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

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

For the quarterly period ended December 31, 2014

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____

Commission File Number: 0-22957
 
 
RIVERVIEW BANCORP, INC.
(Exact name of registrant as specified in its charter) 
     
Washington    91-1838969 
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer I.D. Number) 
     
900 Washington St., Ste. 900,Vancouver, Washington     98660 
(Address of principal executive offices)    (Zip Code) 
     
Registrant's telephone number, including area code:    (360) 693-6650 
 
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ] 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]                    Accelerated filer  [   ]                    Non-accelerated filer [   ]                    Smaller Reporting Company [X]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, $.01 par value per share, 22,471,890 shares outstanding as of February 12, 2015.
 

 
 
 
 
Form 10-Q

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX

 
Part I.    
     
Item 1:  Financial Statements (Unaudited)   
     
 
Consolidated Balance Sheets
as of December 31, 2014 and March 31, 2014
 2 
     
 
Consolidated Statements of Income for the
Three and Nine Months Ended December 31, 2014 and 2013
 3 
     
 
Consolidated Statements of Comprehensive Income Three and
Nine Months Ended December 31, 2014 and 2013 
 4 
     
 
Consolidated Statements of Equity for the
Nine Months Ended December 31, 2014 and 2013
 5 
     
 
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2014 and 2013
 6 
     
  Notes to Consolidated Financial Statements   7-24 
     
Item 2:  Management's Discussion and Analysis of   
  Financial Condition and Results of Operations   25-39 
     
 Item 3:  Quantitative and Qualitative Disclosures About Market Risk   39 
     
 Item 4: Controls and Procedures   39
     
Part II. Other Information 40-41
     
Item 1:  Legal Proceedings   
     
Item 1A: Risk Factors   
     
Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds  
     
Item 3:  Defaults Upon Senior Securities  
     
Item 4:  Mine Safety Disclosures  
     
Item 5:  Other Information   
     
Item 6:  Exhibits  
     
SIGNATURES  42 
Certifications   
  Exhibit 31.1  
  Exhibit 31.2  
  Exhibit 32  
 
 
 
 
Forward Looking Statements

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

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-Q, the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could,” or similar expression are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance. These forward-looking statements are subject to 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 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 reserve for loan losses, write-down assets, reclassify its assets, change Riverview Community Bank’s regulatory capital position or affect the Company’s ability to borrow funds or maintain or increase deposits, which could adversely affect its  liquidity and earnings; legislative or regulatory changes that adversely affect the Company’s business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the Company’s ability to attract and retain deposits; increases in premiums for deposit insurance; the Company’s ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company’s assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on the Company’s balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the Company’s workforce and potential associated charges; computer systems on which the Company depends could fail or experience a security breach; the Company’s ability to retain key members of its senior management team; costs and effects of litigation, including settlements and judgments; the Company’s ability to implement its business strategies; the Company’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel it may acquire into its operations and the Company’s ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the Company’s ability to pay dividends on its common stock and interest or principal payments on its junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services and the other risks described from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2015 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 financial condition and results of operations as well as its stock price performance.
 
 
 
1
 
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
 
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND MARCH 31, 2014
(In thousands, except share and per share data) (Unaudited)
  
December 31,
2014
    
March 31,
2014
  
ASSETS
            
Cash (including interest-earning accounts of $5,872 and $51,715)
   $ 21,981     $ 68,577  
Certificates of deposit held for investment
     27,214       36,925  
Loans held for sale
     724       1,024  
Investment securities available for sale, at fair value
(amortized cost of $17,427 and $23,866)
     17,150       23,394  
Mortgage-backed securities held to maturity, at amortized
cost (fair value of $90 and $104)
     88       101  
Mortgage-backed securities available for sale, at fair value
(amortized cost of $100,613 and $79,083)
     101,216       78,575  
Loans receivable (net of allowance for loan losses of $11,701 and $12,551)
     567,398       520,937  
Real estate and other personal property owned
     1,604       7,703  
Prepaid expenses and other assets
     3,041       3,197  
Accrued interest receivable
     2,024       1,836  
Federal Home Loan Bank stock, at cost
     6,120       6,744  
Premises and equipment, net
     15,683       16,417  
Deferred income taxes, net
     13,500       15,433  
Mortgage servicing rights, net
     393       369  
Goodwill
     25,572       25,572  
Core deposit intangible, net
     8       26  
Bank owned life insurance
     24,719       17,691  
TOTAL ASSETS
   $ 828,435     $ 824,521  
LIABILITIES AND EQUITY
                
                 
LIABILITIES:
                
Deposit accounts
   $ 689,330     $ 690,066  
Accrued expenses and other liabilities
     9,397       10,497  
Advanced payments by borrowers for taxes and insurance
     199       467  
Federal Home Loan Bank advances
     2,100       -  
Junior subordinated debentures
     22,681       22,681  
Capital lease obligations
     2,298       2,361  
Total liabilities
     726,005       726,072  
                 
COMMITMENTS AND CONTINGENCIES (See Note 16)
                
                 
EQUITY:
                
Shareholders’ equity
                
Serial preferred stock, $.01 par value; 250,000 authorized, issued and outstanding: none
     -       -  
Common stock, $.01 par value; 50,000,000 authorized
                
December 31, 2014 – 22,471,890 issued and outstanding
     225       225  
March 31, 2014 – 22,471,890 issued and outstanding
                
Additional paid-in capital
     65,217       65,195  
Retained earnings
     36,565       33,592  
Unearned shares issued to employee stock ownership trust
     (310 )     (387 )
Accumulated other comprehensive income (loss)
     215       (647 )
Total shareholders’ equity
     101,912       97,978  
                 
Noncontrolling interest
     518       471  
Total equity
     102,430       98,449  
TOTAL LIABILITIES AND EQUITY
   $ 828,435     $ 824,521  
 
See notes to consolidated financial statements.

 
2
 

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 2014 AND 2013
  
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  
(In thousands, except share and per share data) (Unaudited)
  
2014
    
2013
    
2014
    
2013
  
INTEREST INCOME:
                        
                         
Interest and fees on loans receivable
   $ 6,498     $ 6,319     $ 19,155     $ 19,389  
Interest on investment securities – taxable
     75       75       257       191  
Interest on mortgage-backed securities
     520       88       1,508       156  
Other interest and dividends
     110       191       359       532  
Total interest and dividend income
     7,203       6,673       21,279       20,268  
                                 
INTEREST EXPENSE:
                                
Interest on deposits
     322       496       1,024       1,537  
Interest on borrowings
     163       149       458       449  
Total interest expense
     485       645       1,482       1,986  
Net interest income
     6,718       6,028       19,797       18,282  
Recapture of loan losses
     (400 )     -       (1,050 )     (2,500 )
Net interest income after recapture of loan losses
     7,118       6,028       20,847       20,782  
                                 
NON-INTEREST INCOME:
                                
Fees and service charges
     1,032       1,177       3,260       3,301  
Asset management fees
     718       605       2,248       1,936  
Net gain on sale of loans held for sale
     154       176       435       609  
Bank owned life insurance
     196       136       528       419  
Other
     164       290       226       252  
Total non-interest income
     2,264       2,384       6,697       6,517  
                                 
NON-INTEREST EXPENSE:
                                
Salaries and employee benefits
     4,472       3,959       12,987       11,696  
Occupancy and depreciation
     1,223       1,187       3,632       3,621  
Data processing
     495       523       1,399       1,641  
Amortization of core deposit intangible
     6       7       18       33  
Advertising and marketing expense
     169       170       522       578  
FDIC insurance premium
     143       400       498       1,228  
State and local taxes
     162       106       416       340  
Telecommunications
     73       78       223       227  
Professional fees
     302       342       848       995  
Real estate owned expenses
     99       298       901       2,402  
Other
     502       541       1,611       1,740  
Total non-interest expense
     7,646       7,611       23,055       24,501  
                                 
INCOME BEFORE INCOME TAXES
     1,736       801       4,489       2,798  
PROVISION FOR INCOME TAXES
     587       -       1,516       16  
NET INCOME
   $ 1,149     $ 801     $ 2,973     $ 2,782  
                                 
Earnings per common share:
                                
Basic
   $ 0.05     $ 0.04     $ 0.13     $ 0.12  
Diluted
     0.05       0.04       0.13       0.12  
    Weighted average number of shares outstanding:
                                
Basic
     22,394,910       22,370,277       22,388,775       22,364,142  
Diluted
     22,439,195       22,371,914       22,421,330       22,365,224  
 
 
3
 

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2014 AND 2013

   
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  
(Dollars in thousands) (Unaudited)
  
2014
    
2013
    
2014
    
2013
  
                         
Net income
   $ 1,149     $ 801     $ 2,973     $ 2,782  
                                 
Other comprehensive income (loss)
                                
Net unrealized holding gain (loss) from available for sale securities arising during
                            
    the period, net of tax of ($274), $77, ($497) and ($174), respectively
     531       (149 )     966       338  
                                 
Reclassification  adjustment of net gain from sale of available for sale securities
                                
    included in income, net of tax of $54, $0, $54 and $0, respectively
     (104 )     -       (104 )     -  
                                 
Other comprehensive income (loss)
     427       (149 )     862       338  
 
                                
Noncontrolling interest
     13       16       47       62  
Total comprehensive income
   $ 1,589     $ 668     $ 3,882     $ 3,182  
See notes to consolidated financial statements.




 
 
4
 
 
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2014 AND 2013

(In thousands, except share data) (Unaudited)
Common Stock
    
Additional
Paid-In
Capital
    
Retained
Earnings
    
Unearned
Shares
Issued to
Employee
Stock
Ownership
Trust
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Noncontrolling Interest
    
Total
  
Shares
    
Amount
                            
                                                 
Balance April 1, 2013
22,471,890
  
$
225
  
$
65,551
  
$
14,169
  
$
(490
)
$
(1,013
)
$
603
  
$
79,045
    
                                                 
Net income
-
    
-
    
-
    
2,782
    
-
    
-
    
-
    
2,782
    
Purchase of subsidiary shares
from noncontrolling interest
-
    
-
    
(399
)
  
-
    
-
    
-
    
(213
)
  
(612
)
  
Stock based compensation expense
-
    
-
    
53
    
-
    
-
    
-
    
-
    
53
    
Earned ESOP shares
-
    
-
    
(29
)
  
-
    
77
    
-
    
-
    
48
    
Unrealized holding gain on securities
  available for sale
-
    
-
    
-
    
-
    
-
    
338
    
-
    
338
    
Noncontrolling interest
-
    
-
    
-
    
-
    
-
    
-
    
62
    
62
    
                                                 
Balance December 31, 2013
22,471,890
  
$
225
  
$
65,176
  
$
16,951
  
$
(413
)
$
(675
)
$
452
  
$
81,716
    
                                                 
                                                 
Balance April 1, 2014
22,471,890
  
$
225
  
$
65,195
  
$
33,592
  
$
(387
)
$
(647
)
$
471
  
$
98,449
    
                                                 
Net income
-
    
-
    
-
    
2,973
    
-
    
-
    
-
    
2,973
    
Stock based compensation expense
-
    
-
    
26
    
-
    
-
    
-
    
-
    
26
    
Earned ESOP shares
-
    
-
    
(4
)
  
-
    
77
    
-
    
-
    
73
    
Unrealized holding gain on securities
  available for sale
-
    
-
    
-
    
-
    
-
    
862
    
-
    
862
    
Noncontrolling interest
-
    
-
    
-
    
-
    
-
    
-
    
47
    
47
    
                                                 
Balance December 31, 2014
22,471,890
  
$
225
  
$
65,217
  
$
36,565
  
$
(310
)
$
215
  
$
518
  
$
102,430
    

See notes to consolidated financial statements.
 
 

 
 
5
 
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2014 AND 2013
  
Nine Months Ended
December 31,
  
(In thousands) (Unaudited)
  
2014
    
2013
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
$
2,973
  
$
2,782
  
Adjustments to reconcile net income to cash provided by operating activities:
            
Depreciation and amortization
  
2,394
    
1,330
  
Recapture of loan losses
  
(1,050
)
  
(2,500
)
Provision for deferred income taxes
  
1,490
    
-
  
Noncash expense related to ESOP
  
73
    
48
  
Increase (decrease) in deferred loan origination fees, net of amortization
  
73
    
(21
)
Origination of loans held for sale
  
(13,130
)
  
(21,474
)
Proceeds from sales of loans held for sale
  
13,734
    
22,615
  
Stock based compensation expense
  
26
    
53
  
Writedown of real estate owned, net
  
715
    
1,607
  
Net gain on loans held for sale, sale of real estate owned,
mortgage-backed securities, investment securities and premises and equipment
  
(501
)
  
(470
)
Income from bank owned life insurance
  
(528
)
  
(419
)
Changes in assets and liabilities:
            
Prepaid expenses and other assets
  
74
    
322
  
Accrued interest receivable
  
(187
)
  
77
  
Accrued expenses and other liabilities
  
(944
)
  
779
  
Net cash provided by operating activities
  
5,212
    
4,729
  
             
CASH FLOWS FROM INVESTING ACTIVITIES:
            
Loan repayments (originations), net
  
(23,335
)
  
19,363
  
Purchase of loans receivable
  
(22,545
)
  
(7,646
)
Proceeds from call, maturity, or sale of investment securities available for sale
  
8,480
    
3,000
  
Principal repayments on investment securities available for sale
  
-
    
847
  
Principal repayments on mortgage-backed securities available for sale
  
13,660
    
1,121
  
Principal repayments on mortgage-backed securities held to maturity
  
13
    
20
  
Purchase of investment securities available for sale
  
(2,000
)
  
(16,448
)
Purchase of mortgage-backed securities available for sale
  
(50,199
)
  
(35,775
)
Proceeds from sale of mortgage-backed securities available for sale
  
14,225
    
-
  
Redemption of certificates of deposit held for investment
  
9,711
    
7,461
  
Proceeds from redemption of Federal Home Loan Bank stock
  
624
    
196
  
Purchase of Bank owned life insurance
  
(6,500
)
  
-
  
Purchase of premises and equipment and capitalized software
  
(367
)
  
(738
)
Proceeds from sale of real estate owned and premises and equipment
  
5,392
    
7,633
  
Net cash used in investing activities
  
(52,841
)
  
(20,966
)
             
CASH FLOWS FROM FINANCING ACTIVITIES
            
Net increase (decrease) in deposit accounts
  
(736
)
  
25,465
  
Purchase of subsidiary shares from noncontrolling interest
  
-
    
(612
)
Proceeds from borrowings
  
25,450
    
2,000
  
Repayment of borrowings
  
(23,350
)
  
(2,000
)
Principal payments under capital lease obligation
  
(63
)
  
(59
)
Net decrease in advance payments by borrowers
  
(268
)
  
(832
)
Net cash provided by financing activities
  
1,033
    
23,962
  
             
NET INCREASE (DECREASE) IN CASH
  
(46,596
)
  
7,725
  
CASH, BEGINNING OF PERIOD
  
68,577
    
115,415
  
CASH, END OF PERIOD
$
21,981
  
$
123,140
  
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Cash paid during the period for:
            
Interest
$
5,048
  
$
1,535
  
Income taxes
  
15
    
29
  
             
NONCASH INVESTING AND FINANCING ACTIVITIES:
            
Transfer of loans to real estate owned
$
804
  
$
5,782
  
Transfer of real estate owned to loans
  
726
    
196
  
Fair value adjustment to securities available for sale
  
1,305
    
512
  
Income tax effect related to fair value adjustment
  
(443
)
  
(174
)

See notes to consolidated financial statements.
 
6
 

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

1.  
BASIS OF PRESENTATION

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

The unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Riverview Bancorp, Inc. Annual Report on Form 10-K for the year ended March 31, 2014 (“2014 Form 10-K”). The results of operations for the nine months ended December 31, 2014 are not necessarily indicative of the results, which may be expected for the fiscal year ending March 31, 2015. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

2.  
PRINCIPLES OF CONSOLIDATION

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

3.  
STOCK PLANS AND STOCK-BASED COMPENSATION

In July 1998, shareholders of the Company approved the adoption of the 1998 Stock Option Plan (“1998 Plan”). The 1998 Plan was effective October 1998 and expired in October 2008. Accordingly, no further option awards may be granted under the 1998 Plan; however, any awards granted prior to its expiration remain outstanding subject to their terms. Each option granted under the 1998 Plan has an exercise price equal to the fair market value of the Company’s common stock on the date of the grant, a maximum term of ten years and a vesting period from zero to five years.

In July 2003, shareholders of the Company approved the adoption of the 2003 Stock Option Plan (“2003 Plan”). The 2003 Plan was effective July 2003 and expired in July 2013. Accordingly, no further option awards may be granted under the 2003 Plan; however, any awards granted prior to its expiration remain outstanding subject to their terms. Each option granted under the 2003 Plan has an exercise price equal to the fair market value of the Company’s common stock on the date of the grant, a maximum term of ten years and a vesting period from zero to five years.

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

 
Nine Months Ended
December 31, 2014
  
Nine Months Ended
December 31, 2013
  
 
Number of
Shares
    
Weighted
Average
Exercise
Price
  
Number of
Shares
    
Weighted
Average
Exercise
Price
  
Balance, beginning of period
474,654
  
$
7.91
  
407,500
  
$
9.05
  
Grants
-
    
-
  
87,154
    
2.78
  
Expired
(32,000
)
  
9.55
  
(20,000
)
  
8.98
  
Balance, end of period
442,654
  
$
7.79
  
474,654
  
$
7.91
  
 

 
 
7
 
The following table presents information on stock options outstanding for the periods shown, less estimated forfeitures.

 
Nine Months
Ended
December 31,
2014
  
Nine Months
Ended
December 31,
2013
Stock options fully vested and expected to vest:
              
Number
  
442,504
      
469,896
  
Weighted average exercise price
$
7.79
    
$
7.96
  
Aggregate intrinsic value (1)
$
253,000
    
$
18,000
  
Weighted average contractual term of options (years)
  
3.95
      
4.81
  
Stock options fully vested and currently exercisable:
              
Number
  
442,054
      
385,300
  
Weighted average exercise price
$
7.79
    
$
9.10
  
Aggregate intrinsic value (1)
$
253,000
    
$
7,000
  
Weighted average contractual term of options (years)
  
3.95
      
3.79
  
               
(1)  The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price) that would have been received by the option holders had all option holders exercised.  This amount changes based on changes in the market value of the Company’s stock.

Stock-based compensation expense related to stock options for the nine months ended December 31, 2014 and 2013 was $26,000 and $53,000, respectively. As of December 31, 2014, all outstanding stock options were fully vested and there was no remaining unrecognized compensation expense.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. The fair value of all awards is amortized on a straight-line basis over the requisite service periods, which are generally the vesting periods. The expected life of options granted represents the period of time that they are expected to be outstanding. The expected life is determined based on historical experience with similar options, giving consideration to the contractual terms and vesting schedules. Expected volatility was estimated at the date of grant based on the historical volatility of the Company’s common stock. Expected dividends are based on dividend trends and the market value of the Company’s common stock at the time of grant. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant. During the nine months ended December 31, 2014, there were no stock options granted. During the nine months ended December 31, 2013, the Company granted 87,154 stock options. The weighted average fair value of stock options granted during the nine months ended December 31, 2013 was $1.18.

The Black-Scholes model uses the assumptions listed in the following table:

 
Risk Free
Interest Rate
    
Expected
Life (years)
    
Expected
Volatility
    
Expected
Dividends
  
Fiscal 2014
1.95
%
  
6.25
    
51.87
%
  
2.04
%
 
4.  
EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income or loss applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted EPS is computed by dividing net income or loss applicable to common stock by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period. Common stock equivalents arise from assumed exercise of outstanding stock options. Shares owned by the Company’s Employee Stock Ownership Plan (“ESOP”) that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. For the three and nine months ended December 31, 2014, stock options for 233,000 and 235,000 shares, respectively, of common stock were excluded in computing diluted EPS because they were antidilutive. For the three and nine months ended December 31, 2013, stock options for 460,000 and 432,000 shares, respectively, of common stock were excluded in computing diluted EPS because they were antidilutive.

