.68 years  
Finance lease discount rate 7.16%  7.16%  
          
Operating lease ROU assets$9,090  $3,949  Prepaid expenses and other assets
Operating lease liabilities$9,511  $4,046  Accrued expenses and other liabilities
Operating lease weighted-average remaining lease term 8.40 years  3.92 years  
Operating lease weighted-average discount rate 1.84%  2.77%  

The table below presents certain information related to the lease costs for operating leases, which are recorded in occupancy and depreciation in the accompanying consolidated statements of income, for the periods indicated (in thousands):

 
Three Months Ended
September 30, 2019
  
Six Months Ended
September 30, 2019
Lease Costs      Three months ended September 30, 2020  Six months ended September 30, 2020 
Finance lease amortization of right-of-use asset$19  38 $19  $38 
Finance lease interest on lease liability 43  86 42  85 
Operating lease costs 396  791 302  651 
Variable lease costs 52  105  52   105 
Total lease cost (1)
$510  1,020 $415  $879 
(1) income related to sub-lease activity is not significant and not presented herein.
(1) income related to sub-lease activity is not significant and not presented herein.
(1) income related to sub-lease activity is not significant and not presented herein.
    

Lease Costs Three months ended September 30, 2019  Six months ended September 30, 2019 
Finance lease amortization of right-of-use asset $19  $38 
Finance lease interest on lease liability  43   86 
Operating lease costs  396   791 
Variable lease costs  52   105 
Total lease cost (1)
 $510  $1,020 
(1) income related to sub-lease activity is not significant and not presented herein.
     

Supplemental cash flow information - Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities was $330,000 and $723,000 for the three and six months ended September 30, 2020, respectively, compared to $443,000 and $870,000 for the three and six months ended September 30, 2019, respectively. During the three and six months ended September 30, 2019,2020, the Company did not record anyrecorded operating lease right-of-use assets that were exchanged for operating lease liabilities.liabilities of $5.0 million and $5.8 million, respectively. The Company did not record any operating lease right-of-use assets that were exchanged for operating lease liabilities during the three and six months ended September 30, 2019.

The following table reconciles the undiscounted cash flows for the periods presented related to the Company’s operating lease liabilities as of September 30, 20192020 (in thousands):

Year Ending March 31:
Operating
Leases
  
Finance
Lease
 
Remaining of 2021$685  $105 
2022 1,374   212 
2023 1,200   215 
2024 1,216   219 
2025 1,218   222 
Thereafter 4,555   3,400 
Total minimum lease payments 10,248   4,373 
Less: amount of lease payment representing interest (737)  (2,023)
Lease liabilities$9,511  $2,350 

Year Ending March 31: 
Operating
Leases
  
Finance
Lease
 
Remaining of 2020$813 $103 
2021 1,011  208 
2022 747  212 
2023 573  215 
2024 583  219 
Thereafter 1,507  3,622 
Total minimum lease payments 5,234  4,579 
Less: amount of lease payment representing interest (439) (2,192)
Lease liabilities$4,795 $2,387 



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain financial information determined by methods other than in accordance with GAAP.accounting principles generally accepted in the United States of America (“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. 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.

Recent Developments Related to COVID-19

The spread of the novel coronavirus of 2019 (“COVID-19”) and the ensuing pandemic has caused significant economic disruption throughout the global economy, including the states and municipalities which constitute the Company's market area. The potential future financial impact is unknown at this time. Prolonged economic disruption will likely affect the ability of the Company's customers to make timely payments on their loans. It may also have an adverse effect on the collateral values securing customers' loan obligations. This may negatively impact the Company's future operations, results of operations, and financial condition. In response to the current global situation surrounding the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.

Paycheck Protection Program ("PPP") Participation – The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”) was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under the PPP, a new loan program. The deadline for PPP loan applications was August 8, 2020. The goal of the PPP was to avoid as many layoffs as possible and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. Under terms of the PPP, all PPP loans have: (a) an interest rate of 1.0% and (b) a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the borrower’s business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. The PPP loans that were originated consisted primarily of existing customers who are small to midsize businesses as well as independent contractors, sole proprietors, partnerships and not-for-profits as allowed under the PPP guidance. We began processing applications for PPP loan forgiveness during the second fiscal quarter of 2020 and will continue working with our customers to assist them with accessing other borrowing options, including SBA and other government sponsored lending programs, as appropriate.

As of September 30, 2020, the total outstanding loan balance and unamortized fees related to SBA PPP loans totaled $113.5 million and $2.7 million, respectively, with an average loan amount of $147,000. There were no PPP loans approved awaiting funding as of September 30, 2020. In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five percent for loans of not more than $350,000; (ii) three percent for loans of more than $350,000 and less than $2,000,000; and one percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants.

We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company will pledge its PPP loans at face value as collateral to obtain FRB non-recourse borrowings. See “Liquidity and Capital Resources” below for additional information.

Loan Modifications –

As of September 30, 2020, the Bank’s loan portfolio exposures to industries most affected by the COVID-19 pandemic were as follows (dollars in thousands):

  Balance  
Percent
to total
loans
  
Weighted Average Loan-To-Value
Percentage
  
Weighted Average Debt-Service-
Coverage Ratio
 
             
Hotel/Motel $107,543   11.0%  50.92%  1.90 
Retail strip centers  79,155   8.1   53.14   1.56 
Restaurant/fast food  14,847   1.5   56.86   1.58 




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The Company is continuing to offer payment and financial relief programs for borrowers impacted by COVID-19. The Company has made available the following short-term relief option to all borrowers affected by COVID-19:

Interest only payments or full payment deferrals for up to 90 days upon request with an extension for another 90 days upon submission of specified documentation and recovery plans;
Loan re-amortization, especially in cases where significant prepayments of principal have occurred and to provide for continuing payment reduction at the end of the 180-day deferment period;
Covenant waivers and resets; and
Extension of up to six months on loans maturing prior to December 31, 2020.

All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

As of September 30, 2020, the Company had approved payment deferrals for 13 commercial loans that were impacted by the COVID-19 pandemic totaling $49.7 million which consisted of deferral of regularly scheduled principal and interest payments which is a significant decrease compared to June 30, 2020 when the Company had 98 commercial loans totaling $161.6 million. In general, the payment deferral period for these loans was 90 days. In certain situations, depending on economic conditions, extensions to the initial payment deferral periods were necessary. Subsequent to September 30, 2020, the Company approved three new payment deferrals for 90 days totaling $1.1 million. As of September 30, 2020, four consumer and mortgage loans totaling $471,000 were approved for payment deferrals which is a significant decrease compared to June 30, 2020 when the Company had 43 consumer loans totaling $10.1 million. Furthermore, three mortgage loans serviced for FHLMC totaling $916,000 were approved for payment deferrals. These modifications were not classified as TDRs in accordance with the guidance of the CARES Act and subsequent bank regulatory guidance.

The primary method of relief granted by the Company has been to allow the borrower to defer their loan payments for up to 90 days with a possibility depending on economic conditions to defer their loan payments for an additional 90 days subject to an evaluation by the Company prior to granting the additional 90 day deferral. After the deferral period, normal loan payments will continue, however, payments will be applied first to interest until the deferred interest is repaid and thereafter applied to both principal and interest with any deficiency in amortized principal payments added to the balloon payment due at maturity. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our customers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

Branch Operations and Additional Customer Support – We have taken various steps to ensure the safety of our customers and our personnel. Many of our employees are working remotely or have flexible work schedules, and we have established measures within our offices to help ensure the safety of those employees who must work on-site. The Family First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges.

The COVID-19 pandemic has caused significant disruptions to our branch operations resulting in the implementation of various social distancing measures at the Company to address client and community needs. To ensure the safety of our customers and employees, we encourage our customers to utilize services that are offered through drive up facilities, ATMs, online banking, and our call center operations.

