Annual Report (10-k)

Date : 06/14/2019 @ 7:38PM
Source : Edgar (US Regulatory)
Stock : Riverview Bancorp (RVSB)
Quote : 8.14  -0.21 (-2.51%) @ 8:59PM

Annual Report (10-k)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K

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

For the Fiscal Year Ended March 31, 2019    OR
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22957

RIVERVIEW BANCORP, INC.   
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1838969
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer I.D. Number)
 
 
 
900 Washington St., Ste. 900, Vancouver, Washington
 
98660
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code:
 
(360) 693-6650
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class   Trading Symbol(s)    Name of each exchange on which registered 
         
Common Stock , Par Value $0.01 per share
 
RVSB  
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:    None 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]   No  [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [   ]  No  [X]

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [   ] 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]   No [   ]

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sales price of the registrant's Common Stock as quoted on the Nasdaq Global Select Market System under the symbol "RVSB" on September 30, 2018 was $199,772,614 (22,598,712 shares at $8.84 per share). As of June 14, 2019, there were issued and outstanding 22,622,712 shares of the registrant's common stock.

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




2
Forward-Looking Statements

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

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-K, the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook," or similar expressions or future or conditional verbs such as "may," "will," "should," "would," and "could," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in the Company's allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in the Company's market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, the Company's net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in the Company's market areas; secondary market conditions for loans and the Company's ability to originate loans for sale and sell loans in the secondary market; results of examinations of our bank subsidiary, Riverview Community Bank, by the Office of the Comptroller of the Currency and of the Company by the Board of Governors of the Federal Reserve System, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the Company to increase its allowance for loan losses, write-down assets, reclassify its assets, change Riverview Community Bank's regulatory capital position or affect the Company's ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings; legislative or regulatory changes that adversely affect the Company's business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the Company's ability to attract and retain deposits; the Company's ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company's assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on the Company's consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the Company's workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; the Company's ability to retain key members of its senior management team; costs and effects of litigation, including settlements and judgments; the Company's ability to implement its business strategies; the Company's ability to successfully integrate any assets, liabilities, customers, systems, and management personnel it may acquire into its operations and the Company's ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the Company's ability to pay dividends on its common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting standards; other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services; and the other risks described from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2020 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company's consolidated financial condition and consolidated results of operations as well as its stock price performance.
3
PART I

Item 1.  Business

General

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

The Company is subject to regulation by the Board of Governors of the Federal Reserve Systems ("Federal Reserve"). Substantially all of the Company's business is conducted through the Bank which is regulated by the Office of the Comptroller of the Currency ("OCC"), its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are insured by the FDIC up to applicable legal limits under the Deposit Insurance Fund ("DIF"). The Bank is a member of the Federal Home Loan Bank of Des Moines ("FHLB") which is one of the 11 regional banks in the Federal Home Loan Bank System ("FHLB System").

As a progressive, community-oriented financial services company, the Company emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Klickitat and Skamania counties of Washington, and Multnomah, Washington and Marion counties of Oregon as its primary market area. The Company is engaged predominantly in the business of attracting deposits from the general public and using such funds in its primary market area to originate commercial business, commercial real estate, multi-family real estate, land, real estate construction, residential real estate and other consumer loans. The Company's loans receivable, net, totaled $864.7 million at March 31, 2019 compared to $800.6 million a year ago.

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

Our strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management through the Trust Company and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. We believe we are well positioned to attract new customers and to increase our market share through our 18 branches, including, among others, ten in Clark County, four in the Portland metropolitan area and three lending centers.

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

4
Market Area

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

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

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

Lending Activities

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

5


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

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

Commercial Business Lending. At March 31, 2019, the commercial business loan portfolio totaled $162.8 million, or 18.6% of total loans. Commercial business loans are typically secured by business equipment, accounts receivable, inventory or other property. The Company's commercial business loans may be structured as term loans or as lines of credit. Commercial term loans are generally made to finance the purchase of assets and usually have maturities of five years or less. Commercial lines of credit are typically made for the purpose of providing working capital and usually have a term of one year or less. Lines of credit are made at variable rates of interest equal to a negotiated margin above an index rate and term loans are at either a variable or fixed rate. The Company also generally obtains personal guarantees from financially capable parties based on a review of personal financial statements.

Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit-worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. Additionally, the borrower's cash flow may be unpredictable and collateral securing these loans may fluctuate in value.

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

7
Commercial real estate and multi-family loans typically have higher loan balances, are more difficult to evaluate and monitor, and involve a higher degree of risk than one-to-four family residential loans. As a result, commercial real estate and multi-family loans are generally priced at a higher rate of interest than residential one-to-four family loans. Often payments on loans secured by commercial properties are dependent on the successful operation and management of the property securing the loan or business conducted on the property securing the loan; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. The Company seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. Loans are secured by first mortgages and often require specified debt service coverage ("DSC") ratios depending on the characteristics of the collateral. The Company generally imposes a minimum DSC ratio of 1.20 for loans secured by income producing properties. Rates and other terms on such loans generally depend on our assessment of credit risk after considering such factors as the borrower's financial condition and credit history, loan-to-value ratio, DSC ratio and other factors.

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

Land acquisition and development loans are included in the other real estate mortgage loan portfolio balance and represent loans made to developers for the purpose of acquiring raw land and/or for the subsequent development and sale of residential lots. Such loans typically finance land purchases and infrastructure development of properties (e.g. roads, utilities, etc.) with the aim of making improved lots ready for subsequent sales to consumers or builders for ultimate construction of residential units. The primary source of repayment is generally the cash flow from developer sale of lots or improved parcels of land, secondary sources and personal guarantees, which may provide an additional measure of security for such loans. At March 31, 2019, land acquisition and development loans totaled $17.0 million, or 1.94% of total loans compared to $15.3 million, or 1.89% of total loans at March 31, 2018. The largest land acquisition and development loan had an outstanding balance at March 31, 2019 of $2.8 million and was performing according to its original payment terms. At March 31, 2019, all of the land acquisition and development loans were secured by properties located in Washington and Oregon. At March 31, 2019, the Company had no land acquisition and development loans on non-accrual status.  At March 31, 2018, the Company had one land acquisition and development loan totaling $763,000 on non-accrual status.

Real Estate Construction.  The Company originates three types of residential construction loans: (i) speculative construction loans, (ii) custom/presold construction loans and (iii) construction/permanent loans. The Company also originates construction loans for the development of business properties and multi-family dwellings. All of the Company's real estate construction loans were made on properties located in Washington and Oregon.

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


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

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

Speculative construction loans are made to home builders and are termed "speculative" because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either the Company or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to service the speculative construction loan and finance real estate taxes and other carrying costs of the completed home for a significant period of time after the completion of construction until a home buyer is identified. The largest speculative construction loan at March 31, 2019 was a loan to finance the construction of a single family home totaling $929,000. This loan is to a single borrower that is secured by a property located in the Company's market area. The average balance of loans in the speculative construction loan portfolio at March 31, 2019 was $275,000. At March 31, 2019 and 2018, the Company had no speculative construction loans on non-accrual status.

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

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

Unlike speculative construction loans, presold construction loans are made for homes that have buyers. Presold construction loans are made to homebuilders who, at the time of construction, have a signed contract with a home buyer who has a commitment for permanent financing for the finished home from the Company or another lender. Presold construction loans are generally originated for a term of 12 months. At March 31, 2019 and 2018, presold construction loans totaled $8.5 million and $9.0 million, respectively.

Unlike speculative and presold construction loans, custom construction loans are made directly to the homeowner. At March 31, 2019 and 2018, the Company had no custom construction loans. Construction/permanent loans are originated to the homeowner rather than the homebuilder along with a commitment by the Company to originate a permanent loan to the homeowner to repay the construction loan at the completion of construction. The construction phase of a construction/permanent loan generally lasts six to nine months. At the completion of construction, the Company may either originate a fixed-rate mortgage loan or an adjustable rate mortgage ("ARM") loan or use its mortgage brokerage capabilities to obtain permanent financing for the customer with another lender. For adjustable rate loans, the interest rates adjust on their first adjustment date. See "Mortgage Brokerage" and "Mortgage Loan Servicing" below for more information. At March 31, 2019, construction/permanent loans totaled $3.3 million, the largest of which had an outstanding balance of $1.4 million and was performing according to its original repayment terms. The average balance of loans in the construction/permanent loan portfolio at March 31, 2019 was $410,000.