 
8
 
 
 
Three Months Ended
December 31,
  
 
Nine Months Ended
December 31,
  
   
2014
    
2013
    
2014
    
2013
  
Basic EPS computation:
                        
Numerator-net income
$
1,149,000
  
$
801,000
  
$
2,973,000
  
$
2,782,000
  
Denominator-weighted average common shares outstanding
  
22,394,910
    
22,370,277
    
22,388,775
    
22,364,142
  
Basic EPS
$
0.05
  
$
0.04
  
$
0.13
  
$
0.12
  
Diluted EPS computation:
                        
Numerator-net income
$
1,149,000
  
$
801,000
  
$
2,973,000
  
$
2,782,000
  
Denominator-weighted average common shares outstanding
  
22,394,910
    
22,370,277
    
22,388,775
    
22,364,142
  
Effect of dilutive stock options
  
44,285
    
1,637
    
32,555
    
1,082
  
Weighted average common shares and common stock equivalents
  
22,439,195
    
22,371,914
    
22,421,330
    
22,365,224
  
Diluted EPS
$
0.05
  
$
0.04
  
$
0.13
  
$
0.12
  

5.  
INVESTMENT SECURITIES

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

 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
December 31, 2014
                      
Trust preferred
$
1,919
  
$
-
  
$
(59
)
$
1,860
Agency securities
  
15,508
    
23
    
(241
)
  
15,290
Total
$
17,427
  
$
23
  
$
(300
)
$
17,150
                       
March 31, 2014
                      
Trust preferred
$
1,919
  
$
-
  
$
(16
)
$
1,903
Agency securities
  
21,947
    
6
    
(462
)
  
21,491
Total
$
23,866
  
$
6
  
$
(478
)
$
23,394

The contractual maturities of investment securities available for sale are as follows (in thousands):
 
December 31, 2014
  
Amortized
Cost
    
Estimated
Fair Value
Due in one year or less
$
-
  
$
-
Due after one year through five years
  
14,500
    
14,262
Due after five years through ten years
  
1,008
    
1,028
Due after ten years
  
1,919
    
1,860
Total
$
17,427
  
$
17,150

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

 
Less than 12 months
  
  12 months or longer
  
  Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
December 31, 2014
                                    
                                     
Trust preferred
$
1,860
  
$
(59
)
$
-
  
$
-
  
$
1,860
  
$
(59
)
Agency securities
  
-
    
-
    
12,759
    
(241
)
  
12,759
    
(241
)
Total
$
1,860
  
$
(59
)
$
12,759
  
$
(241
)
$
14,619
  
$
(300
)
                                     
March 31, 2014
                                    
                                     
Trust preferred
$
1,903
  
$
(16
)
$
-
  
$
-
  
$
1,903
  
$
(16
)
Agency securities
  
17,985
    
(462
)
  
-
    
-
    
17,985
    
(462
)
Total
$
19,888
  
$
(478
)
$
-
  
$
-
  
$
19,888
  
$
(478
)

At December 31, 2014, the Company had a single collateralized debt obligation which is secured by a pool of trust preferred securities issued by 15 other holding companies. The Company holds the mezzanine tranche of this security. All tranches senior to the mezzanine tranche have been repaid by the issuer. Four of the issuers of trust preferred securities in this pool have defaulted (representing 51% of the remaining collateral, including excess collateral), and one other issuer is currently deferring interest payments (2% of the remaining collateral). The Company has estimated an expected default rate
 
 
9
 
of 43% for its portion of this security. The expected default rate was estimated based primarily on an analysis of the financial condition of the underlying issuers. The Company estimates that a default rate of 69% would trigger additional other than temporary impairment (“OTTI”) of this security. The Company utilized a discount rate of 10% to estimate the fair value of this security. There was no excess subordination on this security.

During the three and nine months ended December 31, 2014, the Company determined that there was no additional OTTI charge on the above collateralized debt obligation. The Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of the remaining amortized cost basis.

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

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

Proceeds from sale of investment securities totaled $2.5 million for the three and nine months ended December 31, 2014. Gross realized gains on sales of investment securities totaled $31,000 for both the three and nine months ended December 31, 2014. The Company had no sales and no realized gains or losses on investment securities for the three and nine months ended December 31, 2013. Investment securities with an amortized cost of $3.0 million and $1.0 million and a fair value of $2.9 million and $975,000 at December 31, 2014 and March 31, 2014, respectively, were pledged as collateral for government public funds held by the Bank.

6.  
MORTGAGE-BACKED SECURITIES

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

   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated
Fair
Value
  
December 31, 2014
                        
Mortgage-backed securities (1)
$
88
  
$
2
  
$
-
  
$
90
  
                         
March 31, 2014
                        
Mortgage-backed securities (1)
$
101
  
$
3
  
$
-
  
$
104
  
                         
(1) Comprised of Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“ FHLMC”) issued securities.

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

December 31, 2014
  
Amortized
Cost
    
Estimated
Fair Value
Due in one year or less
$
-
  
$
-
Due after one year through five years
  
-
    
-
Due after five years through ten years
  
75
    
77
Due after ten years
  
13
    
13
Total
$
88
  
$
90

Mortgage-backed securities held to maturity with an amortized cost of $28,000 and $36,000 and a fair value of $28,000 and $37,000 at December 31, 2014 and March 31, 2014, respectively, were pledged as collateral for governmental public funds held by the Company.

 
10
 
Mortgage-backed securities available for sale consisted of the following at the dates indicated (in thousands):

December 31, 2014
  
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated
Fair
Value
  
Real estate mortgage investment conduits (1)
$
23,802
  
$
56
  
$
(54
)
$
23,804
  
Mortgage-backed securities (2)
  
71,240
    
614
    
(107
)
  
71,747
 
Other mortgage-backed securities (3)
  
5,571
    
110
    
(16
)
  
5,665
  
Total
$
100,613
  
$
780
  
$
(177
)
$
101,216
  
                         
March 31, 2014
                        
Real estate mortgage investment conduits
$
7,218
  
$
9
  
$
(77
)
$
7,150
  
Mortgage-backed securities
  
65,858
    
102
    
(547
)
  
65,413
  
Other mortgage-backed securities
  
6,007
    
18
    
(13
)
  
6,012
  
Total
$
79,083
  
$
129
  
$
(637
)
$
78,575
  
                         
(1) Comprised of FHLMC and FNMA issued securities.
(2) Comprised of FHLMC, FNMA and Ginnie Mae (“GNMA”) issued securities.
(3) Comprised of U.S. Small Business Administration (“SBA”) issued securities and commercial real estate (“CRE”) secured securities issued by private issuers.

The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands):
December 31, 2014
  
Amortized
Cost
    
Estimated
Fair Value
Due in one year or less
$
-
  
$
-
Due after one year through five years
  
2,478
    
2,493
Due after five years through ten years
  
5,585
    
5,616
Due after ten years
  
92,550
    
93,107
Total
$
100,613
  
$
101,216

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


 
Less than 12 months
  
  12 months or longer
  
  Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
December 31, 2014
                                    
                                     
Real estate mortgage investment conduits
$
14,822
  
$
(54
)
$
-
  
$
-
  
$
14,822
  
$
(54
)
Mortgage-backed securities (1)
  
4,348
    
(7
)
  
5,202
    
(100
)
  
9,550
    
(107
)
Other mortgage-backed securities (2)
  
-
    
-
    
1,451
    
(16
)
  
1,451
    
(16
)
Total
$
19,170
  
$
(61
)
$
6,653
  
$
(116
)
$
25,823
  
$
(177
)

March 31, 2014
                                    
                                     
Real estate mortgage investment conduits
$
4,996
  
$
(77
)
$
-
  
$
-
  
$
4,996
  
$
(77
)
Mortgage-backed securities
  
49,177
    
(547
)
  
-
    
-
    
49,177
    
(547
)
Other mortgage-backed securities
  
1,526
    
(13
)
  
-
    
-
    
1,526
    
(13
)
Total
$
55,699
  
$
(637
)
$
-
  
$
-
  
$
55,699
  
$
(637
)
                                     
(1) Comprised of FHLMC and FNMA issued securities.
(2) Comprised of SBA issued securities.

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

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

Proceeds from sale of mortgage-backed securities totaled $14.3 million for the three and nine months ended December 31, 2014. Gross realized gains on sales of mortgage-backed securities totaled $127,000 for both the three and nine months ended December 31, 2014. The Company had no sales and no realized gains or losses on mortgage-backed securities for the three and nine months ended December 31, 2013. Mortgage-backed securities available for sale with an amortized cost of $1.5 million and $1.7 million and a fair value of $1.5 million and $1.7 million at December 31, 2014 and March 31, 2014, respectively, were pledged as collateral for government public funds held by the Bank.

 
11
 
7.  
LOANS RECEIVABLE

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

   
December 31,
2014
    
March 31,
2014
Commercial and construction
          
 Commercial business
$
82,284
  
$
71,632
Other real estate mortgage (1)
  
337,030
    
324,881
Real estate construction
  
29,199
    
19,482
Total commercial and construction
  
448,513
    
415,995
           
Consumer
          
Real estate one-to-four family
  
90,865
    
93,007
Other installment
  
39,721
    
24,486
Total consumer
  
130,586
    
117,493
           
Total loans
  
579,099
    
533,488
           
Less:  Allowance for loan losses
  
11,701
    
12,551
Loans receivable, net
$
567,398
  
$
520,937
           
 (1) Other real estate mortgage consists of commercial real estate, land and multi-family loans.

The Company considers its loan portfolio to have very little exposure to sub-prime mortgage loans since the Company has not historically engaged in this type of lending. At December 31, 2014, loans carried at $340.8 million were pledged as collateral to the Federal Home Loan Bank of Seattle (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) pursuant to/under borrowing agreements.

Most of the Bank’s business activity is with customers located in the states of Washington and Oregon. Loans and extensions of credit outstanding at one time to one borrower are generally limited by federal regulation to 15% of the Bank’s shareholders’ equity, excluding accumulated other comprehensive loss. As of December 31, 2014 and March 31, 2014, the Bank had no loans to any one borrower in excess of the regulatory limit.

8.  
ALLOWANCE FOR LOAN LOSSES

Allowance for loan loss: The allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon the Company’s ongoing quarterly assessment of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions and detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are considered impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans based on the Company’s risk rating system and historical loss experience adjusted for qualitative factors. The Company calculates its historical loss rates using the average of the last four quarterly 24-month periods. The Company calculates and applies its historical loss rates by individual loan types in its portfolio. These historical loss rates are adjusted for qualitative and environmental factors. An unallocated component is maintained to cover uncertainties that the Company believes have resulted in incurred losses that have not yet been allocated to specific elements of the general and specific components of the allowance for loan losses. Such factors include uncertainties in economic conditions and in identifying triggering events that directly correlate to subsequent loss rates, changes in appraised value of underlying collateral, risk factors that have not yet manifested themselves in loss allocation factors and historical loss experience data that may not precisely correspond to the current portfolio or economic conditions. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The appropriate allowance level is estimated based upon factors and trends identified by the Company as of the date of the filing of the financial statements.

Management’s evaluation of the allowance for loan losses is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company’s historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of current business cycle, a detailed analysis of impaired loans and other factors as deemed appropriate. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. The Company also considers bank regulatory examination results and findings of credit examiners in its quarterly evaluation of the allowance for loan losses.

 
12
 
The following tables present a reconciliation of the allowance for loan losses for the periods indicated (in thousands):
Three months ended
December 31, 2014
  
Commercial  
Business
    
Commercial
Real Estate
    
Land
    
Multi-
Family
    
Real Estate Construction
    
Consumer
    
Unallocated
    
Total
  
                                                 
Beginning balance
$
1,579
  
$
5,187
  
$
265
  
$
360
  
$
319
  
$
2,822
  
$
1,469
  
$
12,001
  
Provision for (recapture of) loan losses
  
117
    
(868
)
  
192
    
(1
)
  
461
    
60
    
(361
)
  
(400
)
Charge-offs
  
(16
)
  
-
    
-
    
-
    
-
    
(27
)
  
-
    
(43
)
Recoveries
  
24
    
-
    
102
    
-
    
-
    
17
    
-
    
143
  
Ending balance
$
1,704
  
$
4,319
  
$
559
  
$
359
  
$
780
  
$
2,872
  
$
1,108
  
$
11,701
  

Nine months ended
December 31, 2014
                                                
                                                 
Beginning balance
$
2,409
  
$
5,269
  
$
340
  
$
203
  
$
387
  
$
2,653
  
$
1,290
  
$
12,551
  
Provision for (recapture of) loan losses
  
(644
)
  
(922
)
  
(1
)
  
156
    
393
    
150
    
(182
)
  
(1,050
)
Charge-offs
  
(89
)
  
(28
)
  
-
    
-
    
-
    
(85
)
  
-
    
(202
)
Recoveries
  
28
    
-
    
220
    
-
    
-
    
154
    
-
    
402
  
Ending balance
$
1,704
  
$
4,319
  
$
559
  
$
359
  
$
780
  
$
2,872
  
$
1,108
  
$
11,701
  

Three months ended
December 31, 2013
                                                
                                                 
Beginning balance
$
1,913
  
$
6,787
  
$
815
  
$
269
  
$
235
  
$
1,845
  
$
1,832
  
$
13,696
  
Provision for (recapture of) loan losses
  
(170
)
  
(652
)
  
(782
)
  
(101
)
  
5
    
215
    
1,485
    
-
  
Charge-offs
  
(36
)
  
(102
)
  
-
    
-
    
-
    
(137
)
  
-
    
(275
)
Recoveries
  
306
    
8
    
289
    
-
    
-
    
24
    
-
    
627
  
Ending balance
$
2,013
  
$
6,041
  
$
322
  
$
168
  
$
240
  
$
1,947
  
$
3,317
  
$
14,048
  

Nine months ended
December 31, 2013
                                                
                                                 
Beginning balance
$
2,128
  
$
5,979
  
$
2,019
  
$
541
  
$
221
  
$
2,949
  
$
1,806
  
$
15,643
  
Provision for (recapture of) loan losses
  
(503
)
  
313
    
(2,461
)
  
(373
)
  
22
    
(1,009
)
  
1,511
    
(2,500
)
Charge-offs
  
(135
)
  
(274
)
  
(45
)
  
-
    
(7
)
  
(293
)
  
-
    
(754
)
Recoveries
  
523
    
23
    
809
    
-
    
4
    
300
    
-
    
1,659
  
Ending balance
$
2,013
  
$
6,041
  
$
322
  
$
168
  
$
240
  
$
1,947
  
$
3,317
  
$
14,048
  

The following tables present an analysis of loans receivable and allowance for loan losses, which were evaluated individually and collectively for impairment at the dates indicated (in thousands):
 
Allowance for loan losses
  
Recorded investment in loans
  
December 31, 2014
  
Individually
Evaluated for
Impairment
    
Collectively
Evaluated for
Impairment
    
Total
    
Individually
Evaluated for
Impairment
    
Collectively
Evaluated for
Impairment
    
Total
  
                                     
Commercial business
$
-
  
$
1,704
  
$
1,704
  
$
1,188
  
$
81,096
  
$
82,284
  
Commercial real estate
  
9
    
4,310
    
4,319
    
17,048
    
273,367
    
290,415
  
Land
  
-
    
559
    
559
    
800
    
14,262
    
15,062
  
Multi-family
  
-
    
359
    
359
    
2,290
    
29,263
    
31,553
  
Real estate construction
  
-
    
780
    
780
    
-
    
29,199
    
29,199
  
Consumer
  
127
    
2,745
    
2,872
    
2,635
    
127,951
    
130,586
  
Unallocated
  
-
    
1,108
    
1,108
    
-
    
-
    
-
  
Total
$
136
  
$
11,565
  
$
11,701
  
$
23,961
  
$
555,138
  
$
579,099
  
                                     
                                     
March 31, 2014
                                    
                                     
Commercial business
$
-
  
$
2,409
  
$
2,409
  
$
947
  
$
70,685
  
$
71,632
  
Commercial real estate
  
137
    
5,132
    
5,269
    
18,122
    
269,386
    
287,508
  
Land
  
-
    
340
    
340
    
858
    
15,387
    
16,245
  
Multi-family
  
-
    
203
    
203
    
2,014
    
19,114
    
21,128
  
Real estate construction
  
-
    
387
    
387
    
-
    
19,482
    
19,482
  
Consumer
  
142
    
2,511
    
2,653
    
4,009
    
113,484
    
117,493
  
Unallocated
  
-
    
1,290
    
1,290
    
-
    
-
    
-
  
Total
$
279
  
$
12,272
  
$
12,551
  
$
25,950
  
$
507,538
  
$
533,488
  
 
13
 
Non-accrual loans:  Loans are reviewed regularly and it is the Company’s general policy that a loan is past due when it is 30 days to 89 days delinquent. In general, when a loan is 90 days delinquent or when collection of principal or interest appears doubtful, it is placed on non-accrual status, at which time the accrual of interest ceases and a reserve for unrecoverable accrued interest is established and charged against operations. As a general practice, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cost recovery method. As a general practice, a loan is not removed from non-accrual status until all delinquent principal, interest and late fees have been brought current and the borrower has demonstrated a history of performance based upon the contractual terms of the note. Interest income foregone on non-accrual loans was $83,000 and $165,000 during the three months ended December 31, 2014 and 2013, respectively. Interest income foregone on non-accrual loans was $351,000 and $777,000 during the nine months ended December 31, 2014 and 2013, respectively.

The following tables present an analysis of past due loans at the dates indicated (in thousands):

December 31, 2014
  
30-89 Days
Past Due
    
90 Days
and
Greater
(Non-
Accrual)
    
Total Past
Due
    
Current
    
Total
Loans
Receivable
    
Recorded
Investment
> 90 Days
and
Accruing
                                   
Commercial business
$
183
  
$
96
  
$
279
  
$
82,005
  
$
82,284
  
$
-
Commercial real estate
  
1,562
    
3,003
    
4,565
    
285,850
    
290,415
    
-
Land
  
-
    
800
    
800
    
14,262
    
15,062
    
-
Multi-family
  
-
    
2,290
    
2,290
    
29,263
    
31,553
    
-
Real estate construction
  
-
    
-
    
-
    
29,199
    
29,199
    
-
Consumer
  
825
    
1,540
    
2,365
    
128,221
    
130,586
    
-
Total
$
2,570
  
$
7,729
  
$
10,299
  
$
568,800
  
$
579,099
  
$
-
                                   
                                   
March 31, 2014
                                  
                                   
Commercial business
$
120
  
$
452
  
$
572
  
$
71,060
  
$
71,632
  
$
-
Commercial real estate
  
188
    
8,067
    
8,255
    
279,253
    
287,508
    
-
Land
  
-
    
800
    
800
    
15,445
    
16,245
    
-
Multi-family
  
359
    
2,014
    
2,373
    
18,755
    
21,128
    
-
Real estate construction
  
-
    
-
    
-
    
19,482
    
19,482
    
-
Consumer
  
1,580
    
2,729
    
4,309
    
113,184
    
117,493
    
-
Total
$
2,247
  
$
14,062
  
$
16,309
  
$
517,179
  
$
533,488
  
$
-

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

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

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

 
14
 

Special mention – These loans have a risk rating of 6 and are rated in accordance with regulatory guidelines. These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the credit position at some future date. These assets pose elevated risk, but their weakness does not yet justify a “Substandard” classification.
 
Substandard – These loans have a risk rating of 7 and are rated in accordance with regulatory guidelines, for which the accrual of interest may or may not be discontinued. By definition under regulatory guidelines, a “Substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.
 
Doubtful - These loans have a risk rating of 8 and are rated in accordance with regulatory guidelines. Such loans are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.
 
Loss - These loans have a risk rating of 9 and are rated in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following tables present an analysis of credit quality indicators at the dates indicated (dollars in thousands):
 
 
December 31, 2014
    
March 31, 2014
   
Weighted-
Average Risk
Grade
    
Classified
Loans(2)
      
Weighted-
Average
Risk Grade
    
Classified
Loans(2)
                         
Commercial business
  
3.40
  
$
673
      
3.54
  
$
8,419
Commercial real estate
  
3.69
    
12,193
      
3.87
    
19,838
Land
  
4.21
    
800
      
3.88
    
800
Multi-family
  
3.55
    
2,303
      
3.81
    
2,028
Real estate construction
  
3.50
    
1,843
      
3.08
    
-
Consumer (1)
  
7.00
    
1,540
      
7.00
    
2,729
Total
  
3.64
  
$
19,352
      
3.82
  
$
33,814
                         
Total loans risk rated
$
449,298
          
$
418,503
      
                         
  (1) Consumer loans are primarily evaluated on a homogenous pool level and generally not individually risk rated unless certain factors are met.
   (2)  Classified loans consist of substandard, doubtful and loss loans.