Critical Accounting Policies

Critical accounting policies and estimates are discussed in our 20192020 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company’s critical accounting policies and estimates as compared to the disclosures contained in the Company’s 20192020 Form 10-K.

Executive Overview

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 $869.9$956.3 million at September 30, 20192020 compared to $864.7$898.9 million at March 31, 2019.2020.



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The Bank's subsidiary, Riverview Trust Company (the “Trust Company”), is a trust and financial services company with one office located in downtown Vancouver, Washington and one office in Lake Oswego, Oregon which provides full-service brokerage activities, trust and asset management services. The Bank’s Business and Professional Banking Division, with two lending offices in Vancouver and one in Portland, offers commercial and business banking services.

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, – whichother than SBA PPP loans, are mainly concentrated in commercial business and commercial real estate loans –which 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.

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 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 have generally been positive. However, accordingdeteriorated due to the COVID-19 pandemic. According to the Washington State Employment Security Department, unemployment in Clark County increased slightly to 5.5%9.4% at August 31, 20192020 compared to 5.3%4.3% at March 31, 20192020 and 4.2% at September 30, 2018.2019. According to the Oregon Employment Department, unemployment in Portland, Oregon decreasedincreased to 3.5%8.0% at August 31, 2019September 30, 2020 compared to 3.9%3.4% at March 31, 20192020 and 3.6%3.5% at September 30, 2018.2019. Unemployment rates have increased, however, residential home inventory levels and sales continue to remain strong. According to the Regional Multiple Listing Services (“RMLS”), residential home inventory levels in Portland, Oregon have increaseddecreased to 1.1 months at September 30, 2020 compared to 1.8 months at March 31, 2020 and 2.8 months at September 30, 2019 compared to 2.2 months at March 31, 2019 and decreased compared to 3.1 months at September 30, 2018.2019. Residential home inventory levels in Clark County increaseddecreased to 1.0 months at September 30, 2020 compared to 2.1 months at March 31, 2020 and 2.5 months at September 30, 2019 compared to 2.4 months at March 31, 2019 and decreased compared to 2.9 months at September 30, 2018.2019. According to the RMLS, closed home sales in Clark County increased 8.0%28.6% in September 20192020 compared to September 2018.2019. Closed home sales during September 20192020 in Portland, Oregon increased 4.6%36.8% compared to

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September 2018. Commercial real estate leasing activity and the residential real estate market in the Portland/Vancouver area has been strong and the vacancy rates in the Portland/Vancouver area have been relatively low.

2019.

Operating Strategy

Fiscal year 20202021 marks the 9798th 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 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 September 30, 2019,2020, commercial and construction loans represented 89.9%92.3% of total loans compared to 89.5%90.4% at March 31, 2019.2020. 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 de novo branches, the selective acquisition of individual branches, loan purchases and whole bank transactions that meet its investment and market objectives. In this regard, the Company moved to a new, more modern branch in Camas in June 2020 and the Cascade Park neighborhood of Vancouver in September 2020 and will open one additional new branch location in Ridgefield in early 2021.


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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. As a result of these effortsThe Company’s approach to credit management uses well defined policies and procedures and disciplined underwriting criteria resulting in its asset quality and credit metrics remaining steady during the application of more stringent underwriting practices overCOVID-19 pandemic. The Company will continue to proactively monitor modified loans and other loans considered to be at heightened risk due to the last several years, the percentage of nonperforming loansCOVID-19 pandemic and has added to total loans was reduced to 0.17% at September 30, 2019 compared to 0.92% at March 31, 2015. Although theits allowance for loan losses for probable COVID-19 pandemic related credit weakness. Regardless, there may be added pressures on asset quality in future quarters that may require additional provision for loan losses. The Company also intends to continue prudently increaseincreasing 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 managewhile managing its 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 with the purpose of undertaking several initiatives to reduce non-interest expense and continue 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 61.7%63.4% at September 30, 2019.2020.

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, wherebywhere 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 and mobile payments.banking. The products are tailored to meet the needs of small to medium size businesses and households in the markets we serve. Recently, theThe Company launched a new online mortgage origination platform in June 2019. The Bank has implemented remote check capture at all of its branches and for selected customers of the Bank. The Company also 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, to Bank customers, including services provided through the Trust Company to increase its fee income. Assets under management by the Trust Company totaled $690.5 million$1.3 billion and $646.0 million$1.2 billion at September 30, 20192020 and March 31, 2019,2020, respectively. The Company also offers a third-party identity theft product to assist our customers in monitoring their credit that includes an identity theft restoration service.


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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 (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) increased $46.7$204.7 million at September 30, 20192020 compared to March 31, 20192020 reflecting the Company’s commitment to increasing core deposits through organic growth in customer relationships versus relying on wholesale funding.funding as well as deposits generated from SBA PPP loans, government stimulus checks being deposited directly into customer accounts and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.

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.





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Commercial and Construction Loan Composition

The following tables set forth the composition of the Company’s commercial and construction loan portfolios based on loan purpose at the dates indicated (in thousands):


 
Commercial
Business
  
Other Real
Estate
Mortgage
  
Real Estate
Construction
  
Commercial &
Construction
Total
  
Commercial
Business
  
Other Real
Estate
Mortgage
  
Real Estate
Construction
  
Commercial & Construction
Total
 
September 30, 2019
            
September 30, 2020
   
                        
Commercial business $167,782  $-  $-  $167,782  $170,876  $-  $-  $170,876 
SBA PPP 110,794  -  -  110,794 
Commercial construction -  -  67,437  67,437  -  -  20,260  20,260 
Office buildings -  113,713  -  113,713  -  129,865  -  129,865 
Warehouse/industrial -  102,285  -  102,285  -  75,160  -  75,160 
Retail/shopping centers/strip malls -  65,381  -  65,381  -  79,155  -  79,155 
Assisted living facilities -  1,117  -  1,117  -  837  -  837 
Single purpose facilities -  189,075  -  189,075  -  240,960  -  240,960 
Land -  14,166  -  14,166  -  14,531  -  14,531 
Multi-family -  55,978  -  55,978  -  49,878  -  49,878 
One-to-four family construction  -   -   15,737   15,737   -   -   8,048   8,048 
Total $167,782  $541,715  $83,174  $792,671  $281,670  $590,386  $28,308  $900,364 




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  -   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 



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March 31, 2020
            
             
Commercial business $179,029  $-  $-  $179,029 
Commercial construction  -   -   52,608   52,608 
Office buildings  -   113,433   -   113,433 
Warehouse/industrial  -   91,764   -   91,764 
Retail/shopping centers/strip malls  -   76,802   -   76,802 
Assisted living facilities  -   1,033   -   1,033 
Single purpose facilities  -   224,839   -   224,839 
Land  -   14,026   -   14,026 
Multi-family  -   58,374   -   58,374 
One-to-four family construction  -   -   12,235   12,235 
Total $179,029  $580,271  $64,843  $824,143 

Comparison of Financial Condition at September 30, 20192020 and March 31, 20192020

Cash and cash equivalents, including interest-earning accounts, totaled $48.9$238.0 million at September 30, 20192020 compared to $23.0$42.0 million at March 31, 2019. Cash and cash equivalents increased due to2020. Deposit growth outpaced the increasegrowth in deposit balances.loans receivable providing significant excess funds invested in these interest-earning accounts. The Company’s cash balances typically 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. Certificates of deposits held for investment totaled $249,000 and $747,000 at both September 30, 20192020 and March 31, 2019, respectively.2020.