The Company provides construction financing for non-residential business properties and multi-family dwellings. At March 31, 2019, such loans totaled $70.5   million, or 77.6% of total real estate construction loans and 8.05% of total loans. Borrowers may be the business owner/occupier of the building who intends to operate their business from the property upon construction, or non-owner developers. The expected source of repayment of these loans is typically the sale or refinancing of the project upon completion of the construction phase. In certain circumstances, the Company may provide or commit to take-out financing upon construction. Take-out financing is subject to the project meeting specific underwriting guidelines. No assurance can be given that such take-out financing will be available upon project completion. These loans are secured by office buildings, retail rental space, mini storage facilities, assisted living facilities and multi-family dwellings located in the Company's market area. At March 31, 2019, the largest commercial construction loan had a balance of $11.4 million and was performing according to its original repayment terms. The average balance of loans in the commercial construction loan portfolio at March 31, 2019 was $3.1 million . At March 31, 2019 and 2018, the Company had no commercial construction loans on non-accrual status.

9
The Company has originated construction and land acquisition and development loans where a component of the cost of the project was the interest required to service the debt during the construction period of the loan, sometimes known as interest reserves. The Company allows disbursements of this interest component as long as the project is progressing as originally projected and if there has been no deterioration in the financial standing of the borrower or the underlying project. If the Company makes a determination that there is such deterioration, or if the loan becomes nonperforming, the Company halts any disbursement of those funds identified for use in paying interest. In some cases, additional interest reserves may be taken by use of deposited funds or through credit lines secured by separate and additional collateral. For additional information concerning the risks related to construction lending, see Item 1A. "Risk Factors – Our real estate construction and land acquisition and development loans expose us to risk."

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

One-to-four family residences located in the Company's primary market area secure the majority of the residential loans. Underwriting standards require that one-to-four family portfolio loans generally be owner occupied and that loan amounts not exceed 80% (95% with private mortgage insurance) of the lesser of current appraised value or cost of the underlying collateral. Terms typically range from 15 to 30 years. The Company also offers balloon mortgage loans with terms of either five or seven years and originates both fixed-rate mortgages and ARMs with repricing based on the one-year constant maturity U.S. Treasury index or other index. At March 31, 2019, the Company had three residential real estate loans totaling $169,000 on non-accrual status compared to four loans totaling $206,000 at March 31, 2018. All of these loans were secured by properties located in Oregon and Washington.

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

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

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

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

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

Loan Commitments . The Company issues commitments to originate commercial loans, other real estate mortgage loans, construction loans, residential mortgage loans and other installment loans conditioned upon the occurrence of certain events. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to originate loans are conditional and are honored for up to 45 days subject to the Company's usual terms and conditions. Collateral is not required to support commitments. At March 31, 2019, the Company had outstanding commitments to originate loans of $40.7 million compared to $35.1 million at March 31, 2018.

Mortgage Brokerage. In addition to originating mortgage loans for retention in its loan portfolio, the Company employs commissioned brokers who originate mortgage loans (including construction loans) for various mortgage companies, as well as for the Company. The loans brokered to mortgage companies are closed in the name of, and funded by, the purchasing mortgage company and are not originated as an asset of the Company. In return, the Company receives a fee ranging from 1.5% to 2.0% of the loan amount that it shares with the commissioned broker. Loans brokered to the Company are closed on the Company's books and the commissioned broker receives a portion of the origination fee. During the year ended March 31, 2019, brokered loans totaled $35.0 million (including $10.4 million brokered to the Company) compared to $43.4 million (including $11.9 million brokered to the Company) of brokered loans in fiscal year 2018. Gross fees of $504,000 and $746,000, which includes brokered loan fees and fees for loans sold to the Federal Home Loan Mortgage Company ("FHLMC"), were earned for the years ended March 31, 2019 and 2018, respectively. The interest rate environment has a strong influence on the loan volume and amount of fees generated from the mortgage broker activity. In general, during periods of rising interest rates, the volume of loans and the amount of loan fees generally decrease as a result of slower mortgage loan demand. Conversely, during periods of falling interest rates, the volume of loans and the amount of loan fees generally increase as a result of the increased mortgage loan demand.