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

 
15
 
The following tables present an analysis of impaired loans at the dates and for the periods indicated (in thousands):

December 31, 2014
  
Recorded
Investment with
No Specific
Valuation
Allowance
    
Recorded
Investment
with Specific
Valuation
Allowance
    
Total
Recorded
Investment
    
Unpaid
Principal
Balance
    
Related
Specific
Valuation
Allowance
                             
Commercial business
$
1,188
  
$
-
  
$
1,188
  
$
1,342
  
$
-
Commercial real estate
  
15,486
    
1,562
    
17,048
    
17,907
    
9
Land
  
800
    
-
    
800
    
804
    
-
Multi-family
  
2,290
    
-
    
2,290
    
2,462
    
-
Consumer
  
1,286
    
1,349
    
2,635
    
3,238
    
127
Total
$
21,050
  
$
2,911
  
$
23,961
  
$
25,753
  
$
136
                             
March 31, 2014
                            
                             
Commercial business
$
947
  
$
-
  
$
947
  
$
1,067
  
$
-
Commercial real estate
  
17,956
    
166
    
18,122
    
20,601
    
137
Land
  
858
    
-
    
858
    
861
    
-
Multi-family
  
2,014
    
-
    
2,014
    
2,103
    
-
Consumer
  
2,596
    
1,413
    
4,009
    
4,639
    
142
Total
$
24,371
  
$
1,579
  
$
25,950
  
$
29,271
  
$
279

 
Three Months ended
December 31, 2014
    
Three Months ended
December 31, 2013
   
Average
Recorded
Investment
    
Interest
Recognized on
Impaired
Loans
      
Average
Recorded
Investment
    
Interest
Recognized on
Impaired
Loans
                         
Commercial business
$
1,203
  
$
14
    
$
1,610
  
$
14
Commercial real estate
  
17,086
    
121
      
17,452
    
111
Land
  
800
    
-
      
1,640
    
1
Multi-family
  
2,299
    
-
      
2,298
    
-
Consumer
  
2,662
    
18
      
3,103
    
7
Total
$
24,050
  
$
153
    
$
26,103
  
$
133

 
Nine Months ended
December 31, 2014
    
Nine Months ended
December 31, 2013
   
Average
Recorded
Investment
    
Interest
Recognized on
Impaired
Loans
      
Average
Recorded
Investment
    
Interest
Recognized on
Impaired
Loans
                         
Commercial business
$
1,070
  
$
36
    
$
1,201
  
$
37
Commercial real estate
  
17,436
    
346
      
19,783
    
362
Land
  
821
    
-
      
2,103
    
5
Multi-family
  
2,239
    
-
      
2,944
    
15
Real estate construction
  
-
    
-
      
86
    
-
Consumer
  
3,329
    
56
      
3,597
    
30
Total
$
24,895
  
$
438
    
$
29,714
  
$
449

TDRs are loans where 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, 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 using the original note rate, except when the loan is collateral dependent.  In these cases, the estimated fair value of the collateral, less selling costs (when applicable) is used. Impairment is recognized as a specific component within the allowance for loan losses if the 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.

 
16
 
The following table presents new TDRs for the periods indicated:

 
Nine Months Ended December 31, 2014
  
Nine Months Ended December 31, 2013
  
(Dollars in Thousands)
  
Number of
Contracts
    
Pre-
Modification Outstanding
Recorded
Investment
    
Post-
Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
    
Pre-
Modification
Outstanding
Recorded
Investment
    
Post-
Modification
Outstanding
Recorded
Investment
  
                                   
Commercial business
  
-
  
$
-
  
$
-
  
2
  
$
310
  
$
270
  
Commercial real estate
  
1
    
344
    
333
  
1
    
4,525
    
4,330
  
Multi-family
  
-
    
-
    
-
  
1
    
2,562
    
2,065
  
Consumer
  
-
    
-
    
-
  
1
    
43
    
41
  
Total
  
1
  
$
344
  
$
333
  
5
  
$
7,440
  
$
6,706
  

There were no TDRs recorded in the twelve months prior to December 31, 2014 and 2013 that defaulted in the nine months ended December 31, 2014 and 2013.

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 will be 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 would result in full repayment of the outstanding loan balance. Once any of these or other potential sources of repayment are exhausted, the impaired portion of the loan is charged-off, unless an updated valuation of the collateral reveals no impairment. 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.

9. 
GOODWILL

Goodwill and intangibles generally arise from business combinations accounted for under the purchase method. Goodwill and other intangibles deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment not less than annually. The Company has one reporting unit, the Bank, for purposes of computing goodwill.

The Company performed an impairment assessment as of October 31, 2014 and determined that no impairment of the goodwill asset exists. The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value is less than its carrying value, the Company would be required to progress to the second step. In the second step, the Company calculates the implied fair value of goodwill. The GAAP standards with respect to goodwill require that the Company compare the implied fair value of goodwill to the carrying amount of goodwill on the Company’s balance sheet. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment, as no assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. The results of the Company’s step one test indicated that the reporting unit’s fair value was greater than its carrying value and therefore a step two analysis was not required; however, no assurance can be given that the Company’s goodwill will not be written down in future periods.

10.  
FEDERAL HOME LOAN BANK ADVANCES

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

   
December 31,
2014
    
March 31,
2014
  
Federal Home Loan Bank advances
$
2,100
  
$
-
  
Weighted average interest rate:
  
0.34
%
  
-
%


 
17
 

11.  
JUNIOR SUBORDINATED DEBENTURES

At December 31, 2014, the Company had two wholly-owned subsidiary grantor trusts that were established for the purpose of issuing trust preferred securities and common securities. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each 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 deferred period, distributions on the corresponding trust preferred securities is also deferred. Beginning in the first quarter of fiscal 2011, the Company elected to defer regularly scheduled interest payments on its outstanding $22.7 million aggregate principal amount of the Debentures. During the quarter-ended December 31, 2014, the Company paid the entire $4.0 million of interest deferred on the Debentures and the trust preferred securities holders received payment of their deferred distribution.

The Debentures issued by the Company to the grantor trusts, totaling $22.7 million, are reflected in the Consolidated Balance Sheets in the liabilities section, under the caption “junior subordinated debentures.” The common securities issued by the grantor trusts were purchased by the Company, and the Company’s investment in the common securities of $681,000 at December 31, 2014 and March 31, 2014, is included in prepaid expenses and other assets in the Consolidated Balance Sheets. The Company records interest expense on the Debentures in the Consolidated Statements of Income.

The following table is a summary of the terms of the Debentures at December 31, 2014 (in thousands):

Issuance Trust
  
Issuance
Date
    
Amount
Outstanding
  
Rate
Type
  
Initial
Rate
  
Current
Rate
  
Maturing
Date
                           
Riverview Bancorp Statutory Trust I
  
12/2005
  
$
7,217
  
Variable (1)
  
5.88
%
1.60
%
3/2036
Riverview Bancorp Statutory Trust II
  
06/2007
    
15,464
  
Variable (2)
  
7.03
%
1.59
%
9/2037
       
$
22,681
                
                           
(1) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.36%
                           
(2) The trust preferred securities reprice quarterly based on the three-month LIBOR plus 1.35%

12.  
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component for the periods indicated (in thousands):

   
Unrealized Gains and Losses on
Available for Sale Securities (1)
  
   
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  
   
2014
    
2013
    
2014
    
2013
  
                         
Beginning Balance
   $ (212 )   $ (526 )   $ (647 )   $ (1,013 )
                                 
Other comprehensive income (loss)
     531       (149 )     966       338  
                                 
Amounts reclassified from accumulated other comprehensive income (loss) (2)
     (104 )     -       (104 )     -  
                                 
Net current-period other comprehensive income (loss)
     427       (149 )     862       338  
                                 
Ending Balance
   $ 215     $ (675 )   $ 215     $ (675 )
                                 
(1) All Amounts are net of tax. Amounts in parenthesis indicate debits.
                                
(2) See following table for details about reclassifications.
                                


 
18
 



The following table presents details regarding the reclassifications from accumulated other comprehensive income for the periods indicated (in thousands):

   
Unrealized gain and losses on
available for sale securities
    
 
 
Three Months Ended
December 31,
  
 
Nine Months Ended
December 31,
  
Affected Line Item in the
Consolidated Statement
   
2014
    
2013
    
2014
    
2013
  
of Income
                           
Investment securities and mortgage-backed securities gains
$
158
  
$
-
  
$
158
  
$
-
  
Other non-interest income
Income tax expense
  
(54
)
  
-
    
(54
)
  
-
  
Provision for income taxes
Securities gains, net of tax
$
104
  
$
-
  
$
104
  
$
-
    

13.  
FAIR VALUE MEASUREMENT

Accounting guidance regarding fair value measurements defines fair value and establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  The following definitions describe the categories used in the tables presented under fair value measurement.

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

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

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

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

The following table presents assets that are measured at fair value on a recurring basis at the dates indicated (in thousands):
     
    
Fair value measurements using
December 31, 2014
Fair value
  
Quoted prices in
active markets for
identical assets
(Level 1)
  
Other
observable
inputs
(Level 2)
  
Significant
unobservable
inputs
(Level 3)
               
Investment securities available for sale:
                      
Trust preferred
$
1,860
  
$
-
  
$
-
  
$
1,860
Agency securities
  
15,290
    
-
    
15,290
    
-
Mortgage-backed securities available for sale:
                      
Real estate mortgage investment conduits
  
23,804
    
-
    
23,804
    
-
Mortgage-backed securities
  
71,747
    
-
    
71,747
    
-
Other mortgage-backed securities
  
5,665
    
-
    
5,665
    
-
Total recurring assets measured at fair value
$
118,366
  
$
-
  
$
116,506
  
$
1,860

March 31, 2014
              
               
Investment securities available for sale:
                      
Trust preferred
$
1,903
  
$
-
  
$
-
  
$
1,903
Agency securities
  
21,491
    
-
    
21,491
    
-
Mortgage-backed securities available for sale:
                      
Real estate mortgage investment conduits
  
7,150
    
-
    
7,150
    
-
Mortgage-backed securities
  
65,413
    
-
    
65,413
    
-
Other mortgage-backed securities
  
6,012
    
-
    
6,012
    
-
Total recurring assets measured at fair value
$
101,969
  
$
-
  
$
100,066
  
$
1,903

 
19
 
The following tables present a reconciliation of assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated (in thousands). There were no transfers of assets in to or out of Level 1, 2 or 3 for the nine months ended December 31, 2014 and 2013.

   
For the Nine
Months Ended
December 31,
2014
    
For the Nine
Months Ended
December 31,
2013
  
   
Available for
sale securities
    
Available for
sale securities
  
             
Beginning balance
$
1,903
  
$
1,238
  
Transfers in to Level 3
  
-
    
-
  
Included in earnings (1)
  
-
    
-
  
Included in other comprehensive income
  
(43
)
  
683
  
Ending balance
$
1,860
  
$
1,921
  
             
(1) Included in other non-interest income
            

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

Investments and Mortgage-Backed Securities – Investments and mortgage-backed securities available-for-sale are included within Level 1 of the hierarchy when quoted prices in an active market for identical assets are available. The Company uses a third party pricing service to assist the Company in determining the fair value of its Level 2 securities, which incorporates pricing models and/or quoted prices of investment securities with similar characteristics. The Company’s Level 3 assets consist of a single pooled trust preferred security.

For Level 2 securities, the independent pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data from market research publications. Investments securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. The Company’s third-party pricing service has established processes for us to submit inquiries regarding quoted prices. The Company’s third-party pricing service will review the inputs to the evaluation in light of any new market data presented by us. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis.

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

The Company has determined that the market for its collateralized debt obligation secured by a pool of trust preferred pooled securities was inactive. This determination was made by the Company after considering the last known trade date for this specific security, the low number of transactions for similar types of securities, the low number of new issuances for similar securities, the increased implied liquidity risk premium for similar securities, the lack of information that is released publicly and discussions with third-party industry analysts. Due to the inactivity in the market, observable market data was not readily available for all significant inputs for this security. Accordingly, the trust preferred pooled security was classified as Level 3 in the fair value hierarchy. The Company utilized observable inputs where available, unobservable data and modeled the cash flows adjusted by an appropriate liquidity and credit risk adjusted discount rate using an income approach valuation technique in order to measure the fair value of the security. Significant unobservable inputs were used that reflect the Company’s assumptions of what a market participant would use to price the security. Significant unobservable inputs included selecting an appropriate discount rate, default rate and repayment assumptions. The Company estimated the discount rate by comparing rates for similarly rated corporate bonds, with additional consideration given to market liquidity. The default rates and repayment assumptions were estimated based on the individual issuer’s financial conditions, historical repayment information, as well as the Company’s future expectations of the capital markets.

 
20
 
The following table represents certain loans and real estate owned (“REO”) which were marked down to their fair value using fair value measures during the nine months ended December 31, 2014. The following are assets that are measured at fair value on a nonrecurring basis (in thousands).

     
    
Fair value measurements using
December 31, 2014
Fair value
  
Quoted prices in
active markets for
identical assets
(Level 1)
  
Other observable inputs
(Level 2)
  
Significant
unobservable
inputs
(Level 3)
       
    
  
    
  
Impaired loans
$
3,426
  
$
-
  
$
-
  
$
3,426
Real estate owned
  
1,193
    
-
    
-
    
1,193
Total nonrecurring assets measured at fair value
$
4,619
  
$
-
  
$
-
  
$
4,619

The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a nonrecurring basis at December 31, 2014:

   
Valuation
technique
  
Significant unobservable inputs
  
Range (1)
             
Impaired loans
  
Appraised value
  
Adjustment for market conditions
  
0%
             
Real estate owned
  
Appraised value
  
Adjustment for market conditions
  
0%
(1) There were no adjustments to appraised values at December 31, 2014.

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

Impaired loans – A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. For information regarding the Company’s method for estimating the fair value of impaired loans, see Note 8 – Allowance for Loan Losses.

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

Impaired loans are reviewed and evaluated quarterly for additional impairment and adjusted accordingly, based on the same factors identified above. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.

Real estate owned – REO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. REO is recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write downs based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance for loan losses. At acquisition date, any write ups, where the fair value less estimated costs to sell exceeds the loan basis, are first recovered through the allowance for loan losses if there was a prior charge-off and then applied to any outstanding accrued interest. If no prior charge-off or accrued interest is present, the amount is recorded as gain on transfer of REO.

Management considers third party appraisals in determining the fair value of particular properties. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and include consideration for variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions.

Management periodically reviews REO to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any additional write-downs based on re-evaluation of the property fair value are charged to non-interest expense. Because of the high degree of judgment required in estimating the fair value of REO and because of the relationship between fair value and general economic conditions, we consider the fair value of REO to be highly sensitive to changes in market conditions.

 
21
 
14.  
NEW ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure”. The ASU clarifies when a creditor would be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that all or a portion of the loan would be derecognized and the real estate property recognized. Under the guidance, a consumer loan collateralized by residential real estate should be reclassified to other real estate owned when (1) the creditor obtains legal title to the residential property or (2) the borrower conveys all interest in the property to the creditor to satisfy the loan by completing a deed in lieu of foreclosure or similar agreement. In addition, an entity is required to disclose the amount of residential real estate meeting the conditions above, and the recorded investment in consumer mortgage loans secured by residential real estate that are in the process of foreclosure. ASU 2014-04 is effective for annual and interim reporting periods within those annual periods, beginning after December 15, 2014. Adoption of the new guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment.” The ASU clarifies and improves disclosures when a disposal of a component of an entity or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. ASU 2014-08 is effective for annual and interim reporting periods within those annual periods, beginning after December 15, 2014. Adoption of the new guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers." This implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for annual and interim reporting periods within those annual periods, beginning after December 15, 2016. Adoption of the new guidance is not expected to have a significant impact on the Company's consolidated financial statements.
 
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern." This ASU provides guidance in connection with preparing financial statements for each annual and interim reporting period, that an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for annual periods after December 15, 2016 and for annual periods and interim periods thereafter. Adoption of the new guidance is not expected to have a significant impact on the Company's consolidated financial statements.
 
 
 
 
22
 

15.  
FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is made in accordance with applicable accounting standards. The Company, using available market information and appropriate valuation methodologies, has determined the estimated fair value amounts. However, considerable judgment is necessary to interpret market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in the future. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

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

     
Quoted prices
in active
markets for
identical assets
  
Other
observable
inputs
  
Significant
unobservable
inputs
      
December 31, 2014
Carry value
  
(Level 1)
  
(Level 2)
  
(Level 3)
    
Fair value
                             
Assets:
                            
Cash
$
21,981
  
$
21,981
  
$
-
  
$
-
  
$
21,981
Certificates of deposit held for investment
  
27,214
    
-
    
27,408
    
-
    
27,408
Investment securities available for sale
  
17,150
    
-
    
15,290
    
1,860
    
17,150
Mortgage-backed securities held to maturity
  
88
    
-
    
90
    
-
    
90
Mortgage-backed securities available for sale
  
101,216
    
-
    
101,216
    
-
    
101,216
Loans receivable, net
  
567,398
    
-
    
-
    
524,376
    
524,376
Loans held for sale
  
724
    
-
    
724
    
-
    
724
Federal Home Loan Bank stock
  
6,120
    
-
    
6,120
    
-
    
6,120
                             
Liabilities:
                            
Demand – savings deposits
  
548,301
    
548,301
    
-
    
-
    
548,301
Time deposits
  
141,029
    
-
    
140,681
    
-
    
140,681
Federal Home Loan Bank advances
  
2,100
    
-
    
2,100
    
-
    
2,100
Junior subordinated debentures
  
22,681
    
-
    
-
    
10,255
    
10,255
     
    
        
March 31, 2014
                    
                             
Assets:
                            
Cash
$
68,577
  
$
68,577
  
$
-
  
$
-
  
$
68,577
Certificates of deposit held for investment
  
36,925
    
-
    
37,176
    
-
    
37,176
Investment securities available for sale
  
23,394
    
-
    
21,491
    
1,903
    
23,394
Mortgage-backed securities held to maturity
  
101
    
-
    
104
    
-
    
104
Mortgage-backed securities available for sale
  
78,575
    
-
    
78,575
    
-
    
78,575
Loans receivable, net
  
520,937
    
-
    
-
    
480,454
    
480,454
Loans held for sale
  
1,024
    
-
    
1,024
    
-
    
1,024
Federal Home Loan Bank stock
  
6,744
    
-
    
6,744
    
-
    
6,744
                             
Liabilities:
                            
Demand – savings deposits
$
527,813
    
527,813
    
-
    
-
    
527,813
Time deposits
  
162,253
    
-
    
162,020
    
-
    
162,020
Junior subordinated debentures
  
22,681
    
-
    
-
    
11,233
    
11,233

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

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

Cash – Fair value approximates the carrying amount.

Certificates of Deposit held for investment – The fair value of certificates of deposit with stated maturity was based on the discounted value of contractual cash flows. The discount rate was estimated using rates currently available in the local market.

 
23
 
Investments and Mortgage-Backed Securities – Fair values were based on quoted market rates and dealer quotes. The fair value of the trust preferred investment was determined using a discounted cash flow method (see also Note 13 – Fair Value Measurement).

Loans Receivable and Loans Held for Sale – Loans were priced using a discounted cash flow analysis. The fair value of loans held for sale was based on the loans carrying value as the agreements to sell these loans are short term fixed rate commitments and no material difference between the carrying value is likely.

Federal Home Loan Bank stock – The carrying amount approximates the estimated fair value of this investment.

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

Federal Home Loan Bank Advances – The fair value of FHLB advances was based on the carrying value as the advances are overnight (short-term) advances.

Junior Subordinated Debentures – The fair value of the Debentures was based on the discounted cash flow method. Management believes that the discount rate utilized is indicative of those that would be used by market participants for similar types of debentures.

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

16.  
COMMITMENTS AND CONTINGENCIES

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies and is required in instances where the Company deems necessary.

Significant off-balance sheet commitments at December 31, 2014 are listed below (in thousands):

   
Contract or
Notional Amount
Commitments to originate loans:
    
       Adjustable-rate
$
23,840
       Fixed-rate
  
6,734
Standby letters of credit
  
791
Undisbursed loan funds, and unused lines of credit
  
75,354
Total
$
106,719

At December 31, 2014, the Company had firm commitments to sell $3.1 million of residential loans to the FHLMC. Typically, these agreements are short term fixed rate commitments and no material gain or loss is likely.

Other Contractual Obligations.  In connection with certain asset sales, the Company typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Company may have an obligation to repurchase the assets or indemnify the purchaser against loss.  At December 31, 2014, loans under warranty totaled $117.2 million, which substantially represents the unpaid principal balance of the Company’s loans serviced for FHLMC. The Company believes that the potential for loss under these arrangements is remote.  Accordingly, no contingent liability has been recorded in the consolidated financial statements.

The Company is party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect, if any, on the Company’s financial position, results of operations and cash flows.
 
 
24
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain financial information determined by methods other than in accordance with GAAP. These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company’s performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 34% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Critical Accounting Policies

Critical accounting policies and estimates are discussed in our 2014 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies.” That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company’s critical accounting policies and estimates as compared to the disclosure contained in the Company’s 2014 Form 10-K.

Executive Overview

As a progressive, community-oriented financial services company, the Company emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington and Multnomah and Marion counties of Oregon as its primary market area. The counties of Multnomah, Clark and Skamania are part of the Portland metropolitan area as defined by the U.S. Census Bureau. 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, real estate construction, residential real estate and other consumer loans. The Company’s strategy over the past several years has been to control balance sheet growth, including the targeted reduction of residential construction related loans, in order to improve its regulatory capital ratios. The Company’s loan portfolio totaled $567.4 million at December 31, 2014 compared to $520.9 million at March 31, 2014.