Investment securities totaled $163.7$126.3 million and $178.3$148.3 million at September 30, 20192020 and March 31, 2019,2020, respectively. The decrease was due to regular scheduled investment securities repaymentsnormal pay downs, calls and an investment call duringmaturities. During the six months ended September 30, 2019.  During the six months ended September 30,2020 and 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 September 30, 2019,2020, the Company determined that none of its investment securities required an other than temporary impairment (“OTTI”) charge. For additional information on the Company’s investment securities, see Note 5 of the Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Loans receivable, net, totaled $869.9$956.3 million at September 30, 20192020 compared to $864.7$898.9 million at March 31, 2019,2020, an increase of $5.2$57.4 million. The Company has had steady loan demand in its market areas and anticipates continued organic loan growth. The increase was mainly concentrateddue to the origination of SBA PPP loans. At September 30, 2020, SBA PPP loans totaled $110.8 million which are included in the commercial business loan category. In addition, commercial real estate loans which increased $10.1$18.1 million or 2.2%3.57%. In addition, commercial business loans increased $5.0 million, or 3.1% and multi-family loans increased $4.4 million, or 8.5%. Partially offsetting theseThese increases were decreasesoffset by a decrease in real estate construction loans of $7.7$36.5 million, or 8.5% and consumer loans of $3.8 million, or 4.1%56.34%. Due to the timing of the completion of these real estate construction projects, balances may fluctuate between periods.in these categories. Once constructionthese projects are completed, these loans will roll to permanent financing and be classified within a category under other real estate mortgage. In addition, consumer and multifamily loans decreased $12.6 million, or 14.37% and $8.5 million or 14.55%, respectively. 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 September 30, 2019,2020, the


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Company’s purchased SBA loan portfolio was $68.9$62.0 million compared to $67.9$74.8 million at March 31, 2019.2020. During the six months ended September 30, 2019,2020, the Bank purchased $6.9$2.5 million of SBA loans, including premiums.

DepositsPrepaid expenses and other assets increased $57.2$8.5 million to $982.3$16.0 million at September 30, 20192020 compared to $925.1$7.5 million at March 31, 2019.2020. The increase is mainly due to the recording of three operating lease right-of-use assets totaling $5.8 million with a corresponding increase in operating lease liabilities which are recorded in accrued expenses and other liabilities. For additional information on the Company’s leases, see Note 15 of the Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q

Deposits increased $209.5 million to $1.2 billion at September 30, 2020 compared to $990.4 million at March 31, 2020. The increase was mainly due to proceeds from SBA PPP loans deposited directly into customer accounts, government stimulus checks and an increase in savings trends and reduced withdrawals from deposit accounts due to a concentrated effort by the Company to increase deposits. The Company increased interest rates on certain deposit products to be more competitivechange in its market area.spending habits as a result of COVID-19. The Company had no wholesale-brokered deposits at September 30, 20192020 and March 31, 2019.2020. Core branch deposits accounted for 97.2%97.6% of total deposits at September 30, 2019 compared to 98.2% at2020 and March 31, 2019.2020. The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.

The Bank had noFHLB advances from the FHLBincreased to $30.0 million at September 30, 20192020 compared to $56.6 millionno advances at March 31, 2019. Based upon2020. These advances were deployed to supplement the increasefunding of SBA PPP loan originations and will mature in deposit balances, the Company was able to pay off its outstanding FHLB balances during the second fiscal quarter ofOctober 2020.

Shareholders' equity increased $10.0 million$203,000 to $143.1$149.0 million at September 30, 20192020 from $133.1$148.8 million at March 31, 2019.2020. The increase was mainly attributable to current period net income of $8.7$3.0 million and an increase in the accumulated other comprehensive income related to the unrealized holding gaingains on securities available for sale, net of tax, of $2.8$639,000. These increases were offset by the payments of cash dividends totaling $2.2 million and the repurchase of 295,900 shares of common stock totaling $1.4 million for the six months ended September 30, 2019. These increases were partially offset by cash dividends declared of $2.0 million. The Company did not repurchase any shares of common stock for the six months ended September 30, 2019 and 2018.2020.

Capital Resources

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. 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.


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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 as of September 30, 2019.2020.

As of September 30, 2019,2020, 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 
September 30, 2020                  
Total Capital:                  
(To Risk-Weighted Assets) $146,207   17.53% $66,731   8.0% $83,414   10.0%
Tier 1 Capital:                        
(To Risk-Weighted Assets)  135,670   16.26   50,049   6.0   66,731   8.0 
Common equity tier 1 Capital:                        
(To Risk-Weighted Assets)  135,670   16.26   37,536   4.5   54,219   6.5 
Tier 1 Capital (Leverage):                        
(To Average Tangible Assets)  135,670   9.82   55,271   4.0   69,089   5.0 

  Actual  
For Capital
Adequacy Purposes
  
“Well Capitalized”
Under Prompt
Corrective Action
 
  Amount Ratio  Amount Ratio  Amount Ratio 
September 30, 2019
               
Total Capital:               
(To Risk-Weighted Assets)$143,999 17.27%$66,702 8.0%$83,378 10.0%
Tier 1 Capital:               
(To Risk-Weighted Assets) 133,559 16.02  50,027 6.0  66,702 8.0 
Common equity tier 1 Capital:               
(To Risk-Weighted Assets) 133,559 16.02  37,520 4.5  54,196 6.5 
Tier 1 Capital (Leverage):               
(To Average Tangible Assets) 133,559 11.79  45,310 4.0  56,638 5.0 

 Actual  
For Capital
Adequacy Purposes
  
“Well Capitalized”
Under Prompt
Corrective Action
 
 Amount Ratio  Amount Ratio  Amount Ratio 
March 31, 2019
               
March 31, 2020                  
Total Capital:                                 
(To Risk-Weighted Assets)$140,062 16.88%$66,379 8.0%$82,974 10.0% $145,949  17.01% $68,630  8.0% $85,787  10.0%
Tier 1 Capital:                                 
(To Risk-Weighted Assets) 129,671 15.63  49,784 6.0  66,379 8.0  135,196  15.76  51,472  6.0  68,630  8.0 
Common equity tier 1 Capital:                                 
(To Risk-Weighted Assets) 129,671 15.63  37,338 4.5  53,933 6.5  135,196  15.76  38,604  4.5  55,762  6.5 
Tier 1 Capital (Leverage):                                 
(To Average Tangible Assets) 129,671 11.56  44,874 4.0  56,092 5.0  135,196  11.79  45,851  4.0  57,313  5.0 



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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 September 30, 2019,2020, 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 September 30, 2019,2020, 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 20192021 consolidated financial statements.


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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 six months ended September 30, 2019,2020, the Bank used its sources of funds primarily to fund loan commitments. At September 30, 2019,2020, cash and cash equivalents, certificates of deposit held for investment and available for sale investment securities totaled $212.8$364.5 million, or 18.1%25.6% 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 decreasemanage short-term borrowings, including FRB borrowings and FHLB advances.advances consistent with its asset/liability objectives. At September 30, 2019,2020, the Bank had no advances from the FRB and hadmaintains a credit facility with the FRB with available borrowing capacity of $58.7$60.3 million, from the FRB, subject to sufficient collateral. At September 30, 2019,2020, FHLB advances totaled $30.0 million and the Bank had no advances from FHLB and had an available borrowing capacity of $231.1$205.2 million, subject to sufficient collateral and stock investment. At September 30, 2019,2020, 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. Additionally, the Board of Governors of the Federal Reserve System recently established the PPPLF to bolster the effectiveness of the SBA PPP. The Bank may utilize the PPPLF pursuant to approval from the FRB to which the Bank would pledge SBA PPP loans at face value as collateral to obtain FRB non-recourse. As of September 30, 2020, the Bank had not sought approval to utilize PPPLF as it held a substantial cash and cash equivalent position as a result of SBA PPP disbursed funds remaining unused in borrower deposit accounts and due to deposit customers increasing their balances due to COVID-19.