11
Mortgage Loan Servicing.   The Company is a qualified servicer for the FHLMC. The Company generally sells fixed-rate residential one-to-four family mortgage loans that it originates with maturities of 15 years or more and balloon mortgages to the FHLMC as part of its asset/liability strategy. Mortgage loans are sold to the FHLMC on a non-recourse basis whereby foreclosure losses are the responsibility of the FHLMC and not the Company. The Company's general policy is to close its residential loans on FHLMC modified loan documents to facilitate future sales to the FHLMC. Upon sale, the Company continues to collect payments on the loans, supervise foreclosure proceedings, and otherwise service the loans. At March 31, 2019, total loans serviced for others were $149.4 million, of which $111.4 million were serviced for the FHLMC.

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

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

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

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

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

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

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

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

Other loans of concern, which are classified as substandard loans and are not presently included in the non-accrual category, consist of loans where the borrowers have cash flow problems, or the collateral securing the respective loans may be inadequate. In either or both of these situations, the borrowers may be unable to comply with the present loan repayment terms, and the loans may subsequently be included in the non-accrual category. Management considers the allowance for loan losses to be adequate to cover the probable losses inherent in these and other loans.

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

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

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

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

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

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

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

Asset Classification. The OCC has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OCC examiners have authority to identify problem assets and, if appropriate, require them to be classified as such. There are three classifications for problem assets:  substandard, doubtful and loss (collectively "classified loans"). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.
 
14

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

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

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

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

Allowance for Loan Losses. The Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio consistent with accounting principles generally accepted in the United States of America (U.S.) ("GAAP") guidelines. The adequacy of the allowance is evaluated monthly to maintain the allowance at levels sufficient to provide for inherent losses existing at the balance sheet date. The key components to the evaluation are the Company's internal loan review function by its credit administration, which reviews and monitors the risk and quality of the loan portfolio; as well as the Company's external loan reviews and its loan classification systems. Credit officers are expected to monitor their loan portfolios and make recommendations to change loan grades whenever changes are warranted. Credit administration approves any changes to loan grades and monitors loan grades. For additional discussion of the Company's methodology for assessing the appropriate level of the allowance for loan losses see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies."

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

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

Management considers the allowance for loan losses to be adequate at March 31, 2019 to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio, and the Company believes it has established its existing allowance for loan losses in accordance with GAAP. However, a decline in local economic conditions, results of examinations by the Company's regulators, or other factors could result in a material increase in the allowance for loan losses and may adversely affect the Company's future financial condition and results of operations. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses will be adequate or that substantial increases will not be necessary should the quality of any loans deteriorate or should collateral values decline as a result of the factors discussed elsewhere in this document.

The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated (dollars in thousands):
 

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


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

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





17
Investment Activities

The Board sets the investment policy of the Company. The Company's investment objectives are: to provide and maintain liquidity within regulatory guidelines; to maintain a balance of high quality, diversified investments to minimize risk; to provide collateral for pledging requirements; to serve as a balance to earnings; and to optimize returns. The policy permits investment in various types of liquid assets (generally debt securities) permissible under OCC regulation, which includes U.S. Treasury obligations, securities of various federal agencies, "bank qualified" municipal bonds, certain certificates of deposit of insured banks, repurchase agreements, federal funds, real estate mortgage investment conduits ("REMICS") and mortgage-backed securities ("MBS"), but does not permit investment in non-investment grade bonds. The policy also dictates the criteria for classifying investments in debt securities into one of three categories:  held to maturity, available for sale or trading. At March 31, 2019, no investment securities were held for trading purposes. See Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies."

The Company primarily purchases agency securities with maturities of five years or less and purchases a combination of MBS backed by government agencies (FHLMC, Fannie Mae ("FNMA"), U.S. Small Business Administration ("SBA") or Ginnie Mae ("GNMA")). FHLMC and FNMA securities are not backed by the full faith and credit of the U.S. government, while SBA and GNMA securities are backed by the full faith and credit of the U.S. government. At March 31, 2019, the Company owned no privately issued MBS. Our REMICS are MBS issued by FHLMC, FNMA and GNMA and our CRE MBS are issued by FNMA. The Company does not believe that it has any exposure to sub-prime lending in its investment securities portfolio. See Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional information.