Most recently, the Company’s primary focus has been on increasing commercial business loans and owner occupied commercial real estate loans with a specific focus on medical professionals and the medical industry. Beginning in 2014, the Company began purchasing 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 earned on its cash or short-term investments. These indirect automobile loans were originated through a single dealership group located outside the Company’s primary market area. The collateral for these loans is comprised of a mix of used automobiles. These loans are purchased with servicing retained by the seller. At December 31, 2014, the Company had $37.5 million in purchased automobile loans; at that date, three of these loans totaling $44,000 were on non-accrual status.

The Bank’s subsidiary, RAMCorp, a trust and financial services company located in downtown Vancouver, Washington, provides full-service brokerage activities, trust and asset management services. The Bank’s Business and Professional Banking Division, with two lending offices in Vancouver and one in Portland, offers commercial and business banking services.

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

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 and commercial real estate loans in its loan portfolio. Significant portions of our new loan originations carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate mortgages.

At December 31, 2014, checking accounts totaled $251.9 million, or 36.5% of our total deposit mix compared to $223.0 million or 32.4% a year ago. Our strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management through RAMCorp 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
 
 
25
 
market share through our 17 branches, including ten in Clark County, two in the Portland metropolitan area and three lending centers, including our most recently opened full-service branch in Gresham, Oregon.

Economic conditions in the Company’s market areas have continued to improve from the recent recessionary downturn; however, the pace of recovery has been modest and uneven and ongoing stress in the economy will likely continue to be challenging going forward. According to the Washington State Employment Security Department, unemployment in Clark County increased to 7.3% at November 30, 2014 compared to 6.9% at March 31, 2014. According to the Oregon Employment Department, unemployment in Portland remained constant at 6.2% at both November 30, 2014 and March 31, 2014. According to the Regional Multiple Listing Services (“RMLS”), inventory levels in Portland, Oregon have decreased to 2.3 months at December 31, 2014 compared to 3.1 months at March 31, 2014. Inventory levels in Clark County have decreased to 3.4 months at December 31, 2014 compared to 4.6 months at March 31, 2014. According to the RMLS, closed home sales in Clark County increased 13.0% and 9.7% during December 2014 compared to March 2014 and December 2013, respectively. Closed home sales in Portland increased 20.6% and 25.6% during December 2014 compared to March 2014 and December 2013, respectively. The Company has also seen an increase in sales activity for building lots during the past twelve months. Commercial real estate leasing activity in the Portland/Vancouver market area has performed better than the residential real estate market; however, it is generally affected by a slow economy later than other indicators. According to Norris Beggs Simpson, commercial vacancy rates in Clark County and Portland, Oregon were approximately 11.9% and 13.5%, respectively, as of December 31, 2014 compared to 10.8% and 15.2%, respectively, at December 31, 2013.

Operating Strategy

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

Focusing on Asset Quality. The Company is focused on monitoring existing performing loans, resolving nonperforming loans and selling foreclosed assets. The Company has aggressively sought to reduce its level of nonperforming assets through write-downs, collections, modifications and sales of nonperforming loans and real estate owned. The Company has taken proactive steps to resolve its nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with borrowers when appropriate, and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss than foreclosure. In connection with the downturn in real estate markets, the Company applied more conservative and stringent underwriting practices to new loans, including, among other things, increasing the amount of required collateral or equity requirements, reducing loan-to-value ratios and increasing debt service coverage ratios. Nonperforming assets decreased $12.4 million to $9.3 million at December 31, 2014 compared to $21.8 million at March 31, 2014. However, there can be no assurance that the ongoing economic conditions affecting our borrowers will not result in future increases in nonperforming and classified loans.

Improving Earnings by Expanding Product Offerings. The Company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate and commercial loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, while maintaining compliance with its heightened regulatory capital requirements. The Company also intends to selectively add additional products to further diversify revenue sources and to capture more of each customer’s banking relationship by cross selling loan and deposit products and additional services to Bank customers, including services provided through RAMCorp to increase its fee income. Assets under management by RAMCorp totaled $376.7 million and $359.7 million at December 31, 2014 and March 31, 2014, respectively.

The Company continuously reviews new products and services to provide its customers more financial options. All new technology and services are generally reviewed for business development and cost saving purposes. The Bank has implemented remote check capture at all of its branches and for selected customers of the Bank. The Company continues to experience growth in customer use of its online banking services, which allows customers to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying. The Company also upgraded its online banking product for consumer customers, providing consumer customers greater flexibility and convenience in conducting their online banking. The Company’s online service has also enhanced the delivery of cash management services to business customers. The Company introduced its mobile banking application during the second fiscal quarter of 2013 to further allow flexibility and convenience to its customers related to their banking needs. During June 2013, the Company also implemented a new core banking platform that enabled the Company to better serve its customer base. The Company also participates in an internet deposit listing service which allows the Company to post time deposit rates on an internet site where institutional investors have the ability to deposit funds with the Company. The Company does not currently have any internet based deposits; however, the Company will continue to have accessibility to these funds in the future. Furthermore, the Company may utilize the internet deposit listing service to purchase certificates of deposit at other financial institutions. The Company also offers Insured Cash Sweep (ICS™), a reciprocal money market product, to its customers along with the Certificate of Deposit Account Registry Service (CDARS™) program which allows customers access to FDIC insurance on deposits exceeding the $250,000 FDIC insurance limit.
 
 
26
 
Attracting Core Deposits and Other Deposit Products. The Company’s strategic focus is to emphasize total relationship banking with its customers to internally fund its loan growth.  The Company has reduced its reliance on other wholesale funding sources, including FHLB and FRB advances, by focusing on the continued growth of core customer deposits. The Company believes that a continued focus on customer relationships will help to increase the level of core deposits and locally-based retail certificates of deposit. In addition to its retail branches, the Company maintains technology-based products, such as personal financial management, business cash management, and business remote deposit products, that enable it to compete effectively with banks of all sizes. Core branch deposits (comprised of all demand, savings, interest checking accounts and all time deposits but excludes wholesale-brokered deposits, trust account deposits, Interest on Lawyer Trust Accounts (“IOLTA”), public funds and Internet based deposits) increased $6.6 million during the nine months ended December 31, 2014. The Company had $2.1 million in outstanding advances from the FHLB at December 31, 2014. The Company had no outstanding advances from the FRB at December 31, 2014.

Continued Expense Control. Management has undertaken several initiatives to reduce non-interest expense and continues to make it a priority to identify cost savings opportunities throughout all aspects of the Company’s operations, including forming a cost saving committee whose mission is to find additional cost saving opportunities at the Company. The Company has instituted expense control measures such as cancelling certain projects and capital purchases, and reducing travel and entertainment expenditures. In October 2014, the Company closed one of its branches as a result of its failure to meet the Company’s required growth and profitability standards. This was an in-store branch located in Portland Oregon. The Company expects minimal impact to its customers and deposit totals due to this branch’s proximity to its Gresham, Oregon branch which opened in the summer of 2012.

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

Disciplined Franchise Expansion.  The Company believes opportunities currently exist within its market area to grow its franchise. The Company anticipates organic growth as the local economy and loan demand strengthens, through its marketing efforts and as a result of the opportunities being created as a result of the consolidation of financial institutions occurring in its market area. The Company may also seek to expand its franchise through the selective acquisition of individual branches, loan purchases and whole bank transactions that meet its investment and market objectives. The Company expects to gradually expand its operations further in the Portland, Oregon metropolitan area which has a population of approximately two million people. The Company will continue to be disciplined as it pertains to future expansion focusing on the Pacific Northwest markets it knows and understands.

Loan Composition

The following table sets forth the composition of the Company’s commercial and construction loan portfolios based on loan purpose at the dates indicated.

   
Commercial
Business
    
Other Real
Estate
Mortgage
    
Real Estate
Construction
    
Commercial &
Construction
Total
December 31, 2014
(in thousands)
                       
Commercial business
$
82,284
  
$
 -
  
$
 -
  
$
82,284
Commercial construction
  
-
    
-
    
26,051
    
26,051
Office buildings
  
-
    
81,882
    
-
    
81,882
Warehouse/industrial
  
-
    
45,089
    
-
    
45,089
Retail/shopping centers/strip malls
  
-
    
60,472
    
-
    
60,472
Assisted living facilities
  
-
    
1,855
    
-
    
1,855
Single purpose facilities
  
-
    
101,117
    
-
    
101,117
Land
  
-
    
15,062
    
-
    
15,062
Multi-family
  
-
    
31,553
    
-
    
31,553
One-to-four family construction
  
-
    
-
    
3,148
    
3,148
Total
$
82,284
  
$
337,030
  
$
29,199
  
$
448,513


 
27
 


   
Commercial
Business
    
Other Real
Estate
Mortgage
    
Real Estate
Construction
    
Commercial &
Construction
Total
March 31, 2014
  
                       
Commercial business
$
71,632
  
$
-
  
$
-
  
$
71,632
Commercial construction
  
-
    
-
    
15,618
    
15,618
Office buildings
  
-
    
77,476
    
-
    
77,476
Warehouse/industrial
  
-
    
45,632
    
-
    
45,632
Retail/shopping centers/strip malls
  
-
    
63,049
    
-
    
63,049
Assisted living facilities
  
-
    
7,585
    
-
    
7,585
Single purpose facilities
  
-
    
93,766
    
-
    
93,766
Land
  
-
    
16,245
    
-
    
16,245
Multi-family
  
-
    
21,128
    
-
    
21,128
One-to-four family construction
  
-
    
-
    
3,864
    
3,864
Total
$
71,632
  
$
324,881
  
$
19,482
  
$
415,995

Comparison of Financial Condition at December 31, 2014 and March 31, 2014

Cash, including interest-earning accounts, totaled $22.0 million at December 31, 2014 compared to $68.6 million at March 31, 2014. The Company has deployed a portion of its excess cash balances into mortgage-backed securities to earn higher yields than cash held in interest-earning accounts based on its asset/liability program and liquidity objectives in order to maximize earnings. As a part of this strategy, the Company also invests a portion of its excess cash in short-term certificates of deposit. All of the certificates of deposit held for investment are fully insured by the FDIC. At December 31, 2014, certificates of deposits held for investment totaled $27.2 million compared to $36.9 million at March 31, 2014.

Investment securities available for sale totaled $17.2 million and $23.4 million at December 31, 2014 and at March 31, 2014, respectively. The Company primarily purchases agency securities with maturities of five years or less. For the quarter ended December 31, 2014, the Company determined that none of its investment securities required an OTTI charge. For additional information, see Note 13 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Mortgage-backed securities available-for-sale totaled $101.2 million at December 31, 2014, compared to $78.6 million at March 31, 2014. The increase was due to a decision by the Company to invest additional excess cash into higher yielding mortgage-backed securities. During the nine month period ended December 31, 2014, the Company purchased $50.2 million of mortgage-backed securities. The Company also sold, during the three month period ended December 31, 2014, $14.2 million of mortgage-backed securities in order to fund some loan originations and to generate gains on sale by taking advantage of market interest rate fluctuations. Realized gains totaled $127,000 for both the three and nine months ended December 31, 2014. There were no sales of mortgage-backed securities for the three or nine months ended December 31, 2013. The Company primarily purchases a combination of mortgage-backed securities backed by government agencies (FHLMC, FNMA, SBA or GNMA).
 
Loans receivable, net, totaled $567.4 million at December 31, 2014, compared to $520.9 million at March 31, 2014. The increase was primarily due to $31.6 million in net organic loan growth, concentrated in the commercial business, commercial real estate and multi-family loan portfolios. The Company also had a $14.9 million net increase in purchased automobile loan pools. The Company has seen an increase in loan demand in its market areas and anticipates organic loan growth will increase during fiscal year 2015. A substantial portion of the loan portfolio is secured by real estate, either as primary or secondary collateral, located in the Company’s primary market areas. Risks associated with loans secured by real estate include decreasing land and property values, increases in interest rates, deterioration in local economic conditions, tightening credit or refinancing markets, and a concentration of loans within any one area. The Company has no option adjustable-rate mortgage (ARM), or teaser residential real estate loans in its portfolio.

Deposit accounts decreased $736,000 to $689.3 million at December 31, 2014, compared to $690.1 million at March 31, 2014. The Company had no wholesale-brokered deposits as of December 31, 2014 or March 31, 2014. Core branch deposits accounted for 96.7% of total deposits at December 31, 2014, compared to 95.7% at March 31, 2014. The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.

Shareholders’ Equity and Capital Resources

Shareholders' equity increased $3.9 million to $101.9 million at December 31, 2014 from $98.0 million at March 31, 2014. The increase was mainly attributable to net income of $3.0 million and other comprehensive income related to unrealized holding gain on securities available for sale of $862,000 for the nine months ended December 31, 2014.

 
28
 
The Bank is subject to various regulatory capital requirements administered by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. As of December 31, 2014, the Bank was “well capitalized” as defined under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain the minimum capital ratios set forth in the table below.

The Bank’s actual and required minimum capital amounts and ratios are as follows at the dates indicated (dollars in thousands):
   
Actual
    
“Adequately
Capitalized”
    
“Well Capitalized”
  
   
Amount
  
Ratio
    
Amount
  
Ratio
    
Amount
  
Ratio
  
December 31, 2014
                              
Total Capital:
                              
(To Risk-Weighted Assets)
$
91,891
  
15.59
%
$
47,144
  
8.0
%
$
70,716
  
12.0
%(1)
Tier 1 Capital:
                              
(To Risk-Weighted Assets)
  
84,468
  
14.33
    
23,572
  
4.0
    
35,358
  
6.0
  
Tier 1 Capital (Leverage):
                              
(To Adjusted Tangible Assets)
  
84,468
  
10.72
    
31,522
  
4.0
    
70,926
  
9.0
 (1)
Tangible Capital:
                              
(To Tangible Assets)
  
84,468
  
10.72
    
11,821
  
1.5
    
N/A
  
N/A
  

   
Actual
    
“Adequately
Capitalized”
    
“Well Capitalized”
  
   
Amount
  
Ratio
    
Amount
  
Ratio
    
Amount
  
Ratio
  
March 31, 2014
                              
Total Capital:
                              
(To Risk-Weighted Assets)
$
90,733
  
16.66
%
$
43,572
  
8.0
%
$
65,359
  
12.0
% (1)
Tier 1 Capital:
                              
(To Risk-Weighted Assets)
  
83,850
  
15.40
    
21,786
  
4.0
    
32,679
  
6.0
  
Tier 1 Capital (Leverage):
                              
(To Adjusted Tangible Assets)
  
83,850
  
10.71
    
31,320
  
4.0
    
70,469
  
9.0
 (1)
Tangible Capital:
                              
(To Tangible Assets)
  
83,850
  
10.71
    
11,745
  
1.5
    
N/A
  
N/A
  
      (1) The Bank agreed with the OCC to establish higher minimum capital ratios and to maintain a Tier 1 capital (leverage) ratio of not less than 9.0% and a total
         risked-based capital ratio of not less than 12.0% in order to be deemed “well capitalized”.

Liquidity

Liquidity is essential to our business. The objective of the Bank’s liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations.  Core relationship deposits are the primary source of the Bank’s liquidity. As such, the Bank focuses on deposit relationships with local consumer and business clients who maintain multiple accounts and services at the Bank.

In response to the recent adverse economic conditions, the Company has been, and will continue to work toward reducing the amount of nonperforming assets, managing balance sheet growth, reducing controllable operating costs, and augmenting deposits while striving to maximize secured borrowing facilities to manage liquidity and capital levels over the coming fiscal year. However, the Company’s inability to successfully implement its plans or further deterioration in economic conditions and real estate prices could have a material adverse effect on the Company’s liquidity.

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

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

 
29
 
The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations, deposit withdrawals and continuing operations, satisfy other financial commitments and take advantage of investment opportunities. During the nine months ended December 31, 2014, the Company used its sources of funds primarily to fund loan commitments, purchase investment securities and to fund deposit withdrawals. At December 31, 2014, cash and available for sale investments totaled $167.6 million, or 20.2% of total assets. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs; however, its primary liquidity management practice is to increase or decrease short-term borrowings, including FRB borrowings and FHLB advances. At December 31, 2014, the Bank had no advances from the FRB and a borrowing capacity of $42.8 million from the FRB. At December 31, 2014, borrowings from the FHLB of Seattle totaled $2.1 million and the Company had an available credit facility of $186.2 million. At December 31, 2014, the Company had sufficient unpledged collateral to allow it to utilize its available borrowing capacity from the FRB and the FHLB. Borrowing capacity may, however, fluctuate based on acceptability and risk rating of loan collateral and counterparties could adjust discount rates applied to such collateral at their discretion.

An additional source of wholesale funding includes brokered certificate of deposits. While the Company has utilized brokered deposits from time to time, the Company historically has not relied on brokered deposits to fund its operations. At December 31, 2014, the Company had no wholesale-brokered deposits. The Company also participates in the CDARS and ICS deposit products, which allows the Company to accept deposits in excess of the FDIC insurance limit for that depositor and obtain “pass-through” insurance for the total deposit. The Bank’s reciprocal CDARS and ICS balances were $28.7 million, or 4.2% of total deposits at December 31, 2014 compared to $38.3 million, or 5.6% of total deposits at March 31, 2014. Although the FDIC permanently raised the insurance limit to $250,000, demand for CDARS deposits remains strong with continued renewals of existing CDARS deposits and the opening of new accounts. In addition, the Bank is enrolled in an internet deposit listing service. Under this listing service, the Bank may post time deposit rates on an internet site where institutional investors have the ability to deposit funds with the Bank. The Company does not currently have any internet based deposits; however, the Company will continue to have accessibility to these funds in the future. The combination of all the Company’s funding sources, gives the Company available liquidity of $492.9 million, or 59.5% of total assets at December 31, 2014.

The Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution.

At December 31, 2014, the Company had total commitments of $106.7 million, which includes commitments to extend credit of $30.6 million, unused lines of credit and undisbursed balances of $75.4 million and standby letters of credit totaling $791,000. The Company anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposits that are scheduled to mature in less than one year totaled $92.3 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Offsetting these cash outflows are scheduled loan maturities of less than one year totaling $69.2 million.

Sources of capital and liquidity for the Company include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice.

Asset Quality

Nonperforming assets, consisting of nonperforming loans and REO, totaled $9.3 million or 1.13% of total assets at December 31, 2014 compared to $21.8 million or 2.64% of total assets at March 31, 2014.

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

 
December 31, 2014
    
March 31, 2014
   
Number
of Loans
    
Balance
      
Number
of Loans
    
Balance
                         
Commercial business
  
1
  
$
96
      
4
  
$
452
Commercial real estate
  
5
    
3,003
      
8
    
8,067
Land
  
1
    
800
      
1
    
800
Multi-family
  
2
    
2,290
      
1
    
2,014
Consumer
  
11
    
1,540
      
9
    
2,729
Total
  
20
  
$
7,729
      
23
  
$
14,062

The Company has continued to focus on managing the residential construction and land acquisition and development portfolios. At December 31, 2014, the Company’s residential construction and land acquisition and development loan portfolios were $3.1 million and $15.1 million, respectively compared to $3.9 million and $16.2 million, respectively at March 31, 2014. At December 31, 2014 and March 31, 2014, there were no nonperforming loans in the residential
 
 
30
 
construction loan portfolio. The percentage of nonperforming loans in the land acquisition and development portfolio at December 31, 2014 and March 31, 2014 was 5.31% and 4.92%, respectively. For the nine months ended December 31, 2014, there were no charge-offs or recoveries in the residential construction portfolio. There were no charge-offs in the land development portfolio; however, recoveries in the land development portfolio totaled $220,000 for the nine months ended December 31, 2014.

REO totaled $1.6 million at December 31, 2014 compared to $7.7 million at March 31, 2014. During the nine months ended December 31, 2014, REO sales totaled $6.2 million, valuation write-downs totaled $715,000 and transfers to REO totaled $804,000. The $1.6 million balance of REO is comprised of residential building lots totaling $769,000, land development property totaling $502,000 and commercial real estate property totaling $333,000. All of these properties are located in Washington and Oregon.

The allowance for loan losses was $11.7 million or 2.02% of total loans at December 31, 2014 compared to $12.6 million or 2.35% of total loans at March 31, 2014. The decrease in the balance of the allowance for loan losses at December 31, 2014 reflects the continuing trend of lower levels of delinquent and classified loans, decreased charge-offs and increased recoveries, as well as stabilizing real estate values which began in fiscal 2014, which resulted in the Company recording a recapture of loan losses of $1.1 million for the nine months ended December 31, 2014.