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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 September 30, 20192020 and March 31, 2019,2020, 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 $8.2$18.2 million, or 0.83%1.5% of total deposits, and $14.5$5.3 million, or 1.6%0.01% of total deposits, at September 30, 20192020 and March 31, 2019,2020, 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 September 30, 20192020 and March 31, 2019,2020, the Company had no deposits through this listing service. Although the Company did not originate any internet basedinternet-based deposits during the six months ended September 30, 2019,2020, 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 $678.9$843.7 million, or 57.9%59.2% of total assets at September 30, 2019.2020.

At September 30, 2019,2020, the Company had total commitments of $165.5$162.6 million, which includes commitments to extend credit of $28.9$39.3 million, unused lines of credit totaling $81.5$110.0 million, undisbursed construction loans totaling $53.0$11.3 million, and standby letters of credit totaling $2.1 million. The Company anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 20192020 totaled $51.5$83.7 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 $46.2$43.5 million at September 30, 2019.2020.

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 September 30, 2019,2020, Riverview Bancorp, Inc. had $7.5$9.3 million in cash to meet its liquidity needs.



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Asset Quality

Nonperforming assets, consisting of nonperforming loans were $1.5$1.3 million or 0.13%0.09% of total assets at both September 30, 2019 and2020 compared with $1.4 million or 0.12% of total assets at March 31, 2019. 2020.

The following table sets forth information regarding the Company’s nonperforming loans at the dates indicated (dollars in thousands):

September 30, 2019  March 31, 2019 September 30, 2020  March 31, 2020 
 
Number of
Loans
  Balance   
Number of
Loans
  Balance 
Number of
Loans
  Balance  
Number of
Loans
  Balance 
                        
Commercial business 2 $243   2 $225 2  $191  2  $201 
Commercial real estate 2  1,026   2  1,081 2  1,005  2  1,014 
Consumer 11  216   16  213  8   79   9   180 
Total 15 $1,485   20 $1,519  12  $1,275   13  $1,395 

The allowance for loan losses was $11.4$18.9 million or 1.30%1.93% of total loans at September 30, 20192020 compared to $11.5$12.6 million or 1.31%1.38% of total loans at March 31, 2019.2020. The ----balance of the allowanceCompany recorded a provision for loan losses atof $6.3 million for the six months ended September 30, 2019 reflects the lower levels of delinquent, nonperforming and classified loans, low levels of net charge offs, as well as stable real estate values in our market areas. The Company recorded2020. There was no provision for loan losses for the six months ended September 30, 2019. The increase in the allowance for loan losses was necessary due to the evolving uncertainty around the COVID-19 pandemic, and its adverse economic effect on the respective industry exposures within our loan portfolio. The $110.8 million balance of SBA PPP loans were omitted from the calculation of the required allowance for loan losses at September 30, 2020 as these loans are fully guaranteed by the SBA and management expects that a majority of SBA PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA, which in turn, the SBA will reimburse the Bank for the amount forgiven.

The coverage ratio of allowance for loan losses to nonperforming loans was 770.10%1479.69% at September 30, 20192020 compared to 754.25%904.95% at March 31, 2019.2020. At September 30, 2019,2020, the Company identified $1.2$1.1 million or 80.96%88.93% of its nonperforming loans as impaired and performed a specific valuation analysis on each loan resulting in no specific reserves being required for these impaired loans. Management considers the allowance for loan losses to be adequate at September 30, 20192020 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 national and local economic conditions (including declines as a result of the COVID-19 pandemic), 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. For further information regarding the Company’s impaired loans and allowance for loan losses, see Note 7 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.


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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 usingand 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. All of the Company’s TDRs were paying as agreed at September 30, 2019 with the exception of2020 except for one commercial business loan totaling $150,000 and two commercial real estate loansloan totaling $1.0 million.$851,000. The related amount of interest income recognized on TDRs was $111,000$110,000 and $102,000$112,000 for the six months ended September 30, 20192020 and 2018,2019, respectively.

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.

For additional information regarding loan modifications related to COVID-19 that are not deemed TDRs pursuant to the CARES Act and related regulatory guidance see “Recent Developments Related to COVID-19-Loan Modifications, discussed above.”

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.



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The following table sets forth information regarding the Company’s nonperforming assets at the dates indicated (dollars in thousands):

  September 30, 2020  March 31, 2020 
    
Loans accounted for on a non-accrual basis:      
Commercial business $191  $201 
Other real estate mortgage  1,005   1,014 
Consumer  79   180 
Total  1,275   1,395 
Accruing loans which are contractually past due 90 days or more  -   - 
Total nonperforming assets $1,275  $1,395 
         
Foregone interest on non-accrual loans (1)
 $35  $75 
Total nonperforming loans to total loans  0.13%  0.15%
Total nonperforming loans to total assets  0.09%  0.12%
Total nonperforming assets to total assets  0.09%  0.12%
         
(1) Six months ended September 30, 2020 and year ended March 31, 2020.
 


  
September 30,
2019
  
March 31,
2019
 
    
Loans accounted for on a non-accrual basis:      
Commercial business$243 $225 
Commercial real estate 1,026  1,081 
Consumer 216  210 
Total 1,485  1,516 
Accruing loans which are contractually past due 90 days or more -  3 
Total nonperforming assets$1,485 $1,519 
       
Foregone interest on non-accrual loans (1)
$37 $94 
Total nonperforming loans to total loans 0.17% 0.17%
Total nonperforming loans to total assets 0.13% 0.13%
Total nonperforming assets to total assets 0.13% 0.13%
       
(1) Six months ended September 30, 2019 and year ended March 31, 2019.





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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
  Total Other Oregon  
Southwest
Washington
  
Other
  Total 
September 30, 2019
          
September 30, 2020
            
                        
Commercial business$- $- $243 $- $243 $-  $191  $-  $191 
Commercial real estate -  851  175  -  1,026 851  154  -  1,005 
Consumer -  -  184  32  216  -   58   21   79 
Total nonperforming assets$- $851 $602 $32 $1,485 $851  $403  $21  $1,275 

March 31, 2019
          
March 31, 2020
            
                      
Commercial business$65 $- $160 $- $225 $-  $201  $-  $201 
Commercial real estate -  896  185  -  1,081 851  163  -  1,014 
Consumer -  -  169  44  213  -   152   28   180 
Total nonperforming assets$65 $896 $514 $44 $1,519 $851  $516  $28  $1,395 

The composition of land acquisition and development and speculative and custom/presold construction loans by geographical area is as follows at the dates indicated (in thousands):

 
Northwest
Oregon
  
Other
Oregon
  
Southwest
Washington
  Total 
Northwest
Oregon
  
Other
Oregon
  
Southwest
Washington
  Total 
September 30, 2019
          
September 30, 2020
         
                      
Land acquisition and development$2,178 $1,871 $10,117 $14,166 $2,125  $1,803  $10,603  $14,531 
Speculative and custom/presold construction 1,158  160  12,782  14,100  -   -   6,377   6,377 
Total$3,336 $2,031 $22,899 $28,266 $2,125  $1,803  $16,980  $20,908 
           
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, 2020
            
             
Land acquisition and development $2,124  $1,834  $10,068  $14,026 
Speculative and custom/presold construction  282   -   11,745   12,027 
Total $2,406  $1,834  $21,813  $26,053 

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.


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The following table sets forth information regarding the Company’s other loans of concern at the dates indicated (dollars in thousands):

September 30, 2019  March 31, 2019 September 30, 2020  March 31, 2020 
 
Number
of Loans
  Balance   
Number
of Loans
  Balance 
Number
of Loans
  Balance  
Number
of Loans
  Balance 
                        
Commercial business 8 $1,526   9 $1,734 -  $-  3  $147 
Commercial real estate 1  582   3  2,308 1  3,565  -  - 
Land 1  720   1  728
Multi-family 2  20   2  20  3   33   3   34 
Total 12 $2,848   15 $4,790  4  $3,598   6  $181 

LoansAt September 30, 2020, loans delinquent 30 - 89 days were 0.04%0.02% of total loans compared to 0.03% at September 30, 2019 and March 31, 2019. At September 30, 2019,2020 and were comprised of consumer loans. There were no loans 30 - 89 days delinquent in the commercial business and consumer portfolios totaled $187,000 and $171,000, respectively. There were no loans 30-89 days delinquent in any other loan category at September 30, 2019. At that date, commercial real estate (“CRE”) portfolio or commercial business portfolio. CRE loans represented the largest portion of the loan portfolio at 53.51%53.94% of total loans and commercial business and consumer loans represented 19.04% and 10.06%28.88% of total loans, respectively.loans.