The following table sets forth the investment securities portfolio and carrying values at the dates indicated (dollars in thousands):
 
   
At March 31,
 
   
2019
   
2018
   
2017
 
   
Carrying
Value
   
Percent of
Portfolio
   
Carrying
Value
   
Percent of
Portfolio
   
Carrying
Value
   
Percent of
Portfolio
 
       
Available for sale (at estimated fair value):
                                   
Municipal securities
 
$
8,881
     
4.98
%
 
$
8,732
     
4.09
%
 
$
2,819
     
1.41
%
Agency securities
   
12,341
     
6.92
     
22,102
     
10.36
     
16,808
     
8.39
 
REMICs
   
40,162
     
22.53
     
46,955
     
22.02
     
43,160
     
21.55
 
Residential MBS
   
75,821
     
42.54
     
89,074
     
41.77
     
96,611
     
48.24
 
Other MBS
   
41,021
     
23.01
     
46,358
     
21.74
     
40,816
     
20.38
 
     
178,226
     
99.98
     
213,221
     
99.98
     
200,214
     
99.97
 
                                                 
Held to maturity (at amortized cost):
                                               
Residential MBS
   
35
     
0.02
     
42
     
0.02
     
64
     
0.03
 
Total investment securities
 
$
178,261
     
100.00
%
 
$
213,263
     
100.00
%
 
$
200,278
     
100.00
%

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

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

(1)    For available for sale securities carried at estimated fair value, the weighted average yield is computed using amortized cost without a tax equivalent
adjustment for tax-exempt obligations.
18
Management reviews investment securities quarterly for the presence of other than temporary impairment ("OTTI"), taking into consideration current market conditions, the extent and nature of changes in estimated fair value, issuer rating changes and trends, financial condition of the underlying issuers, current analysts' evaluations, the Company's ability and intent to hold investments until a recovery of estimated fair value, which may be maturity, as well as other factors. The Company's trust preferred securities investment consisted of a single collateralized debt obligation ("CDO") secured by a pool of trust preferred securities issued by other bank holding companies which was liquidated during the year ended March 31, 2017, and the Company received $1.8 million in proceeds from the liquidation. During the year ended March 31, 2017, the Company recognized a $240,000 OTTI charge related to this CDO. There was no OTTI charge for investment securities for the years ended March 31, 2019 or 2018.

Deposit Activities and Other Sources of Funds

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

Deposit Accounts. The Company attracts deposits from within its primary market area by offering a broad selection of deposit instruments, including demand deposits, negotiable order of withdrawal ("NOW") accounts, money market accounts, savings accounts, certificates of deposit and retirement savings plans. The Company has focused on building customer relationship deposits which include both business and consumer depositors. Deposit account terms vary according to, among other factors, the minimum balance required, the time periods the funds must remain on deposit and the interest rate. In determining the terms of its deposit accounts, the Company considers the rates offered by its competition, profitability to the Company, matching deposit and loan products and customer preferences and concerns.

The following table sets forth the average balances of deposit accounts held by the Company at the dates indicated (dollars in thousands):
 
   
Year Ended March 31,
 
   
2019
   
2018
   
2017
 
   
Average
Balance
   
Average
Rate
   
Average
Balance
   
Average
Rate
   
Average
Balance
   
Average
Rate
 
       
Non-interest-bearing demand
 
$
289,707
     
0.00
%
 
$
264,128
     
0.00
%
 
$
202,376
     
0.00
%
Interest-bearing checking
   
180,256
     
0.06
     
170,124
     
0.06
     
151,801
     
0.06
 
Savings accounts
   
136,720
     
0.11
     
132,376
     
0.10
     
106,324
     
0.10
 
Money market accounts
   
252,202
     
0.12
     
275,092
     
0.12
     
252,040
     
0.12
 
Certificates of deposit
   
105,049
     
0.43
     
136,370
     
0.47
     
118,769
     
0.53
 
Total
 
$
963,934
     
0.10
%
 
$
978,090
     
0.12
%
 
$
831,310
     
0.14
%

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

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

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

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

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

Borrowings. The Company relies upon advances from the FHLB and borrowings from the Federal Reserve Bank of San Francisco ("FRB") to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB and borrowings from the FRB are typically secured by the Bank's commercial business loans, commercial real estate loans and first mortgage residential loans. At March 31, 2019, the Bank had FHLB advances totaling $56.6 million and no FRB borrowings.  At March 31, 2018, the Bank did not have any FHLB advances or FRB borrowings.