The coverage ratio of allowance for loan losses to nonperforming loans was 151.39% at December 31, 2014 compared to 89.25% at March 31, 2014. At December 31, 2014, the Company identified $7.2 million or 92.53% of its nonperforming loans, as impaired and performed a specific valuation analysis on each loan resulting in no specific reserves being required for these impaired loans. Management considers the allowance for loan losses to be adequate at December 31, 2014 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 further decline in local economic conditions, results of examinations by the Company’s regulators, or other factors could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses will be adequate or that substantial increases will not be necessary should the quality of any loans deteriorate or should collateral values further decline as a result of the factors discussed elsewhere in this document. For further information regarding the Company’s impaired loans and allowance for loan losses, see Note 8 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Troubled debt restructurings (“TDRs”) are loans where 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, 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 using the original note rate, except when the loan is collateral dependent. In these cases, the estimated fair value of the collateral and when applicable, less selling costs, are used.  Impairment is recognized as a specific component within the allowance for loan losses if the 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 December 31, 2014, the Company had TDRs totaling $22.2 million of which $16.8 million were on accrual status. However, all of the Company’s TDRs are paying as agreed except for two of the Company’s TDRs that defaulted since the loan was modified. The related amount of interest income recognized on TDRs was $437,000 for the nine months ended December 31, 2014.

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 were not, the policy exception qualifies as a concession, and 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.

 
31
 
The following table sets forth information regarding the Company’s nonperforming assets at the dates indicated.

   
December 31,
2014
    
March 31,
2014
  
   
(Dollars in thousands)
  
Loans accounted for on a non-accrual basis:
            
Commercial business
$
96
  
$
452
  
Other real estate mortgage
  
6,093
    
10,881
  
Consumer
  
1,540
    
2,729
  
Total
  
7,729
    
14,062
  
Accruing loans which are contractually
past due 90 days or more
  
-
    
-
  
Total nonperforming loans
  
7,729
    
14,062
  
REO
  
1,604
    
7,703
  
Total nonperforming assets
$
9,333
  
$
21,765
  
             
Foregone interest on non-accrual loans (1)
$
351
  
$
949
  
Total nonperforming loans to total loans
  
1.33
%
  
2.64
%
Total nonperforming loans to total assets
  
0.93
    
1.71
  
Total nonperforming assets to total assets
  
1.13
    
2.64
  
             
(1) Nine months ended December 31, 2014 and twelve months ended March 31, 2014

The composition of the Company’s nonperforming assets by loan type and geographical area is as follows at the dates indicated:

 
  
Northwest
Oregon
    
Other
Oregon
    
Southwest
Washington
    
Other
Washington
    
Other
    
Total
December 31, 2014
  
                                   
Commercial business
$
-
  
$
-
  
$
-
  
$
-
  
$
96
  
$
96
Commercial real estate
  
2,077
    
-
    
926
    
-
    
-
    
3,003
Land
  
-
    
800
    
-
    
-
    
-
    
800
Multi-family
  
-
    
1,933
    
357
    
-
    
-
    
2,290
Consumer
  
443
    
-
    
783
    
270
    
44
    
1,540
Total nonperforming loans
  
2,520
    
2,733
    
2,066
    
270
    
140
    
7,729
REO
$
374
  
$
-
  
$
1,185
  
$
45
    
-
    
1,604
Total nonperforming assets
$
2,894
  
$
2,733
  
$
3,251
  
$
315
  
$
140
  
$
9,333
   
March 31, 2014
  
                                   
Commercial business
$
-
  
$
-
  
$
452
  
$
-
  
$
-
  
$
452
Commercial real estate
  
2,194
    
-
    
5,873
    
-
    
-
    
8,067
Land
  
-
    
800
    
-
    
-
    
-
    
800
Multi-family
  
2,014
    
-
    
-
    
-
    
-
    
2,014
Consumer
  
395
    
-
    
2,065
    
269
    
-
    
2,729
Total nonperforming loans
  
4,603
    
800
    
8,390
    
269
    
-
    
14,062
REO
$
374
  
$
542
  
$
5,966
  
$
821
    
-
    
7,703
Total nonperforming assets
$
4,977
  
$
1,342
  
$
14,356
  
$
1,090
  
$
-
  
$
21,765

The composition of the land development and speculative construction loan portfolios by geographical area is as follows at the dates indicated:

   
Northwest
Oregon
    
Other
Oregon
    
Southwest
Washington
    
Other
    
Total
  
December 31, 2014
        
(in thousands)
        
                               
Land development
$
111
  
$
2,924
  
$
12,027
  
$
-
  
$
15,062
  
Speculative construction
  
-
    
-
    
2,190
    
204
    
2,394
  
Total land development and speculative construction
$
111
  
$
2,924
  
$
14,217
  
$
204
  
$
17,456
  
                   
March 31, 2014
                  
                               
Land development
$
2,676
  
$
1,184
  
$
12,385
  
$
-
  
$
16,245
  
Speculative construction
  
-
    
-
    
3,617
    
30
    
3,647
  
Total land development and speculative construction
$
2,676
  
$
1,184
  
$
16,002
  
$
30
  
$
19,892
  
 
 
 
32
 
Other loans of concern consist of loans where the borrowers have cash flow problems, or the collateral securing the respective loans may be inadequate. In either or both of these situations, the borrowers may be unable to comply with the present loan repayment terms, and the loans may subsequently be included in the non-accrual category. Management considers the allowance for loan losses to be adequate to cover the probable losses inherent in these and other loans.
 
The following table sets forth information regarding the Company’s other loans of concern at the dates indicated (dollars in thousands).

 
December 31, 2014
    
March 31, 2014
   
Number
of Loans
    
Balance
      
Number
of Loans
    
Balance
                         
Commercial business
  
8
  
$
577
      
15
  
$
7,967
Commercial real estate
  
9
    
9,190
      
11
    
11,771
Multi-family
  
1
    
13
      
1
    
14
Commercial construction
  
1
    
1,843
      
-
    
-
Total
  
19
  
$
11,623
      
27
  
$
19,752

At December 31, 2014 and March 31, 2014, loans delinquent 30 - 89 days were 0.44% and ­0.42%, respectively, of total loans. At December 31, 2014, the delinquency rate in the commercial business portfolio was 0.22% while the delinquency rate in the commercial real estate loan portfolio was 0.54%, comprised of one loan totaling $1.6 million. At that date, commercial real estate loans represented the largest portion of the loan portfolio at 50.15% of total loans and commercial business loans represented 14.21% of total loans. At December 31, 2014, the 30-89 days delinquency rate in the real estate one-to-four family loan portfolio was 0.74%.

Off-Balance Sheet Arrangements and Other Contractual Obligations

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

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

The Company has commitments to originate fixed and variable rate mortgage loans to customers. Because some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit include funds not disbursed, but committed to construction projects and home equity and commercial lines of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

For further information regarding the Company’s off-balance sheet arrangements and other contractual obligations, see Note 16 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Goodwill Valuation

Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. The Company has one reporting unit, the Bank, for purposes of computing goodwill. All of the Company’s goodwill has been allocated to this single reporting unit. The Company performs an annual review in the third quarter of each year, or more frequently if indications of potential impairment exist, to determine if the recorded goodwill is impaired. If the fair value exceeds the carrying value, goodwill at the reporting unit level is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and additional analysis must be performed to measure the amount of impairment loss, if any. The amount of impairment is determined by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.

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

 
33
 
The Company performed its annual goodwill impairment test during the quarter-ended December 31, 2014. The goodwill impairment test involves a two-step process. Step one of the goodwill impairment test estimates the fair value of the reporting unit utilizing the allocation of corporate value approach, the income approach and the market approach in order to derive an enterprise value of the Company. The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized as the value of a company from the perspective of a controlling interest and is generally higher than the widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transactional history. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a rate that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Assumptions used by the Company in its discounted cash flow model (income approach) included an annual revenue growth rate that approximated 8.5%, a net interest margin that approximated 4.1% and a return on assets that ranged from 0.60% to 1.11% (average of 0.86%). In addition to utilizing the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach was the discount rate of 15.2% utilized for our cash flow estimates and a terminal value estimated at 2.1 times the ending book value of the reporting unit. The Company used a build-up approach in developing the discount rate that included: an assessment of the risk free interest rate, the rate of return expected from publicly traded stocks, the industry the Company operates in and the size of the Company. The market approach estimates fair value by applying tangible book value multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting unit. In applying the market approach method, the Company selected eight publicly traded comparable institutions based on a variety of financial metrics (tangible equity, leverage ratio, return on assets, return on equity, net interest margin, nonperforming assets, net charge-offs, and reserves for loan losses) and other relevant qualitative factors (geographical location, lines of business, business model, risk profile, availability of financial information, etc.). After selecting comparable institutions, the Company derived the fair value of the reporting unit by completing a comparative analysis of the relationship between their financial metrics listed above and their market values utilizing a market multiple of 1.3 times tangible book value. The Company calculated a fair value of its reporting unit of $130.5 million using the corporate value approach, $135.5 million using the income approach and $134.7 million using the market approach, with a final concluded value of $135.0 million, with primary weight given to the market approach. The results of the Company’s step one test indicated that the reporting unit’s fair value was greater than its carrying value and therefore no impairment of goodwill exists at December 31, 2014.

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

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

Comparison of Operating Results for the Three and Nine Months Ended December 31, 2014 and 2013

Net Income. Net income for the three months ended December 31, 2014 and 2013 was $1.1 million, or $0.05 per diluted share, compared to $801,000, or $0.04 per diluted share, respectively. Net income for the nine months ended December 31, 2014 and 2013 was $3.0 million, or $0.13 per diluted share, compared to $2.8 million, or $0.12 per diluted share, respectively. The earnings for the three and nine months ended December 31, 2014 compared to the same prior year period reflects the improvement in net interest income. Furthermore, earnings improved for the nine months ended December 31, 2014 due to the reduction in non-interest expenses, primarily due to the decrease in REO expenses. In addition, net income for the nine month ended December 31, 2014 included a recapture of loan losses of $1.1 million compared to a recapture of loan losses of $2.5 million for the nine months ended December 31, 2013.

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

 
34
 
Net interest income for the three and nine months ended December 31, 2014 was $6.7 million and $19.8 million, respectively, representing a $690,000 and $1.5 million increase compared to the three and nine months ended December 31, 2013, respectively. The net interest margin for the three and nine months ended December 31, 2014 was 3.58% and 3.55%, respectively, compared to 3.29% and 3.39% for the three and nine months ended December 31, 2013, respectively. This increase was primarily the result of the increase in the average balance of loans receivable and short term investments as well as the decrease in average cost of interest bearing deposits.

The Company generally achieves better net interest margins in a stable or increasing interest rate environment as a result of the balance sheet being slightly asset interest rate sensitive. At December 31, 2014, 6.62% of our loan portfolio had adjustable (floating) interest rates. At December 31, 2014, $25.2 million, or 65.73% of our adjustable (floating) loan portfolio contained interest rate floors, below which the loan’s contractual interest rate may not adjust. The inability of these loans to adjust downward has contributed to increased income in the currently low interest rate environment; however, net interest income will be reduced in a rising interest rate environment until such time as the current rate exceeds these interest rate floors. At December 31, 2014, $25.2 million or 4.35% of the loans in the Company’s loan portfolio were at the floor interest rate of which $22.3 million or 88.69% had yields that would begin floating again once the Wall Street Journal Prime Rate increases at least 150 basis points. While the Company does not anticipate further significant reductions in market interest rates, further modest reductions in its deposit costs are expected due to decreases in its deposit rate offerings and as existing long-term deposits renew upon maturity and reprice at a lower rate. The amount and timing of these reductions is dependent on competitive pricing pressures, yield curve shape and changes in interest rate spread.

Interest Income. Interest income for the three and nine months ended December 31, 2014, was $7.2 million and $21.3 million, respectively, compared to $6.7 million and $20.3 million, respectively, for the same periods in the prior year. The increase was due primarily to the increase in the average balance of investment securities and mortgage-backed securities which resulted in an increase in interest income of $66,000 and $1.4 million, respectively for the nine months ended December 31, 2014 compared the same prior year period. This increase was offset by a decrease of interest income on loans of $234,000 for the nine months ended December 31, 2014 compared the same prior year period due primarily to the impact of loans repricing down to the current low interest rates.

The average balance of net loans increased $37.5 million and $23.5 million to $554.4 million and $548.0 million for the three and nine months ended December 31, 2014, respectively, from $516.9 million and $524.6 million for the same prior year periods, respectively. The average yield on net loans was 4.65% and 4.64% for the three and nine months ended December 31, 2014, respectively, compared to 4.85% and 4.91% for the same three and nine months in the prior year. The decrease in the average yield on net loans was primarily due to the impact of loans repricing downward in the current low interest rate environment and the lower yields on the purchased automobile loan pools. During the three and nine months ended December 31, 2014, the Company also reversed $2,000 and $15,000, respectively, of interest income on nonperforming loans compared to $7,000 and $149,000 for the same three and nine month period in the prior year.

Interest Expense. Interest expense decreased $160,000 and $504,000 to $485,000 and $1.5 million for the three and nine months ended December 31, 2014, respectively, compared to $645,000 and $2.0 million for the three and nine months ended December 31, 2013. The decrease in interest expense was primarily the result of declining deposit costs, due to the Company’s decision to further reduce its deposit rate offerings in light of the continued low interest rate environment, and to a lesser extent a decline in the average balance of higher costing certificates of deposit. The Company has continued to lower its deposit costs throughout the year on many of its deposit products. The weighted average interest rate on interest-bearing deposits decreased to 0.23% and 0.25% for the three and nine months ended December 31, 2014, respectively from 0.35% and 0.37% for the same respective periods in the prior year.
 
 
 

 
 
35
 
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest earned on average interest-earning assets and interest paid on average interest-bearing liabilities, resultant yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities and net interest margin.

 
Three Months Ended December 31,
 
2014
  
2013
 
Average
Balance
  
Interest and
Dividends
  
Yield/Cost
    
Average
Balance
  
Interest and
Dividends
  
Yield/Cost
  
             
(Dollars in thousands)
            
Interest-earning assets:
                                  
Mortgage loans
$
426,280
  
$
5,029
  
4.68
%
  
$
424,382
  
$
5,107
  
4.77
%
Non-mortgage loans
  
128,096
    
1,469
  
4.55
      
92,482
    
1,212
  
5.20
  
Total net loans (1)
  
554,376
    
6,498
  
4.65
      
516,864
    
6,319
  
4.85
  
                                   
Mortgage-backed securities (2)
  
117,023
    
520
  
1.76
      
23,584
    
88
  
1.48
  
Investment securities (2)
  
19,661
    
75
  
1.51
      
20,503
    
75
  
1.45
  
Daily interest-bearing assets
  
1,483
    
-
  
-
      
1,192
    
-
  
-
  
Other earning assets
  
51,808
    
110
  
0.84
      
165,800
    
191
  
0.46
  
Total interest-earning assets
  
744,351
    
7,203
  
3.84
      
727,943
    
6,673
  
3.64
  
                                   
Non-interest-earning assets:
                                  
Office properties and equipment, net
  
15,841
                
16,931
            
Other non-interest-earning assets
  
71,057
                
53,572
            
Total assets
$
831,249
              
$
798,446
            
                                   
Interest-bearing liabilities:
                                  
Regular savings accounts
$
72,462
    
18
  
0.10
    
$
61,616
    
23
  
0.15
  
Interest checking accounts
  
104,172
    
20
  
0.08
      
93,930
    
26
  
0.11
  
Money market deposit accounts
  
226,694
    
69
  
0.12
      
228,579
    
128
  
0.22
  
Certificates of deposit
  
144,001
    
215
  
0.59
      
172,127
    
319
  
0.74
  
Total interest-bearing deposits
  
547,329
    
322
  
0.23
      
556,252
    
496
  
0.35
  
                                   
Other interest-bearing liabilities
  
26,088
    
163
  
2.48
      
25,075
    
149
  
2.36
  
Total interest-bearing liabilities
  
573,417
    
485
  
0.34
      
581,327
    
645
  
0.44
  
                                   
Non-interest-bearing liabilities:
                                  
  Non-interest-bearing deposits
  
146,366
                
123,915
            
  Other liabilities
  
9,139
                
10,539
            
Total liabilities
  
728,922
                
715,781
            
Shareholders’ equity
  
102,327
                
82,665
            
Total liabilities and shareholders’ equity
$
831,249
              
$
798,446
            
Net interest income
      
$
6,718
              
$
6,028
      
Interest rate spread
            
3.50
%
              
3.20
%
Net interest margin
            
3.58
%
              
3.29
%
Ratio of average interest-earning assets to average interest-bearing liabilities
            
129.81
%
              
125.22
%
                                   
 
(1) Includes non-accrual loans.
 
(2) For purposes of the computation of average yield on investments available for sale, historical cost balances were utilized;
     therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity.
 


 
36
 
 

 
Nine Months Ended December 31,
 
2014
  
2013
 
Average
Balance
  
Interest and
Dividends
  
Yield/Cost
    
Average
Balance
  
Interest and
Dividends
  
Yield/Cost
  
             
(Dollars in thousands)
            
Interest-earning assets:
                                  
Mortgage loans
$
423,193
  
$
14,852
  
4.66
%
  
$
438,211
  
$
15,748
  
4.77
%
Non-mortgage loans
  
124,848
    
4,303
  
4.57
      
86,358
    
3,641
  
5.60
  
Total net loans (1)
  
548,041
    
19,155
  
4.64
      
524,569
    
19,389
  
4.91
  
                                   
Mortgage-backed securities (2)
  
104,370
    
1,508
  
1.92
      
13,144
    
156
  
1.58
  
Investment securities (2)
  
20,781
    
257
  
1.64
      
17,580
    
191
  
1.44
  
Daily interest-bearing assets
  
1,289
    
-
  
-
      
1,206
    
-
  
-
  
Other earning assets
  
65,470
    
359
  
0.73
      
159,875
    
532
  
0.44
  
Total interest-earning assets
  
739,951
    
21,279
  
3.82
      
716,374
    
20,268
  
3.76
  
                                   
Non-interest-earning assets:
                                  
Office properties and equipment, net
  
16,115
                
17,388
            
Other non-interest-earning assets
  
69,989
                
52,091
            
Total assets
$
826,055
              
$
785,853
            
                                   
Interest-bearing liabilities:
                                  
Regular savings accounts
$
69,693
    
53
  
0.10
    
$
58,268
    
66
  
0.15
  
Interest checking accounts
  
102,281
    
58
  
0.08
      
91,698
    
78
  
0.11
  
Money market deposit accounts
  
227,966
    
209
  
0.12
      
222,629
    
372
  
0.22
  
Certificates of deposit
  
151,339
    
704
  
0.62
      
177,182
    
1,021
  
0.76
  
Total interest-bearing deposits
  
551,279
    
1,024
  
0.25
      
549,777
    
1,537
  
0.37
  
                                   
Other interest-bearing liabilities
  
25,391
    
458
  
2.39
      
25,102
    
449
  
2.37
  
Total interest-bearing liabilities
  
576,670
    
1,482
  
0.34
      
574,879
    
1,986
  
0.46
  
                                   
Non-interest-bearing liabilities:
                                  
  Non-interest-bearing deposits
  
138,685
                
119,642
            
  Other liabilities
  
9,679
                
9,804
            
Total liabilities
  
725,034
                
704,325
            
Shareholders’ equity
  
101,021
                
81,528
            
Total liabilities and shareholders’ equity
$
826,055
              
$
785,853
            
Net interest income
      
$
19,797
              
$
18,282
      
Interest rate spread
            
3.48
%
              
3.30
%
Net interest margin
            
3.55
%
              
3.39
%
Ratio of average interest-earning assets to average interest-bearing liabilities
            
128.31
%
              
124.61
%
                                   
 
(1) Includes non-accrual loans.
 
(2) For purposes of the computation of average yield on investments available for sale, historical cost balances were utilized;
     therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity.
 

 
37
 
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the three and nine month periods ended December 31, 2014 compared to the three and nine month periods ended December 31, 2013. Variances that were insignificant have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change.