Off-Balance Sheet Arrangements and Other Contractual Obligations

In the normal course of operations, the Company enters into certain contractual obligations and other commitments. Obligations generally relate to funding of operations through deposits and borrowings as well as leases for premises. Commitments generally relate to lending operations.

The Company has obligations under long-term operating and capital leases, principally for building space and land. Lease terms generally cover five-year periods, with options to extend, and are not subject to cancellation.

The Company has commitments to originate fixed and variable rate mortgage loans to customers. Because some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash

35
requirements. Undisbursed loan funds and unused lines of credit include funds not disbursed but committed to construction projects and home equity and commercial lines of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

For further information regarding the Company’s off-balance sheet arrangements and other contractual obligations, see NotesNote 14 and 15 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

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 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.


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The Company performed its annual goodwill impairment test as of October 31, 2018.2019. 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%5.3%, a net interest margin that approximated 4.3%4.0% and a return on assets that ranged from 1.33%1.24% to 1.53%1.34% (average of 1.42%1.29%). 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%15.54% utilized for our cash flow estimates and a terminal value estimated at 1.71.43 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 1.31.1 times tangible book value. The Company calculated a fair value of its reporting unit of $254.0$217.0 million using the corporate value approach, $194.9$170.0 million using the income approach and $259.0$253.0 million using the market approach, with a final concluded value of $238.0$216.0 million, with primaryequal weight given to the corporate value approach and market approach and slightly less weight given to the income 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.






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Even though the Company determined that there was no goodwill impairment, a sustained 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.

As a result of the effects of the COVID-19 pandemic and its impacts on the financial markets and economy, the Company completed a qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of the Bank (the reporting unit), exceeds its carrying value at September 30, 2020. If adverse economic conditions or the recent decrease in the Company’s common stock price and market capitalization as a result of the COVID-19 pandemic were sustained in the future rather than temporary, it may significantly affect the fair value of the reporting unit and may trigger future goodwill impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition. However, such an impairment would not impact the Company’s liquidity, operations or regulatory capital.

Comparison of Operating Results for the Three and Six Months Ended September 30, 20192020 and 20182019

Net Income. Net income was $4.5$2.5 million, or $0.20$0.11 per diluted share for the three months ended September 30, 2019,2020, compared to $4.2$4.5 million, or $0.19$0.20 per diluted share for same prior year period. Net income for each of the six months ended September 30, 2020 and 2019 was $3.0 million, or $0.14 per diluted share, and 2018 was $8.7 million, or $0.38 per diluted share.share, respectively. The Company’s earningsnet income decreased primarily as a result of the increased provision for loan losses of $1.8 million and $6.3 million for the three and six months ended September 30, 2020 and 2019, comparedrespectively, in addition to the same prior year period improved due to increasesa decrease in both interest and non-interest income which was partially offset by an increasea decrease in interest expense primarily related to interest on deposits and borrowings.non-interest expense.

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 the three and six months ended September 30, 20192020 was $11.7$11.1 million and $23.2$22.2 million, respectively, representing a $59,000$655,000 and $259,000$997,000 decrease, respectively, compared to the three and six months ended September 30, 2018.2019. The net interest margin for the three and six months ended September 30, 20192020 was 4.36%3.33% and 4.35%3.48%, respectively, compared to 4.39%4.36% and 4.43%4.35% for the three and six months ended September 30, 2018.2019. These decreases in the net interest margin were due primarily to increasesthe result of the low interest rate environment putting downward pressure on adjustable rate instruments combined with the impact of the low loan yields on the SBA PPP loan portfolio causing a decrease in the cost of totalaverage yield on interest-earning assets partially offset by the decrease in the average yield on interest-bearing deposits.

35
liabilities. The decreases were also due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rate changes.

Interest and Dividend Income. Interest and dividend income for the three and six months ended September 30, 20192020 was $11.9 million and $24.2 million, respectively, compared to $12.9 million and $25.4 million, respectively, compared to $12.4 million and $24.7 million, respectively, for the same periods in the prior year. The increasedecrease for the three months ended September 30, 2020 was due primarily to an increase inthe 120 basis point decrease on interest earning assets to 3.60% compared to 4.80% for the three months ended September 30, 2019. The decrease for the six months ended September 30, 2020 was due primarily to the 97 basis point decrease on loans receivable of $774,000interest earning assets to 3.80% compared to 4.77% for the six months ended September 30, 2019. Interest and dividend income included $760,000 and $1.4 million of interest income and fees earned related to SBA PPP loans for the three and six months ended September 30, 2020, respectively. There was no interest income and fees related to SBA PPP loans for the three and six months ended September 30, 2019.

The average balance of net loans increased $94.5 million and $101.9 million to $983.7 million and $985.3 million for the three and six months ended September 30, 2019,2020, respectively, due primarily to higher average balances of net loans partially offset by a decrease in interest on investment securities of $256,000 and $576,000, respectively, for the same prior year periods due primarily to lower average balances on investment securities.

The average balance of net loans increased $49.7 million and $57.0 million tofrom $889.2 million and $883.4 million for the same period in the prior year due to SBA PPP loans. Although the average balance of loans increased, the average yield on net loans decreased and was 4.58% and 4.63%, respectively, for the three and six months ended September 30, 2019, respectively, from $839.5 million and $826.3 million for the same prior year periods. The average yield on net loans was2020 compared to 5.32% and 5.31% for the three and six months ended September 30, 2019, respectively, compared to 5.25% and 5.33% for the same three and six month periods in the prior year, respectively, due primarily to the decreases in short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic and secondarily due to the impact of SBA PPP loans. For the three and six months ended September 30, 2020, the average balance of SBA PPP loans was $110.6 million and $97.8 million,

37
respectively. The average yield was 2.73% and 2.91% for the three and six months ended September 30, 2020, respectively, which included the recognition of the net deferred fees. This resulted in a negative impact to the average loan yield on net loans of 23 basis points and 19 basis points during the three and six months ended September 30, 2020, respectively. The impact of SBA PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met. This decrease in the average yield on net loans was negatively impacted by two 25 basis point decreasesthe primary reason for overall decrease in the targeted Fed Funds Rate in the current quarter.interest and dividend income.

Interest Expense. Interest expense increased $552,000decreased $278,000 and $1.0$254,000 to $885,000 and $2.0 million for the three and six months ended September 30, 2020, respectively, compared to $1.2 million and $2.2 million for the three and six months ended September 30, 2019, respectively,respectively. Interest expense on deposits decreased $3,000 to $657,000 for the three months ended September 30, 2020 compared to $611,000$660,000 for the same three month period in the prior year. Interest expense on deposits increased $504,000 to $1.5 million for the six months ended September 30, 2020 compared to $1.0 million for the same six month period in the prior year. The weighted average interest rate on interest-bearing deposits decreased to 0.33% for the three months ended September 30, 2020, compared to 0.40% for the three months ended September 30, 2019. The weighted average interest rate on interest-bearing deposits increased to 0.39% for the six months ended September 30, 2020, compared to 0.31% for the six months ended September 30, 2019 due primarily to the increase in the weighted average interest rate on certificates of deposit due to pricing pressures and $1.2competition in our local markets. For the three months ended September 30, 2020, interest expense for deposits remained relatively unchanged compared to the same prior year period as the decrease in the weighted average interest rate offset the overall increase in weighted average deposit balances. For the six months ended September 30, 2020, interest expense for deposits increased due to the overall increase in both the weighted average balance and weighted average interest rate. The average balance of interest-bearing deposits increased $140.2 million and $128.2 million for the three and six months ended September 30, 2018, respectively. The increase in interest expense was attributable2020, respectively, compared to the increasesame periods in the Company’s utilization of FHLB advances for its funding needsprior year due primarily to proceeds from SBA PPP loans deposited directly into customer accounts, government stimulus checks and an increase in savings trends and reduced withdrawals from deposit accounts due to a change in spending habits as a result of 25 basis pointsCOVID-19.