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

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

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

20
At March 31, 2019, the Company had three wholly-owned subsidiary grantor trusts totaling $26.6 million that were established for the purpose of issuing trust preferred securities and common securities including a $5.2 million trust acquired in the MBank transaction. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement. The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the "Debentures") of the Company. The Debentures are the sole assets of the trusts. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon maturity of the Debentures or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole or in part on or after specific dates, at a redemption price specified in the indentures governing the Debentures plus any accrued but unpaid interest to the redemption date. The Company also has the right to defer the payment of interest on each of the Debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity. During such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company may not pay cash dividends to the holders of shares of the Company's common stock. The common securities issued by the grantor trusts are held by the Company, and the Company's investment in the common securities of $836,000 at both March 31, 2019 and 2018 is included in prepaid expenses and other assets in the Consolidated Balance Sheets included in the Consolidated Financial Statements contained in Item 8 of this Form 10-K. For more information, see also Note 12 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Taxation

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

Personnel

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

Corporate Information

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

Subsidiary Activities

Under OCC regulations, the Bank is authorized to invest up to 3% of its assets in subsidiary corporations classified as service corporations, with amounts in excess of 2% only if primarily for community purposes, and unlimited amounts in operating subsidiaries. At March 31, 2019, the Bank's investments in its wholly-owned subsidiaries of $1.2 million in Riverview Services, Inc. ("Riverview Services") and $5.4 million in the Trust Company were within these limitations.

Riverview Services acts as a trustee for deeds of trust on mortgage loans granted by the Bank and receives a reconveyance fee for each deed of trust. Riverview Services had net income of $24,000 for the fiscal year ended March 31, 2019 and total assets of $1.2 million at March 31, 2019. Riverview Services' operations are included in the Consolidated Financial Statements of the Company contained in Item 8 of this Form 10-K.

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

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

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

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

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

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

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

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

Christopher P. Cline is President and Chief Executive Officer of the Trust Company, a wholly-owned subsidiary of the Bank. Mr. Cline joined the Trust Company in 2016, after having spent eight years managing the trust department of Wells Fargo's Private Bank in Oregon and Southwest Washington. Prior to that, Mr. Cline was an estate planning attorney for 17 years, most recently as a partner at Holland & Knight. Mr. Cline manages all aspects of the trust business, is a Fellow of the American College of Trust and Estate Counsel and is a nationally recognized speaker and author, having written books on estate planning and trust administration. Mr. Cline holds a Bachelor of Arts degree from San Francisco State University and a Juris Doctor degree from Hastings College of the Law in San Francisco.
22
REGULATION

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

Legislation is introduced from time to time in the United States Congress ("Congress") that may affect the Company's and Bank's operations. In addition, the regulations governing the Company and the Bank may be amended from time to time by the OCC, the FDIC, the Federal Reserve Board or the SEC, as appropriate. Any such legislation or regulatory changes in the future could have an adverse effect   on our operations and financial condition. We cannot predict whether any such changes may occur.

General

As a federally chartered savings bank, the Bank is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and the FDIC, as the insurer of its deposits.   As used herein, the terms "savings institution" and "savings association" refer to federally chartered savings banks. Additionally, the Company is subject to extensive regulation, examination and supervision by the Federal Reserve as its primary federal regulator. The Bank is a member of the FHLB System and its deposits are insured up to applicable limits by the DIF, which is administered by the FDIC. The Bank must file reports with the OCC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations of the Bank by the OCC and of the Company by the Federal Reserve to evaluate safety and soundness and compliance with various regulatory requirements. This regulatory structure establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the protection of the DIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OCC, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on the Company and the Bank and their operations.

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

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

23
Federal Regulation of Savings Institutions

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

All savings institutions are required to pay assessments to the OCC to fund the agency's operations. The general assessments, paid on a semi-annual basis, are determined based on the savings institution's total assets, including consolidated subsidiaries. The Bank's OCC assessment for the fiscal year ended March 31, 2019 was $266,000.