 
Three Months Ended December 31,
  
Nine Months Ended December 31,
 
2014 vs. 2013
  
2014 vs. 2013
                                       
 
Increase (Decrease) Due to
          
Increase (Decrease) Due to
        
             
Total
                
Total
  
             
Increase
                
Increase
  
(in thousands)
Volume
  
Rate
  
(Decrease)
    
Volume
  
Rate
  
(Decrease)
  
                                       
Interest Income:
                                      
Mortgage loans
$
22
  
$
(100
)
$
(78
)
  
$
(536
)
$
(360
)
$
(896
)
Non-mortgage loans
  
423
    
(166
)
  
257
      
1,417
    
(755
)
  
662
  
Mortgage-backed securities
  
412
    
20
    
432
      
1,311
    
41
    
1,352
  
Investment securities (1)
  
(3
)
  
3
    
-
      
38
    
28
    
66
  
Daily interest-bearing
  
-
    
-
    
-
      
-
    
-
    
-
  
Other earning assets
  
(181
)
  
100
    
(81
)
    
(412
)
  
239
    
(173
)
Total interest income
  
673
    
(143
)
  
530
      
1,818
    
(807
)
  
1,011
  
                                       
Interest Expense:
                                      
Regular savings accounts
  
4
    
(9
)
  
(5
)
    
12
    
(25
)
  
(13
)
Interest checking accounts
  
2
    
(8
)
  
(6
)
    
7
    
(27
)
  
(20
)
Money market deposit accounts
  
(1
)
  
(58
)
  
(59
)
    
9
    
(172
)
  
(163
)
Certificates of deposit
  
(46
)
  
(58
)
  
(104
)
    
(140
)
  
(177
)
  
(317
)
Other interest-bearing liabilities
  
6
    
8
    
14
      
5
    
4
    
9
  
Total interest expense
  
(35
)
  
(125
)
  
(160
)
    
(107
)
  
(397
)
  
(504
)
Net interest income
$
708
  
$
(18
)
$
690
    
$
1,925
  
$
(410
)
$
1,515
  
                                       
(1) Interest is presented on a fully tax-equivalent basis using a tax rate of 34%
                      

Provision for Loan Losses. The recapture of loan losses for the three and nine months ended December 31, 2014 was $400,000 and $1.1 million, respectively. This compares to no provision for loan losses for the three months ended December 31, 2013 and a recapture of loan losses of $2.5 million for the nine months ended December 31, 2013. The recapture of loan losses was primarily a result of a decrease in net charge-offs and the decline in the level of delinquent, nonperforming and classified loans, as well as the stabilization of real estate values in our market areas. Although real estate values and the economy in our market areas have recently improved, classified and nonperforming loans remain at higher levels compared to historical trends.

Net recoveries for the three and nine months ended December 31, 2014 were $100,000 and $200,000, respectively, compared to net recoveries of $352,000 and $905,000 for the three and nine months ended December 31, 2013, respectively. Annualized net recoveries to average net loans for the nine-month period ended December 31, 2014 was 0.05% compared 0.23% for the same period in the prior year. The net recoveries occurred primarily as a result of the decrease in nonperforming loans and stabilization of real estate values as well as an increase in recoveries on previously charged off loans. Nonperforming loans were $7.7 million at December 31, 2014, compared to $13.4 million at December 31, 2013. The ratio of allowance for loan losses to nonperforming loans was 151.39% at December 31, 2014 compared to 105.02% at December 31, 2013. See “Asset Quality” set forth above for additional information related to asset quality that management considers in determining the provision for loan losses.

Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of December 31, 2014, the Company had identified $24.0 million of impaired loans. Because the significant majority of the impaired loans are collateral dependent, nearly all of the specific allowances are calculated based on the fair value of the collateral. Of the total impaired loans, $21.1 million have no specific valuation allowance as their estimated collateral value is equal to or exceeds the carrying costs, which in some cases is the result of previous loan charge-offs. Charge-offs on these impaired loans totaled $533,000 from their original loan balance. The remaining $2.9 million have specific valuation allowances totaling $136,000.

Non-Interest Income. Non-interest income decreased $120,000 to $2.3 million for the three months ended December 31, 2014 compared to $2.4 million for the same prior year period. Non-interest income increased $180,000 to $6.7 million for the nine months ended December 31, 2014, compared to $6.5 million for the nine months ended December 31, 2013. The decrease of $120,000 for the three months ended December 31, 2014 compared to the same period in prior year was due to a decrease in gains on transfer of loans to real estate owned of $229,000 and a decrease in fees and service charges of $145,000. These decreases were offset by an increase in gains on sales of investment securities of $158,000 and an increase in asset management fees of $113,000. Asset management fees increased primarily as a result of an increase in assets under management as compared to the same period last year.

 
38
 
The $180,000 increase for the nine months ended December 31, 2014 compared to the same period in prior year was primarily a result of a $312,000 increase in asset management fees and a $109,000 increase in the cash surrender value of bank owned life insurance policies. These increases were offset by a decrease in fees and service charges of $41,000 and a decrease of $174,000 in gain on sale of loans held for sale, which was primarily due to the decrease in mortgage related activity as a result of an increase in mortgage interest rates which curtailed refinancing activity.

Non-Interest Expense. Non-interest expense remained relatively stable for the three months ended December 31, 2014 as compared to the same period in prior year at $7.6 million for both periods. Non-interest expense decreased $1.4 million to $23.1 million for the nine months ended December 31, 2014, compared to $24.5 million for the nine months ended December 31, 2013. Management continues to focus on managing controllable costs as the Company proactively adjusts to lower levels of real estate lending activity. REO expenses (which include operating costs and write-downs on property) decreased $1.5 million for the nine months ended December 31, 2014 primarily due to the overall decrease in REO balances at December 31, 2014 compared to December 31, 2013. Data processing expenses decreased $242,000 for the nine months ended December 31, 2014 compared to the same period in the prior year as a result of conversion related expenses in the prior year for the Company’s core operating system conversion. The Company’s FDIC insurance premiums also decreased $730,000 for the nine months ended December 31, 2014 compared to the same period in prior year reflecting the Bank’s improved financial condition. Offsetting these decreases was an increase in salaries and employee benefits of $1.3 million for the nine months ended December 31, 2014 compared to the same prior year period. The increase in salaries and employee benefits was due to an increase in staffing in the Company’s lending groups as well as the reinstatement of the Company’s incentive plans.

Income Taxes. The provision for income taxes was $587,000 and $1.5 million for the three and nine months ended December 31, 2014 compared to none and $16,000 for the three and nine months ended December 31, 2013. As of December 31, 2013, the Company carried a deferred tax asset valuation allowance against its deferred tax asset which resulted in the minimum tax expense incurred during the three and nine months ended December 31, 2013. The Company’s effective tax rate at December 31, 2014 remains lower than the statutory tax rate primarily as a result of non-taxable income generated from investments in bank owned life insurance. At March 31, 2014, the Company reversed its deferred tax asset valuation allowance related to the Company’s’ deferred tax assets as management deemed that it was no longer appropriate to carry a deferred tax asset valuation allowance as a result of changes in the factors considered by management when the Company initially established the valuation allowance. In making this conclusion, management considered, among other factors, the Company’s earnings during the past three years, including the Company’s recent financial performance, the improvement in the Company’s asset quality and financial condition, as well as projected earnings and the impact from the Company’s balance sheet restructure.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There has not been any material change in the market risk disclosures contained in the 2014 Form 10-K.

Item 4.  Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13(a) - 15(e) of the Securities Exchange Act of 1934) as of December 31, 2014 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as in effect on December 31, 2014 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934 is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In the quarter-ended December 31, 2014, the Company did not make any changes in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect these controls.

While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements attributable to error or fraud may occur and not be detected.
 
 
39
 
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Form 10-K for the year ended March 31, 2014.

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

                  None.

Item 3. Defaults Upon Senior Securities
 
                  Not applicable

Item 4. Mine Safety Disclosures
 
                  Not applicable

Item 5. Other Information
 
                  Not applicable
 
 
 
 

 
 
40
 
Item 6. Exhibits
 
(a)  
Exhibits:
  
     
  3.1  Articles of Incorporation of the Registrant (1) 
  3.2  Bylaws of the Registrant (1) 
  4  Form of Certificate of Common Stock of the Registrant (1) 
  10.1 
Form of Employment Agreement between the Company and the Bank and each of Patrick Sheaffer, Ronald A. Wysaske and Kevin J. Lycklama
  10.2 
Form of Change in Control Agreement between the Company and the Bank and each of Patrick Sheaffer, Ronald A. Wysaske and Kevin J. Lycklama
  10.3 Form of Employment Agreement between the Bank and John A. Karas (2) 
  10.4  Employee Severance Compensation Plan (3)
  10.5  Employee Stock Ownership Plan (4)
  10.6  1998 Stock Option Plan (5)
  10.7  2003 Stock Option Plan (6)
  10.8  Form of Incentive Stock Option Award Pursuant to 2003 Stock Option Plan (7)
  10.9  Form of Non-qualified Stock Option Award Pursuant to 2003 Stock Option Plan (7)
  10.10
Deferred Compensation Plan (8)
  11 
Statement recomputation of per share earnings (See Note 4 of Notes to Consolidated Financial Statements contained herein.)
  31.1 
Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
  31.2 
Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
  32 
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
  101 
The following materials from Riverview Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Equity (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements (9)
            

(1)
Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 333-30203), and incorporated herein by reference.
(2)
Filed as an exhibit to the Registrant's Current Report on Form 8-K filed with the SEC on September 18, 2007 and incorporated herein by reference.
(3)
Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter-ended September 30, 1997, and incorporated herein by reference.
(4)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated herein by reference.
(5)
Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-66049), and incorporated herein by reference.
(6)
Filed as an exhibit to the Registrant’s Definitive Annual Meeting Proxy Statement (000-22957), filed with the Commission on June 5, 2003, and incorporated herein by reference.
(7)  
Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter-ended December 31, 2005, and incorporated herein by reference.
(8)  
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2009 and incorporated herein by reference.
(9)  
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under those sections.
 
 
41
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
          RIVERVIEW BANCORP, INC.
 
By:  /s/ Patrick Sheaffer   By:  /s/ Kevin J. Lycklama
  Patrick Sheaffer      Kevin J. Lycklama 
 
Chairman of the Board and
    
Executive Vice President and
 
Chief Executive Officer
    
Chief Financial Officer
  (Principal Financial Officer)      (Principal Financial Officer) 
         
         
Date:  February 12, 2015    Date:  February 12, 2015 
 
 

 
 
 
 
 
 
 
42
 
 
EXHIBIT INDEX

 
10.1
Form of Employment Agreement between the Company and the Bank and each of Patrick Sheaffer, Ronald A. Wysaske and Kevin J. Lycklama
 
10.2
Form of Change in Control Agreement between the Company and the Bank and each of Patrick Sheaffer, Ronald A. Wysaske and Kevin J. Lycklama
 
31.1
Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 
31.2
Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 
32
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
 
101*
The following materials from Riverview Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Equity (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

 
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under those sections.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
43


Exhibit 10.1


 







RIVERVIEW BANCORP, INC.

RIVERVIEW COMMUNITY BANK


EMPLOYMENT AGREEMENT

FOR

_________________________

 

 
 
 

RIVERVIEW BANCORP, INC.
 
RIVERVIEW COMMUNITY BANK
 
EMPLOYMENT AGREEMENT
 
FOR
 
__________________________
 
This EMPLOYMENT AGREEMENT (“Agreement”) by and between RIVERVIEW BANCORP, INC., a registered savings and loan holding company (“Bancorp”), RIVERVIEW COMMUNITY BANK, a federally chartered savings bank (the “Bank”), which is a wholly owned subsidiary of  Bancorp (Bancorp and the Bank are collectively referred to as the “Company”), and ________________________________ (“Executive”) is dated February 1, 2015 (the “Effective Date”).
 
1.
At-Will Employment.  The Bank will continue to employ Executive, subject to the terms and conditions set forth in this Agreement.  The employment is “at will.”  Notwithstanding the term of this Agreement, the Bank may terminate Executive’s employment at any time for any lawful reason or for no reason at all, subject to the provisions of this Agreement.
 
2.           Term; Extension.
 
 
(a)
Term.  The term of this Agreement begins on the Effective Date and ends on September 30, 2017, subject to extension as provided in subsection (b) below.
 
 
(b)
Extension.  At any time during the term of this Agreement, the Bank’s Board of Directors (the “Board”) may elect to extend the term of this Agreement.  If the Board elects to extend this Agreement, the term of this Agreement shall be extended through September 30 of the third calendar year following the year in which the Agreement is extended.  This Agreement may be extended any number of times in a similar manner.
 
3.
Position.  Executive will serve as the Bank’s___________________ or such other position at the same grade level as the Bank may designate from time to time.  Executive also agrees to serve, if elected, as an officer and/or director of the Company or any of its affiliates.  Executive will faithfully and diligently perform the duties that are normal and customary to the position, as well as those duties assigned from time to time by the Board and/or the Bank’s Chief Executive Officer (the “CEO”).
 
4.           Obligations.
 
 
(a)
Executive shall devote Executive’s best efforts, energies, and skills to the position and shall not engage in any business or employment activity that is not on the Company’s behalf (whether or not pursued for gain or profit), except for:
 
 
 
1
 
 
 
 
(1)
Activities approved in writing in advance by the Bank’s Board; and
 
 
(2)
Passive investments that do not involve Executive providing any advice or services to the businesses in which the investments are made.
 
 
(b)
Executive agrees to act in accordance with the laws of the State of Washington and the federal government and pursuant to the general guidelines and directions as established from time to time by the Company.
 
 
(c)
The Company anticipates that Executive will be active in community associations in the Company’s market area.
 
5.           Compensation/Benefits.
 
 
(a)
Base Salary.  For services performed under this Agreement, Executive’s annual base salary as of the Effective Date is $______________ (the “Base Salary”).  The Base Salary will be paid in accordance with the Bank’s regular payroll schedule.  Executive’s Base Salary shall be reviewed at least annually and may be increased by the Bank in its sole discretion.
 
 
(b)
Incentive Compensation.  In addition to the Base Salary, Executive will participate in the Bank’s Salary at Risk Program and any successor incentive compensation plans (“Incentive Compensation”).
 
 
(c)
Other Benefits.  During the term of this Agreement, Executive shall be entitled to receive all employee benefits the Bank provides to its employees generally.
 
 
(d)
Reimbursable Expenses.  Executive is authorized to receive reimbursement for reasonable expenses incurred in performing Executive’s duties and in promoting the business of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established from time to time by the Bank.
 
 
(e)
Vacation.  Executive shall be entitled to paid vacation according to the Bank’s Personnel Policy Manual.
 
 
(f)
Indemnification.  The Company shall provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense, and, with respect to any claims not covered by that policy, shall indemnify Executive (and Executive’s heirs, executors and administrators) to the fullest extent permitted under law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding brought by a third party against the Company in which Executive may be involved by reason of having been a director or officer of the Company or any of its affiliates (whether or not Executive continues to be a director or officer at the time of incurring those expenses or liabilities).  Those expenses and liabilities include, but are not limited
 
 
 
 
2
 
 
 
 
to, court costs, attorneys’ fees and expenses, judgments and reasonable settlement costs.
 
6.
Definitions.
 
 
(a)
“Cause.”
 
 
(1)
Grounds for Termination.  Cause for termination of employment means the occurrence of any one or more of the following:
 
 
(A)
Conviction of any felony or of any crime in connection with Executive’s duties;
 
 
(B)
Removal of Executive from office or permanent prohibition of Executive from participating in the conduct of the Company’s affairs by an order issued by a bank regulatory authority;
 
 
(C)
Willful misfeasance, gross negligence, conduct involving dishonesty, or a material breach of a fiduciary duty in the performance of Executive’s duties;
 
 
(D)
Conduct significantly harmful to the Company, including but not limited to public disparagement of the Company or any affiliate of the Company, intentional violation of law or of any significant policy or procedure of the Company;
 
 
(E)
Refusal or failure to act in accordance with any lawful stipulation, requirement or directive of the Board or CEO; or
 
 
(F)
Chronic drug or alcohol abuse.
 
 
(2)
Procedure for Termination. Termination for Cause will be automatic upon the occurrence of an incident under paragraph (1)(A) or (B) above.  Otherwise, the Board may not terminate Executive’s employment for Cause unless:
 
 
(A)
With respect to incidents under paragraph (1)(C), (D), (E) or (F):
 
 
(i)
Executive is given reasonable written notice (in no event less than five business days’ notice) of the Board meeting called to make that determination; and
 
 
(ii)
Executive and Executive’s legal counsel are given the opportunity to address that meeting.
 

 
3
 

 
(B)
In addition, with respect to incidents under paragraph (1)(E) or (F) only, Executive is first given:
 
 
(i)
Written notice by the Board or CEO specifying in detail the performance issues; and
 
 
(ii)
A reasonable opportunity to cure the issues specified in the notice.
 
 
(b)
“Good Reason.”
 
 
(1)
Subject to paragraph (2) below, Good Reason for Executive’s resignation means any one or more of the following occurring without Executive’s consent:
 
 
(A)
Reduction of Executive’s Base Salary;
 
 
(B)
A material reduction in Executive’s opportunity to receive incentive-based compensation as compared to the opportunity under the Salary at Risk Program or such other incentive based compensation program as in effect as of the Effective Date or the current renewal date of this Agreement, as applicable, unless that reduction applies generally to all executive officers at the Executive’s grade level;
 
 
(C)
A material reduction in the benefits and perquisites to Executive from those being provided as of the Effective Date or the current renewal date of this Agreement, as applicable, unless that reduction applies generally to all executive officers at the Executive’s grade level; or
 
 
(D)
A relocation or transfer of Executive’s principal place of employment that would require Executive to commute on a regular basis more than 25 miles each way from the main business office of the Company as of the Effective Date.
 
 
(2)
To resign for Good Reason, Executive must give the Bank:
 
 
(A)
Written notice of resignation not more than ninety (90) days after the initial occurrence of the circumstances giving rise to Executive’s intended resignation for Good Reason; and
 
 
(B)
A reasonable opportunity of at least thirty (30) days in which to cure those circumstances.
 
 
 
4
 
 
 
7.
Severance Benefits.
 
 
(a)
Payment of Accrued Salary and Benefits.  Upon termination of Executive’s employment for any reason, Executive will receive payments for all Base Salary and benefits accrued as of the date of Executive’s termination, which shall be paid in accordance with applicable law.  All further compensation and benefits shall terminate as of the date of termination, except as otherwise required by law (e.g., COBRA coverage) or as provided in subsection (c) or (d) below.
 
 
(b)
Termination for Cause or Without Good Reason.  If Executive’s employment is terminated by the Bank for Cause or by Executive without Good Reason, Executive will have no right to receive additional compensation past the date of termination and will have no right to any unpaid Incentive Compensation.
 
 
(c)
Termination Without Cause or for Good Reason.
 
 
(1)
If Executive’s employment is terminated by the Bank without Cause or by Executive with Good Reason, the Bank will pay Executive (or in the event of Executive’s subsequent death, Executive’s beneficiaries or estate) a severance benefit (the “Severance Benefit”) in an aggregate amount equal to:
 
 
(A)
____ months of Executive’s monthly Base Salary (based on the Executive’s Base Salary as of the date of termination of employment);
 
 
(B)
Any Incentive Compensation not yet paid based on the fiscal year that ended immediately before the date of termination;
 
 
(C)
Prorated Incentive Compensation for the fiscal year in which the termination occurs based on performance through the month ended before the date of termination; and
 
 
(D)
Continued coverage under the Bank’s then existing benefit plans for life insurance, medical and disability insurance for the number of months stated in subparagraph (A) above following the termination of employment; provided, however, that if the Bank’s benefit plans do not permit continued participation by Executive following termination of employment, the Bank shall include in the Severance Benefit an amount equal to the premiums (estimated in good faith by the Bank) that the Bank would have paid under those benefit plans for Executive’s continued participation for the number of months stated under subparagraph (A) above.
 
 
(2)
Subject to the restrictions in paragraph (3) below, the Severance Benefit will be paid in a lump sum within ten (10) days of termination of Executive’s employment or, if later, the day after the expiration of the revocation period as described in Section 8(a) below.
 
 
 
5
 
 
 
 
(3)
Payment of the Severance Benefit will be subject to the following conditions:
 
 
(A)
All payroll tax withholding and other deductions required by law;
 
 
(B)
The limitations in Section 8 below; and
 
 
(C)
If the Severance Benefit is subject to § 409A of the Internal Revenue Code of 1986, as amended, (the “Code”) and Executive is deemed to be a “specified employee” within the meaning of Code § 409A(a)(2)(B)(i), the lump-sum payment will not be made until the seventh month following termination of employment.
 
 
(d)
Change in Control Benefits.
 
(1)           
If Executive’s employment terminates under circumstances that qualify as a payment event under the Change In Control Agreement between the Company and Executive, as amended, (the “C-I-C Agreement”), Executive will receive:
 
(A)          
Only those payments under this Agreement that are payable under subsection (a) above; and
 
(B)          
The benefits payable in accordance with the terms and conditions of the C-I-C Agreement in lieu of those payable under subsection (c) above.
 
(2)           
If Executive’s employment terminates under circumstances that do not qualify as a payment event under the C-I-C Agreement (e.g., because the change in beneficial ownership is not large enough to qualify as a change in control as defined under the C-I-C Agreement or because the termination occurs after the period of time covered by that agreement), the compensation and benefits payable to Executive upon termination of employment will be determined solely under this Section 7.
 
                  (e)   Disability.

(1)           
If Executive becomes disabled as defined in the Bank’s then current long-term disability plan (or, if no such plan is then in effect, if Executive is permanently and totally disabled within the meaning of Code § 22(e)(3) as determined by a physician designated by the Bank), Executive’s employment will terminate and the Bank will pay Executive, as disability pay and in lieu of the Severance Benefit, a monthly payment equal to seventy-five percent (75%) of Executive’s bi-weekly rate of Base Salary.
 