Interest expense on borrowings decreased $275,000 and 16 basis points in the weighted average interest rate on interest-bearing deposits$758,000 for the three and six months ended September 30, 2019, respectively, compared to the same prior year periods. The weighted average interest rate on interest-bearing deposits increased to 0.40% and 0.31% for the three and six months ended September 30, 2019, respectively, from 0.15% for both the three and six months ended September 30, 2018. The increase in the weighted average interest rate on regular savings accounts and certificates of deposit primarily contributed to the overall increase in the expense related to interest-bearing deposits, reflecting increased deposit rates to remain competitive in the Company’s market area. The average balance of interest-bearing deposits decreased $33.1 million and $41.8 million for the three and six months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year. The decreases in theweighted average balance ofinterest rate on other interest-bearing deposits were offset by the utilization of FHLB advances which increased the average balance of FHLB advances $24.8 millionliabilities decreased to 1.53% and $39.1 million1.75% for the three and six months ended September 30, 2019,2020, respectively, compared to 3.72% and 3.53% for the same three and six month periods in the prior year periods.year. The average balance of FHLB advances was $24.8other interest-bearing liabilities increased to $59.0 million and $41.1for the three months ended September 30, 2020, compared to $53.8 million for the same three month period in the prior year. The average balance of other interest-bearing liabilities decreased to $54.6 million for the six months ended September 30, 2020, compared to $70.1 million for the same six month period in the prior year. Overall, total interest expense decreased as a result of the decrease in the weighted average interest rate on interest-bearing liabilities for the three and six months ended September 30, 2020 and 2019, respectively, compared to $40,000 and $2.0 million, respectively, for the same periods in the prior year. The average interest rate on FHLB advances was 1.22% and 2.54% for the three and six months ended September 30, 2019, respectively, compared to 1.20% and 1.97%, respectively, for the same prior year periods. The overall increase in weighted average interest rate on interest-bearing deposits and the utilization of FHLB advances to supplement the decrease in average interest-bearing deposits contributed to the increase in the average cost of interest-bearing liabilities to 0.65% and 0.63% for the three and six months ended September 30, 2019, respectively, compared to 0.34% for both the same prior year periods.respectively.





36




38
The following tables set 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 (dollars in thousands):

Three Months Ended September 30, Three Months Ended September 30, 
2019 2018 2020  2019 
Average
Balance
 
Interest
and
Dividends
 Yield/Cost 
Average
Balance
 
Interest
and
Dividends
 Yield/Cost  
Average
Balance
  
Interest
and
Dividends
  Yield/Cost  
Average
Balance
  
Interest
and
Dividends
  Yield/Cost 
                           
Interest-earning assets:                                
Mortgage loans$699,996 $9,839 5.59% $659,734 $8,983 5.40% $684,682  $8,746  5.07% $699,996  $9,839  5.59%
Non-mortgage loans 189,212  2,054 4.32  179,763  2,136 4.71   299,055   2,600  3.45   189,212   2,054  4.32 
Total net loans (1)
 889,208  11,893 5.32  839,497 11,119 5.25  983,737  11,346  4.58  889,208  11,893  5.32 
                                 
Investment securities (2)
 167,899  907 2.15  203,579 1,163 2.27  129,090  527  1.62  167,899  907  2.15 
Daily interest-earning assets 130  - -  18 - -  42  -  -  130  -  - 
Other earning assets 11,972
 93 3.09  21,292
 118 2.20   205,934   81  0.16   11,972   93  3.09 
Total interest-earning assets 1,069,209  12,893 4.80  1,064,386 12,400 4.62  1,318,803  11,954  3.60  1,069,209  12,893  4.80 
                                 
Non-interest-earning assets:                                 
Office properties and equipment, net 15,455       15,574      18,069        15,455       
Other non-interest-earning assets 76,615       66,571       76,617         76,615       
Total assets$1,161,279      $1,146,531      $1,413,489        $1,161,279       
                                 
Interest-bearing liabilities:                                 
Regular savings accounts$179,209  276 0.61 $137,423 35 0.10  $252,153  91  0.14  $179,209  276  0.61 
Interest checking accounts 180,458  25 0.06  182,799 26 0.06  220,190  20  0.04  180,458  25  0.06 
Money market accounts 193,881  57 0.12  257,175 79 0.12  190,635  34  0.07  193,881  57  0.12 
Certificates of deposit 101,487  302 1.18  110,711  119 0.43   132,277   512  1.54   101,487   302  1.18 
Total interest-bearing deposits 655,035  660 0.40  688,108 259 0.15  795,255  657  0.33  655,035  660  0.40 
                                 
Other interest-bearing liabilities 53,811  503 3.72  28,977  352 4.82   59,048   228  1.53   53,811   503  3.72 
Total interest-bearing liabilities 708,846  1,163 0.65  717,085 611 0.34  854,303  885  0.41  708,846  1,163  0.65 
                                 
Non-interest-bearing liabilities:                                 
Non-interest-bearing deposits 297,248       298,840      395,296        297,248       
Other liabilities 12,990       7,976       13,489         12,990       
Total liabilities 1,019,084       1,023,901      1,263,088        1,019,084       
Shareholders’ equity 142,195       122,630       150,401         142,195       
Total liabilities and shareholders’ equity$1,161,279      $1,146,531      $1,413,489        $1,161,279       
Net interest income   $11,730      $11,789       $11,069        $11,730    
Interest rate spread      4.15%      4.28%        3.19%        4.15%
Net interest margin      4.36%      4.39%        3.33%        4.36%
                
Ratio of average interest-earning assets to
average interest-bearing liabilities
      150.84%     148.43%        154.37%        150.84%
                                 
Tax equivalent adjustment (3)
   $11      $11       $5        $11    
                                 
(1) Includes non-accrual loans.
               
(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.
(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.
(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.
(3) Tax-equivalent adjustment relates to non-taxable investment interest income and preferred equity securities dividend income.
(3) Tax-equivalent adjustment relates to non-taxable investment interest income and preferred equity securities dividend income.
 


37

39


 
Six Months Ended September 30,
 
Six Months Ended September 30,
 
2019 2018 2020  2019 
Average
Balance
 
Interest
and
Dividends
 Yield/Cost  
Average
Balance
 
Interest
and
Dividends
 Yield/Cost  
Average
Balance
  
Interest
and
Dividends
  Yield/Cost  
Average
Balance
  
Interest
and
Dividends
  Yield/Cost 
                            
Interest-earning assets:                                  
Mortgage loans$694,555 $19,108 5.50% $648,796 $17,963 5.52% $697,351  $17,708  5.06% $694,555  $19,108  5.50%
Non-mortgage loans 188,795  4,339 4.60   177,513  4,116 4.62   287,917   5,166  3.58   188,795   4,339  4.60 
Total net loans (1)
 883,350  23,447 5.31   826,309  22,079 5.33  985,268  22,874  4.63  883,350  23,447  5.31 
                                   
Investment securities (2)
 172,745  1,834 2.12   209,735  2,409 2.29  134,309  1,206  1.79  172,745  1,834  2.12 
Daily interest-earning assets 121  - -   33  - -  88  -  -  121  -  - 
Other earning assets 11,521
 180 3.12   20,445
 211 2.06   151,342   118  0.16   11,521   180  3.12 
Total interest-earning assets 1,067,737  25,461 4.77   1,056,522  24,699 4.66  1,271,007  24,198  3.80  1,067,737  25,461  4.77 
                                   