The Bank's general permissible lending limit for loans to one borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At March 31, 2019, the Bank's lending limit under this restriction was $21.2 million and, at that date, the Bank's largest lending relationship with one borrower was $14.6 million, which consisted of one commercial real estate loan which was performing according to its original payment terms.

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

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

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

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

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

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

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

Prompt Corrective Action.   An institution is considered adequately capitalized if it meets the minimum capital ratios described above. The OCC is required to take certain supervisory actions against undercapitalized savings institutions, the severity of which depends upon the institution's degree of undercapitalization. Subject to a narrow exception, the OCC is required to appoint a receiver or conservator for a savings institution that is critically undercapitalized. OCC regulations also require that a capital restoration plan be filed with the OCC within 45 days of the date a savings institution receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. Significantly undercapitalized and critically undercapitalized institutions are subject to more extensive mandatory regulatory actions. The OCC also can take a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. An institution that is not well-capitalized is subject to certain restrictions on deposit rates and brokered deposits.

Federal Home Loan Bank System.   The Bank is a member of the FHLB, which is one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each of which serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See Business – "Deposit Activities and Other Sources of Funds – Borrowings." As a member, the Bank is required to purchase and maintain stock in the FHLB. At March 31, 2019, the Bank held $3.6 million in FHLB stock, which was in compliance with this requirement. During the year ended March 31, 2019, the Bank purchased $27,000 of FHLB membership stock at par and $2.3 million of FHLB activity stock at par.

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

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

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

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

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

25

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

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

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

Limitations on Capital Distributions. OCC regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as the Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC's approval prior to making such distribution. In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve. The Federal Reserve or the OCC may object to a capital distribution based on safety and soundness concerns. Additional restrictions on Bank dividends may apply if the Bank fails the QTL test. In addition, as noted above, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company will be limited, which may limit the ability of the Company to pay dividends to its stockholders.

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

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

Transactions with Affiliates. The Bank's authority to engage in transactions with affiliates is limited by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve's Regulation W. The term affiliates for these purposes generally mean any company that controls or is under common control with an institution except subsidiaries of the institution. The Company and its non-savings institution subsidiaries are affiliates of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions are restricted to an aggregate percentage of the institution's capital. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. FDIC-insured institutions are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, these institutions are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.
 
26

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

Community Reinvestment Act and Consumer Protection Laws. Under the Community Reinvestment Act of 1977 ("CRA"), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. The OCC may use an unsatisfactory rating as the basis for the denial of an application. Similarly, the Federal Reserve is required to take into account the performance of an insured institution under the CRA when considering whether to approve an acquisition by the institution's holding company. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community.

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

Enforcement.   The OCC has primary enforcement responsibility over federally-chartered savings institutions and has the authority to bring action against all "institution-affiliated parties," including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in a wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can range up to $2.0 million per day. The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

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

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

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

Total reported loans for construction, land development and other land represent 100% or more of the bank's capital; or
Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank's total capital or the outstanding balance of the bank's commercial real estate loan portfolio has increased 50% or more during the prior 36 months.

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

Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), is a federal statute that generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term "owner and operator" excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which could substantially exceed the value of the collateral property.

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

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

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

Savings and Loan Holding Company Regulation

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

Capital Requirements. For a savings and loan holding company   that qualifies as a small bank holding company under the Federal Reserve's Small Bank Holding Company Policy Statement, such as the Company, the capital regulations apply to its savings institution subsidiaries, but not the Company. The Federal Reserve expects the holding company's savings institution subsidiaries to be well capitalized under the prompt corrective action regulations. At March 31, 2019, the Company exceeded all regulatory capital requirements. See "Federal Regulation of Savings Institutions- Capital Requirements" above.
Activities Restrictions. The GLBA provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies. Further, the GLBA specifies that, subject to a grandfather provision, existing savings and loan holding companies may only engage in such activities. The Company qualifies for grandfathering and is therefore not restricted in terms of its activities. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be limited to activities permitted by Federal Reserve regulation.

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

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

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

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

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

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

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

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Item 1A.  Risk Factors

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

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

Substantially all of our loans are to businesses and individuals in the states of Washington and Oregon. A decline in the economies of the seven counties in which we operate, i