 
6
 

(2)          
These disability payments will continue for the period of time (the “Disability Payment Period”) that commences on the effective date of Executive’s termination for disability and ends on the earliest of the:
 
                                                (A)     Executive’s full-time employment with another employer;
 
                                                (B)      Executive’s death; or
 
                                                (C)      Expiration of the period of time stated in subsection (c)(1)(A) above.
 
(3)          
The disability pay shall be reduced by the amount, if any, paid to Executive under any plan of the Bank providing disability benefits to Executive or any compensation paid to Executive as a result of subsequent reemployment of Executive by the Bank during the remaining term of the Disability Payment Period.
 
(4)          
During the Disability Payment Period, the Bank will, if possible, continue Executive’s life, medical, dental, and disability coverage on the policies in existence before Executive’s termination for disability.  If the Bank is unable to continue the policy coverage, the Bank will pay Executive, within 30 days of the date it is determined continued coverage is not possible, a cash amount equal to the premiums that the Bank would have paid for such coverage for the remainder of the Disability Payment Period, based on the premium amounts paid immediately before termination of the insurance coverage.
 
8.
Limitations on Benefit Payments.
 
 
(a)
Release of Claims.  Executive’s receipt of the Severance Benefit is conditioned on Executive having executed a separation agreement in substantially the form attached hereto as Exhibit A (the “Separation Agreement”) and the revocation period having expired without Executive having revoked the Separation Agreement.  If the combined consideration and revocation periods (as defined in Sections 15 and 16 of the Separation Agreement) overlap two calendar years, the payment will be made in the later of the two years (irrespective of the year in which the Separation Agreement is effective and irrevocable) resulting in taxation to Executive in the second calendar year.
 
 
(b)
Compliance with Material Terms.  Receipt of the Severance Benefit is further conditioned on Executive not being in violation of any material term of this Agreement or in violation of any material term of the Separation Agreement.
 
 
(c)
Regulatory Limitation.  The Company shall make no payment of any benefit provided for under this Agreement to the extent that the payment would be prohibited by applicable banking regulations or any regulatory order.  If the payment is prohibited, the Company shall use its best efforts to secure the consent 
 
 
 
7
 
 
 
 
of the banking regulator to make the payment in the highest amount permissible, up to the amount provided for in this Agreement.
 
9.
Restrictive Covenants.
 
 
(a)
Confidential Information.
 
 
(1)
Executive acknowledges that, in the course of Executive’s employment, Executive will or may have or obtain knowledge of confidential information and other secrets concerning the Company and its business, plans and strategies, its actual and prospective customers, and other matters which are valuable to the Company and which the Company does not want disclosed (“Confidential Information”).
 
 
(2)
Executive will not, during and after the term of this Agreement, disclose to any other person or entity any Confidential Information concerning the Company, its business operations or customers, or use for Executive’s own purposes or permit or assist others in the use of such confidential information, unless:
 
 
(A)
Bancorp’s Board of Directors consents to the use or disclosure of the information;
 
 
(B)
The use or disclosure is consistent with Executive’s duties under this Agreement; or
 
 
(C)
Disclosure is required by law or court order.
 
 
(b)
Noncompetition.
 
 
(1)
Executive agrees not to Compete with the Company, for a one-year period following termination of employment for any reason, in any city, town, or county in which the Company has an office or branch or has filed an application for regulatory approval to establish an office or branch, determined as of the effective date of the termination of employment.
 
 
(2)
The term “Compete” means being employed by or providing consulting or other services to, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Company.
 
 
(c)
Nonsolicitation.
 
 
(1)
During employment and for a one-year period following termination of Executive’s employment for any reason whatsoever, Executive will not solicit any Customer of the Bank or of any of the Bank’s affiliates for services or products then provided by the Bank or any of its affiliates.
 
 
 
8
 
 
 
 
(2)
“Customers” are:
 
 
(A)
All customers serviced by the Bank or any of the Bank’s affiliates at any time within 12 months before termination of Executive’s employment;
 
 
(B)
All customers and potential customers whom the Bank or the Bank’s affiliates, with the knowledge or participation of Executive, actively solicited at any time during the 12 months before termination of Executive’s employment; and
 
 
(C)
All successors, owners, directors, partners and management personnel of the Customers described in subparagraph (A) or (B) above.
 
 
(d)
Nonraiding of Employees.
 
 
(1)
Executive recognizes that the workforce of the Bank and its affiliates are a vital part of the Company’s business.  Therefore, Executive agrees that for 12 months following termination of Executive’s employment for any reason whatsoever, Executive will not directly or indirectly recruit or solicit any Employee to leave his or her employment with the Bank or any of the Bank’s affiliates.
 
 
(2)
Without limiting the foregoing, Executive will not:
 
 
(A)
Disclose to any third party the names, backgrounds, or qualifications of any of the Employees or otherwise identify them as potential candidates for employment; or
 
 
(B)
Personally or through any other person approach, recruit, interview or otherwise solicit Employees to work for any other employer.
 
 
(3)
“Employees” are all employees working for the Bank or any of the Bank’s affiliates at the time of termination of Executive’s employment.
 
 
(e)
Injunctive Relief.  Executive acknowledges that it is impossible to measure in money the damages that the Company will incur if Executive fails to observe the covenants in this Section 9 (the “Restrictive Covenants”) and, therefore, Executive agrees that:
 
 
(1)
The Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any breach or threatened breach of the Restrictive Covenants;
 
 
 
9
 
 
 
 
(2)
If the Company is required to post a bond in order to secure an injunction or other equitable remedy, that bond shall be no more than a nominal amount;
 
 
(3)
Executive waives any claim or defense that an adequate remedy at law is available to the Company; and
 
 
(4)
These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity.
 
 
(f)
Reasonableness.  The parties agree that:
 
 
(1)
This Agreement in its entirety, and in particular the Restrictive Covenants, is reasonable both as to time and scope;
 
 
(2)
The Restrictive Covenants are necessary for the protection of the Company’s business and goodwill;
 
 
(3)
The Restrictive Covenants are not any greater than are reasonably necessary to secure the Company’s business and goodwill;
 
 
(4)
The degree of injury to the public due to the loss of the service and skill of Executive or the restrictions placed upon Executive’s opportunity to make a living with Executive’s skills upon enforcement of those covenants, does not and will not warrant non-enforcement of those restraints; and
 
 
(5)
If the scope of the Restrictive Covenants is adjudged too broad to be capable of enforcement, then the parties authorize that court or arbitrator to narrow the Restrictive Covenants so as to make them capable of enforcement, given all relevant circumstances, and to enforce them to the fullest extent allowed.
 
 
(g)
Survival. This Section shall survive the termination of this Agreement.
 
10.
Creative Work.
 
 
(a)
Executive agrees that all creative work and work product, including but not limited to all technology, business management tools, processes, software, patents, trademarks and copyrights developed by Executive during employment with the Company, regardless of when or where such work or work product was produced, constitutes work made for hire, all rights of which are owned by the Company.
 
 
(b)
Executive hereby assigns to the Company all rights, title, and interest, whether by way of copyrights, trade secret, trademark, patent, or otherwise, in all such work or work product, regardless of whether it is subject to protection by patent, trademark or copyright laws.
 
 
 
10
 
 
 
11.
Return of Company Property. When Executive ceases for any reason to be employed by the Bank:
 
 
(a)
Executive must immediately return to the Company:
 
 
(1)
All keys, pass cards, identification cards and any other property of the Company, and disclose all computer user identifications and passwords used by Executive in the course of employment or necessary for accessing information on the Company’s computer system; and
 
 
(2)
All originals and copies (whether in hard copy, electronic or other form) of any documents, drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals and specifications which constitute Confidential Information or proprietary information or material of the Company.
 
 
(b)
The obligations in this Section include the return of documents and other materials that may be in Executive’s desk at work, Executive’s car or place of residence, or in any other location under Executive’s control.
 
12.
Dispute Resolution.
 
 
(a)
Arbitration.
 
 
(1)
The parties agree to submit any dispute arising under this Agreement, regardless of the nature of the dispute or the legal concepts involved, to final, binding, private arbitration in Vancouver, Washington. Disputes subject to arbitration include not only disputes involving the meaning or performance of this Agreement, but disputes about its negotiation, drafting or execution.
 
 
(2)
The dispute will be determined by a single arbitrator and governed by then existing rules of arbitration procedure in Clark County Superior Court except as set forth in this Section. Instead of filing a civil complaint in Clark County Superior Court, a party will commence the arbitration process by noticing the other party. The parties will choose an arbitrator who specializes in employment conflicts from the arbitration list for Clark County Superior Court.  If the parties are unable to agree on an arbitrator within ten (10) days of receipt of the list of arbitrators, each party will select one attorney from the list, and those two attorneys shall select the arbitrator from the list.  Each of the two selecting attorneys will then conclude their services and be compensated by the party who selected that attorney, subject to recovery of those fees under subsection (b) below.
 
 
(3)
The arbitrator may charge his or her standard arbitration fees rather than the fees prescribed in Clark County Superior Court arbitration procedures.
 
 
(4)
Subject to the limitations under Section 13(i), the arbitrator will have full authority to determine all issues, including arbitrability, to award any
 
 
 
 
11
 
 
 
 
remedy, including permanent injunctive relief, and to determine any request for attorneys’ fees, costs and expenses in accordance with subsection (b) below.
 
 
(5)
There shall be no right of review in court. The arbitrator’s award may be reduced to final judgment or decree in Clark County Superior Court.
 
 
(b)
Expenses/Attorneys’ Fees.  The prevailing party shall be awarded all costs and expenses of the proceeding, including but not limited to, attorneys’ fees, filing and service fees, witness fees and arbitrator’s fees.  If arbitration is commenced, the arbitrator will be required to name the prevailing party and will have full authority and complete discretion to make that determination and the amount of costs and expenses to be awarded.  The prevailing party shall be entitled to recover any reasonable attorneys’ fees and other costs and expenses it incurs in enforcing or collecting an arbitration award.
 
13.
Miscellaneous.
 
 
(a)
Notices. Any notice to be delivered under this Agreement shall be given in writing and shall be deemed delivered when received or three days after mailing, by certified mail, postage prepaid, addressed to the CEO or to Executive at Executive’s last known address on the records of the Bank, if mailed.  Either party may designate an address for notices by written notice to the other.
 
 
(b)
Governing Law.  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Washington.
 
 
(c)
Amendment/Waiver.
 
 
(1)
This Agreement may not be amended, released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed by each of the parties hereto.
 
 
(2)
The failure of any party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of any party to enforce each and every such provision. No waiver or any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.
 
 
(d)
Severability.  If any provision of this Agreement is held by a court or arbitrator to be invalid or unenforceable, the remaining provisions shall continue to be fully effective.  If any part of this Agreement is held to be unenforceable as written, it shall be enforced to the maximum extent allowed by applicable law.  The unenforceability of any provision in this Agreement in any jurisdiction shall not affect the enforceability of any provision of this Agreement in any other jurisdiction.
 
 
 
12
 
 
 
 
(e)
Entire Agreement.  This Agreement represents the entire agreement between the parties regarding the matters addressed in this Agreement and together with the Bank’s Personnel Policy Manual governs the terms of Executive’s employment.  Where there is a conflict between this Agreement and the Personnel Policy Manual, the terms of this Agreement shall govern. This Agreement supersedes any other prior oral or written employment agreement between the parties. This Agreement does not supersede any incentive compensation agreement (including stock option agreements) and/or the Change in Control Agreement entered into separately by the parties to this Agreement.
 
 
(f)
Code § 409A Compliance.  If the Company or Executive believes, at any time, that this Agreement does not comply with Code § 409A, it will promptly advise the other party, and both parties will negotiate reasonably and in good faith to amend the terms of the Agreement so that it complies with the most limited possible economic effect on the Company and Executive.
 
 
(g)
Assignment; Death; Binding Effect.
 
 
(1)
Executive shall not assign or transfer any of Executive’s rights under this Agreement, wholly or partially, to any other person or to delegate the performance of the Executive’s duties under the terms of this Agreement.
 
 
(2)
Upon Executive’s death, no death benefit is payable under this Agreement other than benefits that were already in pay status at the date of death.  Executive’s rights under this Agreement with respect to any benefits earned before the date of death shall inure to Executive’s heirs, executors, administrators or personal representatives.
 
 
(3)
The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of the Company, regardless of the manner in which the successors or assigns succeed to the interests or assets of the Company.  This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company, by any merger, consolidation or acquisition where the Company is not the surviving corporation, by any transfer of all or substantially all of the Company’s assets, or by any other change in the Company’s structure or the manner in which the Company’s business or assets are held.  Executive’s employment shall not be deemed terminated upon the occurrence of one of the foregoing events. In the event of any merger, consolidation or transfer of assets, this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation to which the assets are transferred.
 
 
(h)
Survival.  If any benefits provided to Executive under this Agreement are still owed, or claims under the Agreement are still pending at the time of termination of this Agreement, this Agreement shall continue in force with respect to those
 
 
 
13
 
 
 
 
obligations or claims, until those benefits are paid in full or those claims are resolved in full.  The Restrictive Covenants and dispute resolution provisions of this Agreement shall survive the termination of this Agreement and shall be enforceable regardless of any claim Executive may have against the Company.
 
(i)           
Board’s Authority.
 
 
(1)
The Board has the authority to interpret and construe the provisions of this Agreement, including the attached Separation Agreement.  However, with respect to any decision of the Board regarding Executive’s benefits under this Agreement or the attached Separation Agreement (including eligibility for benefits, the calculation of benefits or the forfeiture of benefits), the burden of proof shall be on the Board and that decision shall be:
 
(A)           Subject to the duty of good faith and fair dealing;
 
(B)           Supported by a preponderance of the evidence; and
 
 
(C)
Made by the affirmative vote of at least three fourths of the Board.
 
 
(2)
An arbitrator or a court reviewing such a decision by the Board shall make its own independent decision and not grant deference to the Board’s decision.
 
 
(j)
Joint and Several Obligations.  Bancorp and the Bank will be jointly and severally liable for the payment obligations under this Agreement.
 
(k)           Actions by Banking Regulatory Authorities.
 
 
(1)
If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company’s affairs by a notice served under § 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. § 1818(e)(3) and (g)(1), the Company’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, the Company may in its discretion:
 
 
(A)
Pay Executive all or part of the payments under this Agreement that were withheld while its obligations under this Agreement were suspended; and/or
 
 
(B)
Reinstate in whole or in part any of its obligations which were suspended.
 
 
(2)
If Executive is removed and/or permanently prohibited from participating in the conduct of the Company’s affairs by an order issued under § 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. § 1818(e)(4) and (g)(1), Executive shall be terminated for Cause as of the effective date of the order.
 
 
 
14
 
 
 
 
(3)
If the Company is in default (as defined in § 3(x)(1) of the FDIA, 12 U.S.C. § 1813(x)(1)), all further obligations under this Agreement shall terminate as of the date of default.
 
 
(4)
This Agreement may be terminated entirely or suspended for a period of time by the applicable banking regulatory authority, or as otherwise required by law, if:
 
 
(A)
The Federal Deposit Insurance Corporation (“FDIC”) enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in § 13(c) of the FDIA, 12 U.S.C. § 1823(c);
 
 
(B)
The applicable banking regulatory authority approves a supervisory merger to resolve problems related to the operation of the Company; or
 
 
(C)
The applicable banking regulatory authority determines the Company is in an unsafe or unsound condition.
 
 
(5)
The Severance Benefit and the indemnification rights granted under Section 5(f), are subject to and conditioned upon their compliance with 12 U.S.C. § 1828(k) and FDIC regulation 12 C.F.R. Part 359, “Golden Parachute and Indemnification Payments.”
 
14.
Advice of Counsel.  Executive acknowledges that, in executing this Agreement, Executive has had the opportunity to seek the advice of independent legal counsel and has read and understood all of the terms and provisions of this Agreement.  This Agreement shall not be construed against any party by reason of the drafting or preparation of its provisions.
 
 

 
EXECUTIVE:
  
________________________________   
   
Date: ____________________________   
   
RIVERVIEW COMMUNITY BANK       RIVERVIEW BANCORP, INC.
   
   
By: _____________________________  By: ____________________________   
Title: ____________________________      Title: ___________________________ 
Date: ____________________________    Date: ____________________________  
 
                                                                    
                                                                                                                             
                                                                                                                           
 

 
15
 

Exhibit A
 
EMPLOYMENT SEPARATION AGREEMENT AND RELEASE OF CLAIMS
 
This is a confidential agreement (this “Separation Agreement”) between you, _______________, and us, Riverview Community Bank (the “Bank”) and Riverview Bancorp, Inc. (“Bancorp”) (Bancorp and the Bank are collectively referred to as “Riverview”). This Separation Agreement is dated for reference purposes _____________, 20___, which is the date we delivered this Separation Agreement to you for your consideration.
 
1.
Termination of Employment.  Your employment terminates (or was terminated) on _______________, 20___ (the “Separation Date”).
 
2.
Payments.  In exchange for your agreeing to the release of claims and other terms in this Separation Agreement, we will pay you the Severance Benefit specified in Section 7 of the Employment Agreement between you and Riverview dated __________________ (the “Employment Agreement”), which is incorporated herein by reference.  You acknowledge that we are not obligated to make these payments to you unless you comply with the Restrictive Covenants in Section 9 of the Employment Agreement and otherwise comply with the material terms of the Employment Agreement and of this Separation Agreement.
 
3.
COBRA Continuation Coverage.  Your normal employee participation in Riverview’s group health coverage will terminate on the Separation Date or, if provided under the group health plan, the last day of the month in which the Separation Date occurs.  Continuation of group health coverage thereafter will be made available to you and your dependents pursuant to federal law (COBRA). Continuation of group health coverage after the Separation Date is entirely at your expense, as provided under COBRA.
 
4.
Termination of Benefits.  Except as provided in Section 3 above, your participation in all employee benefit plans and programs ends (or ended) on the Separation Date or as otherwise provided in those plans.  Your rights under any benefit or other plans in which you may have participated will be determined in accordance with the written plan documents governing those plans.
 
5.
Full Payment.  You acknowledge having received full payment of all compensation of any kind (including wages, salary, paid time off, sick leave, commissions and incentive compensation) that you earned as a result of your employment by us and that was owing to you as of the Separation Date.
 
6.
No Further Compensation.  Any and all agreements to pay you bonuses or other incentive compensation are terminated.  You understand and agree that you have no right to receive any further payments for bonuses or other incentive compensation.  We owe you no further compensation or benefits of any kind, except as described in Section 2 above.
 
 
 
 
A-1
 

 
7.
Release of Claims.
 
 
(a)
You hereby release:
 
 
(1)
Riverview and its affiliates and benefit plans (each, including Riverview, a “Riverview Affiliate”);
 
 
(2)
Each of the Riverview Affiliates’ past and present shareholders, executives, directors, officers, agents, employees, representatives, administrators, fiduciaries and attorneys; and
 
 
(3)
The predecessors, successors, transferees and assigns of each of such persons and entities, from any and all claims of any kind, known or unknown, that arose on or before the date you signed this Separation Agreement.
 
 
(b)
The claims you are releasing include, without limitation, claims of wrongful termination, claims of constructive discharge, claims arising out of employment agreements, representations or policies related to your employment, claims arising under federal, state or local laws or ordinances prohibiting discrimination or harassment or requiring accommodation on the basis of age, race, color, national origin, religion, sex, disability, marital status, sexual orientation or any other status, claims of failure to accommodate a disability or religious practice, claims for violation of public policy, claims of retaliation, claims of failure to assist you in applying for future position openings, claims of failure to hire you for future position openings, claims for wages or compensation of any kind (including overtime claims), claims of tortious interference with contract or expectancy, claims of fraud or negligent misrepresentation, claims of breach of privacy, defamation claims, claims of intentional or negligent infliction of emotional distress, claims of unfair labor practices, claims arising out of any claimed right to stock or stock options or other equity interests, claims for attorneys’ fees or costs, and any other claims that are based on any legal obligations that arise out of or are related to your employment relationship with us.
 
 
(c)
You specifically waive any rights or claims that you may have under Title 49 of the Revised Code of Washington, the Civil Rights Act of 1964 (including Title VII of that Act), the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967 (ADEA), the Americans with Disabilities Act of 1990 (ADA), the Fair Labor Standards Act of 1938 (FLSA), the Family and Medical Leave Act of 1993 (FMLA), the Worker Adjustment and Retraining Notification Act (WARN), the Employee Retirement Income Security Act of 1974 (ERISA), the National Labor Relations Act (NLRA), and all similar federal, state and local laws.
 