Non-interest-earning assets:                                   
Office properties and equipment, net 15,447        15,675       17,787        15,447       
Other non-interest-earning assets 73,170        66,859        77,654         73,170       
Total assets$1,156,354       $1,139,056       $1,366,448        $1,156,354       
                                   
Interest-bearing liabilities:                                   
Regular savings accounts$164,919  391 0.47  $136,211  68 0.10  $245,976  307  0.25  $164,919  391  0.47 
Interest checking accounts 181,271  50 0.06   180,053  51 0.06  211,090  47  0.04  181,271  50  0.06 
Money market accounts 208,202  123 0.12   260,173  159 0.12  186,089  87  0.09  208,202  123  0.12 
Certificates of deposit 94,390  447 0.95   114,188  241 0.42   133,863   1,074  1.60   94,390   447  0.95 
Total interest-bearing deposits 648,782  1,011 0.31   690,625  519 0.15  777,018  1,515  0.39  648,782  1,011  0.31 
                                   
Other interest-bearing liabilities 70,074  1,238 3.53   30,925  710 4.58   54,616   480  1.75   70,074   1,238  3.53 
Total interest-bearing liabilities 718,856  2,249 0.63   721,550  1,229 0.34  831,634  1,995  0.48  718,856  2,249  0.63 
                                   
Non-interest-bearing liabilities:                                   
Non-interest-bearing deposits 287,725        288,716       371,259        287,725       
Other liabilities 10,364        7,977        13,002         10,364       
Total liabilities 1,016,945        1,018,243       1,215,895        1,016,945       
Shareholders’ equity 139,409        120,813        150,553         139,409       
Total liabilities and shareholders’ equity$1,156,354       $1,139,056       $1,366,448        $1,156,354       
Net interest income   $23,212       $23,470       $22,203        $23,212    
Interest rate spread      4.14%       4.32%        3.32%        4.14%
Net interest margin      4.35%       4.43%        3.48%        4.35%
                 
Ratio of average interest-earning assets to
average interest-bearing liabilities
      148.53%      146.42%        152.83%        148.53%
                                   
Tax equivalent adjustment (3)
   $23       $22       $11        $23    
                                   
(1) Includes non-accrual loans.
                 
(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.
(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.
(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.
(3) Tax-equivalent adjustment relates to non-taxable investment interest income and preferred equity securities dividend income.
(3) Tax-equivalent adjustment relates to non-taxable investment interest income and preferred equity securities dividend income.
 



3840

The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the periods ended September 30, 20192020 compared to the periods ended September 30, 2018.2019. 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).

 Three Months Ended September 30,  Six Months Ended September 30,  Three Months Ended September 30,  Six Months Ended September 30, 
 2019 vs. 2018  2019 vs. 2018  2020 vs. 2019  2020 vs. 2019 
                                    
 Increase (Decrease) Due to     Increase (Decrease) Due to     Increase (Decrease) Due to     Increase (Decrease) Due to    
       Total Net        Total Net        Total Net        Total Net 
 Volume  Rate  
Increase
(Decrease)
  Volume  Rate  
Increase
(Decrease)
  Volume  Rate  
Increase
(Decrease)
  Volume  Rate  
Increase
(Decrease)
 
                                    
Interest Income:                                    
Mortgage loans $543  $313  $856  $1,213  $(68) $1,145  $(208) $(885) $(1,093) $80  $(1,480) $(1,400)
Non-mortgage loans 105  (187) (82) 242  (19) 223  1,022  (476) 546  1,939  (1,112) 827 
Investment securities (1)
 (197) (59) (256) (405) (170) (575) (184) (196) (380) (370) (258) (628)
Other earning assets  (63)  38   (25)  (114)  83   (31)  155   (167)  (12)  260   (322)  (62)
Total interest income 388  105  493  936  (174) 762  785  (1,724) (939) 1,909  (3,172) (1,263)
                                    
Interest Expense:                                    
Regular savings accounts 14  227  241  17  306  323  83  (268) (185) 143  (227) (84)
Interest checking accounts (1) -  (1) (1) -  (1) 5  (10) (5) 11  (14) (3)
Money market accounts (22) -  (22) (36) -  (36) (2) (21) (23) (11) (25) (36)
Certificates of deposit (11) 194  183  (49) 255  206  105  105  210  238  389  627 
Other interest-bearing liabilities  246   (95)  151   722   (194)  528   45   (320)  (275)  (231)  (527)  (758)
Total interest expense  226   326   552   653   367   1,020   236   (514)  (278)  150   (404)  (254)
Net interest income $162  $(221) $(59) $283  $(541) $(258) $549  $(1,210) $(661) $1,759  $(2,768) $(1,009)
                                    
(1) Interest is presented on a fully tax-equivalent basis.
(1) Interest is presented on a fully tax-equivalent basis.
          
(1) Interest is presented on a fully tax-equivalent basis.
          

Provision for Loan Losses. The Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio consistent with 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 portfolios and make recommendations to change loan grades whenever changes are warranted. Credit administration approves any changes to loan grades and monitors loan grades.

In accordance with GAAP, loans acquired from MBank during the purchase and assumption transaction of MBank (“MBank transaction”)fiscal year ended March 31, 2017 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 $1.3 million$871,000 and $1.5$1.1 million at September 30, 20192020 and March 31, 2019,2020, respectively.

There was noThe provision for loan losses for the six months ended September 30, 2019, compared to a provision for loan losses of $50,000 for the six months ended September 30, 2018. The lack of a provision for loan losses for the six months ended September 30, 2019 compared to 2018 was based primarily upon the low level of charge-offs, recoveries of previously charged off loans$1.8 million and stable real estate values in our market areas.

Net charge-offs$6.3 million for the three and six months ended September 30, 2019 totaled $6,0002020 compared to no provision for loan losses for both the three and $21,000, respectively. This compares to net charge-offs of $86,000 and net recoveries of $697,000six months ended September 30, 2019. The provision for loan losses for the three and six months ended September 30, 2018, respectively.2020 is based primarily upon the evolving uncertainty around the COVID-19 pandemic and its adverse economic effect on the respective industry exposures within our loan portfolio.

Net charge-offs totaled $10,000 and $58,000 for the three and six months ended September 30, 2020, respectively compared to $6,000 and $21,000 for the three and six months ended September 30, 2019. Annualized net charge-offs to average net loans were not meaningful for the three and six month periodsmonths ended September 30, 20192020 and was not meaningful. Annualized net charge-offs to average net loans0.01% for the three and six month periodsmonths ended September 30, 2018 was 0.04% and (0.17)%, respectively.2020, compared to the same prior year periods, which were not meaningful. Nonperforming loans were $1.3 million at September 30, 2020, compared to $1.5 million at September 30, 2019, compared to $2.3 million at September 30, 2018.2019. The ratio of allowance for loan losses to nonperforming loans was 1479.69% at September 30, 2020 compared to 770.10% at September 30, 2019 compared to 504.29% at September 30, 2018.2019. See “Asset Quality” above for additional information related to asset quality that management considers in determining the provision for loan losses.

39


41

Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of September 30, 2019,2020, the Company had identified $5.3 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 collateral value is equal to or exceeds the carrying costs, which in some cases is the result of previous loan charge-offs. At September 30, 2019,2020, charge-offs on these impaired loans totaled $460,000 from their original loan balances. The remaining $145,000$130,000 of impaired loans hadhas specific valuation allowances totaling $10,000 at September 30, 2019.2020.

Non-Interest Income. Non-interest income increased $329,000decreased $350,000 and $596,000$863,000 to $3.2$2.8 million and $6.3$5.4 million for the three and six months ended September 30, 2019,2020, respectively, compared to the same prior year periods. The increasedecrease in non-interest income was primarily due to the decrease in fees and service charges of $89,000 and $328,000 for the three and six months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year periodsreflecting primarily from a decrease in transactions due to a change in customer spending habits during the COVID-19 pandemic. Additionally, the decrease in non-interest income was primarily due to the increase in fees and service charges of $238,000 and $303,000, respectively, in addition to an increasedecrease in asset management fees of $147,000$207,000 and $364,000, respectively, reflecting the increase in the Trust Company assets under management. These increases were partially offset by a decrease in other non-interest income of $88,000 and $61,000,$376,000 for the three and six months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year periods. Foras a result of the six months ended September 30, 2019, the above increase was offset by a decrease incurrent economic conditions and overall stock market performance. Furthermore, net gains on sales of loans held for sale of $54,000decreased $46,000 and $114,000 for the three and six months ended September 30, 2020, respectively, compared to the same periods in the prior year period.as the Company has transitioned to a model where mortgage loan originations are brokered to various third-party mortgage companies.

Non-Interest Expense. Non-interest expense increased $88,000decreased $167,000 and $263,000$676,000 to $9.0$8.8 million and $18.2$17.5 million for the three and six months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year periods.year. The increasedecrease in non-interest expense for the three and six months ended September 30, 2019,2020, compared to the same prior year periods was primarily due to increasesa decrease in salaries and employee benefits of $414,000$318,000 and $551,000,$841,000, respectively, and data processing expense of $47,000 and 96,000, respectively, due to additional staffingwhich is mainly attributable to the overall growthloan origination cost offset related to the origination of the CompanySBA PPP loans and continued investments into enhancing our information technology infrastructure. These increases were offset by decreases in occupancythe Company’s focus to manage controllable costs such as salaries and depreciation of $74,000employee benefits. In addition, advertising and $113,000, professional fees of $124,000marketing expenses decreased $188,000 and $83,000 and other non-interest expense of $97,000 and $146,000$269,000 for the three and six months ended September 30, 2019,2020, respectively, comparedprimarily due to the same prior year periods.reduced opportunities for community sponsorships and cancellations of sponsored events due to COVID-19 restrictions. Partially offsetting these decreases was an increase in FDIC insurance premium expense decreased $85,000premiums of $84,000 and $81,000$52,000 for the three and six months ended September 30, 2019,2020, respectively, comparedas assessments returned to the same prior year periods.normal levels. The decrease inBank utilized its remaining FDIC insurance premium expense is attributable to credits for previously paid deposit insurance premiums which cameto partially offset current assessments in the prior quarter. In addition, occupancy and depreciation expense increased $180,000 and $310,000 for the three and six months ended September 30, 2020, respectively, compared to the same periods in the prior year due to continued investments into enhancing our information technology infrastructure and technology expenditures incurred as a result of employees working from home during the FDIC exceeding its stated Deposit Insurance Fund Reserve Ratio. The company has $198,000 in credits on future assessments remaining as of September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met.COVID-19 pandemic.

Income Taxes. The provision for income taxes was $704,000 and $790,000 for the three and six months ended September 30, 2020, respectively, compared to $1.4 million and $2.6 million for the three and six months ended September 30, 2019, respectively, compareddue to $1.2lower pre-tax income. Income before income taxes was $3.2 million and $2.5$3.8 million for the three and six months ended September 30, 2018,2020, respectively, compared to the same prior year periods of $5.9 million and $11.3 million, respectively. The Company’s effective tax rate for the three and six months ended September 30, 20192020 was 23.0%21.7% and 22.8%20.7%, respectively, compared to 22.4%23.0% and $22.8% for both the three and six months ended September 30, 2018.2019, respectively. The decrease in the effective tax rate is primarily due to investments in tax-exempt bank owned life insurance. As of September 30, 2019,2020, management deemed that a valuation allowance related to the Company’s deferred tax asset was not necessary. At September 30, 2019,2020, the Company had a net deferred tax asset of $3.3$3.1 million compared to $4.2$3.3 million at March 31, 2019.2020.





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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There has not been any material change in the market risk disclosures contained in the 20192020 Form 10-K.

Item 4.  Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13(a) - 15(e) of the Securities Exchange Act of 1934) as of September 30, 20192020 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. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as in effect on September 30, 20192020 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934 is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In the quarter ended September 30, 2019,2020, the Company did not make any changes in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, these controls.

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 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 control.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.








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43

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Form 10-K for the year ended March 31, 2019.2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 None.None

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable











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44


Item 6. Exhibits


(a)
Exhibits:

 
2.1
   (a)
Purchase and Assumption Agreement among Riverview Community Bank, a federal savings bank, and Riverview Bancorp, Inc. a Washington corporation, and MBank, an Oregon state-chartered commercial bank, and Merchants Bancorp, an Oregon corporation (1)
Exhibits:
 
3.1
Articles of Incorporation of the Registrant (2)(1)
 
3.2
Bylaws of the Registrant (3)(2)
 
4.1
Form of Certificate of Common Stock of the Registrant (2)(1)
 
10.1
Form of Employment Agreement between the Company and the Bank and each of Kevin J. Lycklama, David Lam,
Daniel D. Cox, Kim J. Capeloto and Steven P. Plambeck (4)(3)
 
10.2
Form of Change in Control Agreement between the Company and the Bank and each of Kevin J. Lycklama, David Lam, Daniel D. Cox, Kim J. Capeloto and Steven P. Plambeck (4)(3)
 
10.3
Form of Employment Agreement between the Company and Chris P. Cline (5)(4)
 
10.4
Form of Change in Control Agreement between the Company and Chris P. Cline (5)(4)
 
10.5
Employee Stock Ownership Plan (6)(5)
 
10.6
2003 Stock Option Plan (7)(6)
 
10.7
Form of Incentive Stock Option Award Pursuant to 2003 Stock Option Plan (8)(7)
 
10.8
Form of Non-qualified Stock Option Award Pursuant to 2003 Stock Option Plan (8)(7)
 
10.9
Deferred Compensation Plan (9)(8)
 
10.10
2017 Equity Incentive Plan (10)(9)
 
10.11
Form of Incentive Stock Option Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (11)(10)
 
10.12
Form of Non-Qualified Stock Option Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (11)(10)
 
10.13
Form of Restricted Stock Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (11)(10)
 
10.14
Form of Restricted Stock Unit Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (11)(10)
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act *
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act *
 
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley ActAct*
 101The following materials from Riverview Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019,2020, 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)(2)Filed as an exhibit to the Registrant’sRegistrant's Current Report on Form 8-K filed with the SEC on May 3, 2019July 6, 2020 and incorporated herein by reference.
(4)(3)Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2019,2020, and incorporated herein by reference.
(5)(4)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)(5)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.
(7)(6)Filed as an exhibit to the Registrant’s Definitive Annual Meeting Proxy Statement (000-22957), filed with the Commission on June 5, 2003, and incorporated herein by reference.
(8)(7)Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, and incorporated herein by reference.
(9)(8)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.
(10)(9)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.
(11)(10)Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-228099), and incorporated herein by reference.
*Filed herewith




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45
SIGNATURES

Pursuant to the requirements 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.
 
 
 

 
By:
/S/s/ Kevin J. Lycklama
By:
/S/s/ David Lam
Kevin J. Lycklama
David Lam
President and Chief Executive Officer
Director
(Principal Executive Officer)
David Lam
Executive Vice President and
Director
Chief Financial Officer
(Principal Executive Officer)
(Principal Financial and Accounting Officer)

    
Date:
November 7, 2019
13, 2020
Date:
November 7, 2019
13, 2020
 
















44


EXHIBIT INDEX


31.1

31.2

32

101
The following materials from Riverview Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Shareholders’ Equity (d) Consolidated Statements of Cash Flows; and (e) Notes to Consolidated Financial Statements


46















45