 
(d)
You agree not to seek any personal recovery (of money damages, injunctive relief or otherwise) for the claims you are releasing in this Separation Agreement, either through any complaint to any governmental agency or otherwise, whether
 
 
 
A-2
 
 
 
 
individually or through a class action.  You agree never to start or participate as a plaintiff in any lawsuit or arbitration asserting any of the claims you are releasing in this Separation Agreement.  You represent and warrant that you have not initiated any complaint, charge, lawsuit or arbitration involving any of the claims you are releasing in this Separation Agreement.
 
 
(e)
Should you apply for future employment with a Riverview Affiliate, the Riverview Affiliate has no obligation to consider you for future employment.
 
 
(f)
You represent and warrant that you have all necessary authority to enter into this Separation Agreement (including, if you are married, on behalf of your marital community) and that you have not transferred any interest in any claims to your spouse or to any third party.
 
 
(g)
This Separation Agreement does not affect your rights arising under any of the Bank’s benefit plans through the Separation Date or afterwards under the terms of those plans to receive pension plan benefits, medical plan benefits, unemployment compensation benefits or workers’ compensation benefits.
 
 
(h)
This Separation Agreement also does not affect your rights under agreements, bylaw provisions, insurance or otherwise, to be indemnified, defended or held harmless in connection with claims that may be asserted against you by third parties.
 
 
(i)
You understand that you are releasing potentially unknown claims, and that you have limited knowledge with respect to some of the claims being released.  You acknowledge that there is a risk that, after signing this Separation Agreement, you may learn information that might have affected your decision to enter into this Separation Agreement.  You assume this risk and all other risks of any mistake in entering into this Separation Agreement.
 
 
(j)
You are giving up all rights and claims of any kind, known or unknown, except for the rights specifically given to you in this Separation Agreement.
 
 
(k)
You agree that this release is fairly and knowingly made.
 
8.
No Admission of Liability.  Neither this Separation Agreement nor the payments made under this Separation Agreement are an admission of liability or wrongdoing by any Riverview Affiliate.
 
9.
Riverview Materials.  You represent and warrant that you have, or no later than the Separation Date will have, returned all keys, credit cards, documents and other materials that belong to us, and disclosed all computer user identifications and passwords used by you in the course of your employment or necessary for accessing information on our computer system, in accordance with Section 11 of the Employment Agreement, which is incorporated herein by reference.
 
 
 
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10.
Nondisclosure Agreement.  You will comply with the covenant regarding confidential information in Section 9(a) of the Employment Agreement, which covenant is incorporated herein by reference.
 
11.
No Disparagement.  You may not disparage any Riverview Affiliate or its business or products, and may not encourage any third parties to sue a Riverview Affiliate.
 
12.
Cooperation Regarding Other Claims.  If any claim is asserted by or against a Riverview Affiliate as to which you have relevant knowledge, you will reasonably cooperate with us in the prosecution or defense of that claim, including by providing truthful information and testimony as reasonably requested by us.
 
13.
Noncompetition; Nonsolicitation; No Interference.  You will comply with Section 9(b), 9(c) and 9(d) of the Employment Agreement, incorporated herein by reference, and Riverview will have the right to enforce those provisions under the terms of Section 9(e) of the Employment Agreement, incorporated herein by reference.  Following the expiration of the covenants referenced in the preceding sentence, you will not, apart from good faith competition, interfere with any Riverview Affiliate’s relationships with customers, employees, vendors, or others.
 
14.
Independent Legal Counsel.  You are advised and encouraged to consult with an attorney before signing this Separation Agreement.  You acknowledge that you have had an adequate opportunity to do so.
 
15.
Consideration Period.  You have 21 days from the date this Separation Agreement is given to you to consider this Separation Agreement before signing it.  You may use as much or as little of this 21-day period as you wish before signing.  If you do not sign and return this Separation Agreement within this 21-day period, you will not be eligible to receive the benefits described in this Separation Agreement.
 
16.
Revocation Period and Effective Date.  You have 7 calendar days after signing this Separation Agreement to revoke it.  To revoke this Separation Agreement after signing it, you must deliver a written notice of revocation to the Bank’s Chief Executive Officer before the 7-day period expires.  This Separation Agreement shall not become effective until the 8th calendar day after you sign it.  If you revoke this Separation Agreement, it will not become effective or enforceable, and you will not be entitled to the benefits described in this Separation Agreement.
 
17.
Governing Law.  This Separation Agreement is governed by the laws of the State of Washington that apply to contracts executed and to be performed entirely within the State of Washington.
 
18.
Dispute Resolution.  Any dispute arising under this Agreement shall be subject to arbitration in accordance with Section 12 of the Employment Agreement, as modified by Section 13(i) of the Employment Agreement, which sections are specifically incorporated by reference, in their entirety, in this Agreement.
 

A-4
 
 
 

19.
Saving Provision.  If any part of this Separation Agreement is held to be unenforceable, it shall not affect any other part.  If any part of this Separation Agreement is held to be unenforceable as written, it shall be enforced to the maximum extent allowed by applicable law.
 
20.
Final and Complete Agreement.  Except for the Employment Agreement and/or the Change in Control Agreement, which are expressly incorporated herein by reference, this Separation Agreement is the final and complete expression of all agreements between us on all subjects related to your employment or its termination and supersedes and replaces all prior discussions, representations, agreements, policies and practices.  You acknowledge you are not signing this Separation Agreement relying on anything not set out herein.
 
 
 
 
Riverview Community Bank
  
   
   
By: ________________________  
Title: _______________________      
Date: _______________________    
   
Riverview Bancorp, Inc.
  
   
   
By:    _______________________  
Title: _______________________  
Date: _______________________   
 
     
I, the undersigned, having been advised to consult with an attorney, hereby agree to be bound by this Separation Agreement and confirm that I have read and understood each part of it.
 

 
 _______________________   
   
 _______________________   
 Printed Name  
 _______________________   
 Date  
 

 

 
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Exhibit 10.2


 
 







RIVERVIEW BANCORP, INC.

RIVERVIEW COMMUNITY BANK


CHANGE IN CONTROL AGREEMENT

FOR

_________________________






 
 
 

RIVERVIEW BANCORP, INC.

RIVERVIEW COMMUNITY BANK

CHANGE IN CONTROL AGREEMENT

FOR

__________________________
 

This CHANGE IN CONTROL AGREEMENT (“Agreement”) by and between RIVERVIEW BANCORP, INC., a registered savings and loan holding company (“Bancorp”), RIVERVIEW COMMUNITY BANK, a federally chartered savings bank (the “Bank”), which is a wholly owned subsidiary of  Bancorp (Bancorp and the Bank are collectively referred to as the “Company”), and
_____________________________ (“Executive”), is dated February 1, 2015 (the “Effective Date”).


1.           Term; Extensions.

 
(a)
Term.  The term of this Agreement begins on the Effective Date and ends on September 30, 2017, subject to extension as provided in subsection (b) below.

 
(b)
Extensions.  At any time during the term of this Agreement, Bancorp’s Board of Directors may elect to extend the term of this Agreement.  If the Board of Directors elects to extend this Agreement, the term of this Agreement shall be extended through September 30 of the third calendar year following the year in which the Agreement is extended.  This Agreement may be extended any number of times in a similar manner.

2.
Definitions.

 
(a)
“Cause.”

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

 
(A)
Conviction of any felony or of any crime in connection with Executive’s duties;

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

 
(C)
Willful misfeasance, gross negligence, conduct involving dishonesty, or a material breach of a fiduciary duty in the performance of Executive’s duties;

 
(D)
Conduct significantly harmful to the Company, including but not limited to public disparagement of the Company or any affiliate of the Company, intentional violation of law or of any significant policy or procedure of the Company; or
 
 
 
1
 
 

 
 
(E)
Refusal or failure to act in accordance with any lawful stipulation, requirement or directive of the Bank’s Board of Directors or Chief Executive Officer.

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

(A)           With respect to incidents under paragraph (1)(C), (D), or (E):

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


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

 
(B)
In addition, with respect to incidents under paragraph (1) (C) or (E) only, Executive is first given:

 
(i)
Written notice by the Bank’s Board of Directors or Chief Executive Officer specifying in detail the performance issues; and

 
(ii)
A reasonable opportunity to cure the issues specified in the notice.

(b)           “Good Reason.”

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

 
(A)
Reduction of Executive’s base salary as in effect immediately prior to the Change in Control (as defined in subsection (c) below);

 
(B)
A material reduction in Executive’s opportunity to receive incentive-based compensation as compared to the opportunity under the Salary at Risk Program or such other incentive-based compensation program as in effect immediately prior to the Change in Control;

 
(C)
A material reduction in the benefits and perquisites to Executive from those being provided immediately prior to the Change in Control;

 
(D)
A relocation or transfer of Executive’s principal place of employment that would require Executive to commute on a regular basis more than 15 miles each way from the main business office of the Company as of the date of this Agreement or outside the State of Washington; or

 
(E)
A change in Executive’s position of employment such that Executive’s functions, authority, duties or responsibilities are materially changed and, as a result of such change, are inappropriate in light of Executive’s position prior to the change, Executive’s previous employment experience, and Executive’s career development.
 
 
 
2
 
 
 
 
(2)
To resign for “Good Reason,” Executive must give the Bank:

 
(A)
Written notice of resignation not more than ninety (90) days after the initial occurrence of the circumstances giving rise to Executive’s intended resignation for Good Reason; and
 
 
(B)
A reasonable opportunity of at least thirty (30) days in which to cure those circumstances.

 
(c)
“Change in Control” means:

 
(1)
Bank or Bancorp merges or consolidates with another corporation and as a result, less than 51% of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Bank or Bancorp’s voting securities immediately before the merger or consolidation;

 
(2)
Any person, entity, or group of persons or entities, other than through merger or consolidation, acquires a majority of the Bank or Bancorp’s outstanding common stock or substantially all of the Bank’s or Bancorp’s assets;

 
(3)
The incumbent directors of either the Bank’s or Bancorp’s Board of Directors change for any reason by two or more members of that Board of Directors.  The “incumbent directors” are those directors who are either:

 
(A)
Directors on the Effective Date; or

 
(B)
Elected, or nominated for election, to that Board of Directors by a majority vote of the members of that Board of Directors or the Nominating Committee of that Board of Directors who were directors on the Effective Date.  However this subparagraph (B) does not include any director whose election came as a result of an actual or threatened election contest regarding the election or removal of directors or other actual or threatened solicitation of proxies relating to the election of directors of that Board of Directors; or

 
(4)
Approval by Bancorp’s or the Bank’s shareholders of the Bank’s complete liquidation, dissolution or sale to another entity.

3.
Change in Control Benefits.

 
(a)
Benefit Amount.

 
(1)
Subject to the limitations under paragraph (2) below, if Executive’s employment with the Bank is terminated by the Bank without Cause or is terminated by Executive with Good Reason, within the number of months stated under subparagraph (A) below after the effective date of a Change in Control, the Company shall pay Executive a severance benefit (the “Change in Control Benefit”) equal to:

 
(A)
____ months of Executive’s monthly base salary (based on the higher of Executive’s base salary as of the Change in Control or as of the date of termination of employment);
 
 
 
 
3
 

 
 
(B)
Any incentive compensation earned from the Bank’s Salary at Risk Program and/or any successor incentive compensation plans (“Incentive Compensation”) not yet paid based upon the fiscal year that ended immediately before the date of the termination;

 
(C)
Prorated Incentive Compensation for the fiscal year in which the termination occurs based on performance through the month ended before the date of termination; and

 
(D)
Accelerated vesting to 100% on all stock options or restricted stock issued to Executive.

 
(2)
The Change in Control Benefit shall not exceed the lesser of:
 

 
(A)
2.99 times the sum of Executive’s annual base salary in effect immediately prior to the Change in Control, plus an amount equal to the average annual Incentive Compensation and bonus earned by Executive for the three fiscal years preceding the Change in Control; or

(B)           The lesser of the limitations determined under Section 4(c) and (d).

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

 
(b)
Additional Benefits.  In the event Executive’s employment with the Bank is terminated by the Bank without Cause or is terminated by Executive with Good Reason within the number of months stated in Section 3(a)(1)(A) after the effective date of a Change in Control, the Bank shall provide continued coverage under the then existing the Bank’s benefit plans for life, medical and disability insurance for a period of three years following a termination of employment; provided, however, that if the Bank’s benefit plans do not permit continued participation by Executive following termination of employment, the Company shall include in the lump-sum payment of the Change in Control Benefit under subsection (c) below an amount equal to the premiums (estimated in good faith by the Bank) that the Bank would have paid under such benefit plans for Executive’s continued participation for a three-year period.

 
(c)
Payment of Benefit.

 
(1)
Subject to paragraph (2) below, the Change in Control Benefit will be paid in a lump sum within 10 days of termination of Executive’s employment or, if later, the day after the expiration of the revocation period as described in Section 4(a) below.

(2)           If the Change in Control Benefit is subject to § 409A of the Internal Revenue Code
of 1986, as amended, (the “Code”) and Executive is deemed to be a “specified employee” within the meaning of Code § 409A(a)(2)(B)(i), the lump-sum payment will not be made until the seventh month following termination of employment.

4.           Limitations on Change in Control Benefits.

 
(a)
Release of Claims.  Executive’s receipt of the Change in Control Benefit and the additional benefits under Section 3 is conditioned on Executive having executed a separation agreement in substantially the form attached hereto as Exhibit A (the “Separation
 
 
 
4
 
 
 
 
Agreement”) and the revocation period having expired without Executive having revoked the Separation Agreement.  If the combined consideration and revocation periods (as defined in Sections 15 and 16 of the Separation Agreement) overlap two calendar years, the payment will be made in the later of the two years (irrespective of the year in which the Separation Agreement is effective and irrevocable) resulting in taxation to Executive in the second calendar year.
 
 
(b)
Compliance with Material Terms.  Receipt of the Change in Control Benefit is further conditioned on Executive not being in violation of any material term of this Agreement or in violation of any material term of the Separation Agreement.

 
(c)
“Excess Parachute Payment” Restrictions.  If the benefits under Section 3, either alone or together with other payments to which Executive is entitled to receive from the Company in connection with a Change in Control, would constitute an “excess parachute payment” as defined in Code § 280G, such benefits shall be reduced to the largest amount that will result in no portion of the benefits being subject to the excise tax imposed by Code § 4999.  The determination of the amount of any reduction in the benefits pursuant to the foregoing provisions, shall be made by mutual agreement of the Bank and Executive, or if no agreement is possible, by Bancorp’s outside independent accountants. Without limiting the foregoing, Executive may, to the extent possible and in Executive’s sole discretion, choose from among the payments or benefits subject to limitation under this subsection and select the payments or benefits that are to be reduced.

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

5.
Restrictive Covenants.

 
(a)
Confidential Information.
 
 
(1)
Executive acknowledges that, in the course of Executive’s employment, Executive will or may have or obtain knowledge of confidential information and other secrets concerning the Company and its business, plans and strategies, its actual and prospective customers, and other matters which are valuable to the Company and which the Company does not want disclosed (“Confidential Information”).
 
 
(2)
Executive will not, during and after the term of this Agreement, disclose to any other person or entity any Confidential Information concerning the Company, its business operations or customers, or use for Executive’s own purposes or permit or assist others in the use of such confidential information, unless:
 
 
(A)
Bancorp’s Board of Directors consents to the use or disclosure of the information;
 
 
(B)
The use or disclosure is consistent with Executive’s duties under this Agreement; or
 
 
(C)
Disclosure is required by law or court order.
 

 
5
 

 
(b)
Nonsolicitation.
 
 
(1)
During employment and for a one-year period following termination of Executive’s employment for any reason whatsoever, Executive will not solicit any Customer of the Bank or of any of the Bank’s affiliates for services or products then provided by the Bank or any of its affiliates.
 
 
(2)
“Customers” are:
 
 
(A)
All customers serviced by the Bank or any of its affiliates at any time within 12 months before termination of Executive’s employment;
 
 
(B)
All customers and potential customers whom the Bank or its affiliates, with the knowledge or participation of Executive, actively solicited at any time during the 12 months before termination of Executive’s employment; and
 
 
(C)
All successors, owners, directors, partners and management personnel of the Customers described in subparagraph (A) or (B) above.

 
(c)
Nonraiding of Employees.

 
(1)
Executive recognizes that the workforce of the Bank and its affiliates are a vital part of the Company’s business.  Therefore, Executive agrees that, for 12 months following termination of Executive’s employment for any reason whatsoever, Executive will not directly or indirectly recruit or solicit any Employee to leave his or her employment with the Bank or any of the Bank’s affiliates.

 
(2)
Without limiting the foregoing, Executive will not:
 
 
(A)
Disclose to any third party the names, backgrounds, or qualifications of any of the Employees or otherwise identify them as potential candidates for employment; or
 
 
(B)
Personally or through any other person approach, recruit, interview or otherwise solicit Employees to work for any other employer.
 
 
(3)
“Employees” are all employees working for the Bank or any of the Bank’s affiliates at the time of termination of Executive’s employment.
 
 
(d)
Injunctive Relief.  Executive acknowledges that it is impossible to measure in money the damages that the Company will incur if Executive fails to observe the covenants in this Section 5 (the “Restrictive Covenants”) and, therefore, the Executive agrees that:
 
 
(1)
The Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any breach or threatened breach of the Restrictive Covenants;
 
 
(2)
If the Company is required to post a bond in order to secure an injunction or other equitable remedy, that bond shall be no more than a nominal amount;
 
 
(3)
Executive waives any claim or defense that an adequate remedy at law is available to the Company; and
 
 
 
6
 
 
 
 
(4)
These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity.
 
 
(e)
Reasonableness.  The parties agree that:
 
 
(1)
This Agreement in its entirety, and in particular the Restrictive Covenants, is reasonable both as to time and scope;
 
 
(2)
The Restrictive Covenants are necessary for the protection of the Company’s business and goodwill;
 
 
(3)
The Restrictive Covenants are not any greater than are reasonably necessary to secure the Company’s business and goodwill;
 
 
(4)
The degree of injury to the public due to the loss of the service and skill of Executive or the restrictions placed upon Executive’s opportunity to make a living with Executive’s skills upon enforcement of those covenants, does not and will not warrant non-enforcement of those restraints; and
 
 
(5)
If the scope of the Restrictive Covenants is adjudged too broad to be capable of enforcement, then the parties authorize that court or arbitrator to narrow the Restrictive Covenants so as to make them capable of enforcement, given all relevant circumstances, and to enforce them to the fullest extent allowed.
 
 
(f)
Survival. This Section shall survive the termination of this Agreement.
 
6.
Creative Work.
 
 
(a)
Executive agrees that all creative work and work product, including but not limited to all technology, business management tools, processes, software, patents, trademarks, and copyrights developed by Executive during employment with the Company, regardless of when or where such work or work product was produced, constitutes work made for hire, all rights of which are owned by the Company.
 
 
(b)
Executive hereby assigns to the Company all rights, title, and interest, whether by way of copyrights, trade secret, trademark, patent, or otherwise, in all such work or work product, regardless of whether it is subject to protection by patent, trademark, or copyright laws.
 
7.
Return of Company Property. When Executive ceases for any reason to be employed by the Company:
 
 
(a)
Executive must immediately return to the Company:
 
 
(1)
All keys, pass cards, identification cards and any other property of the Company, and disclose all computer user identifications and passwords used by Executive in the course of employment or necessary for accessing information on the Company’s computer system; and
 
 
(2)
All originals and copies (whether in hard copy, electronic or other form) of any documents, drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals, and specifications which constitute Confidential Information or proprietary information or material of the Company.
 
 
 
7
 
 
 
 
(b)
The obligations in this Section include the return of documents and other materials that may be in Executive’s desk at work, Executive’s car or place of residence, or in any other location under Executive’s control.
 
8.
Dispute Resolution.
 
 
(a)
Arbitration.
 
 
(1)
The parties agree to submit any dispute arising under this Agreement, regardless of the nature of the dispute or the legal concepts involved, to final, binding, private arbitration in Vancouver, Washington. Disputes subject to arbitration include not only disputes involving the meaning or performance of the Agreement, but disputes about its negotiation, drafting or execution.
 
 
(2)
The dispute will be determined by a single arbitrator and governed by then existing rules of arbitration procedure in Clark County Superior Court except as set forth in this Section. Instead of filing a civil complaint in Clark County Superior Court, a party will commence the arbitration process by noticing the other party. The parties will choose an arbitrator who specializes in employment conflicts from the arbitration list for Clark County Superior Court.  If the parties are unable to agree on an arbitrator within ten (10) days of receipt of the list of arbitrators, each party will select one attorney from the list, and those two attorneys shall select the arbitrator from the list.  Each of the two selecting attorneys will then conclude their services and be compensated by the party who selected that attorney, subject to recovery of those fees under subsection (b) below.
 
 
(3)
The arbitrator may charge his or her standard arbitration fees rather than the fees prescribed in Clark County Superior Court arbitration procedures.
 
 
(4)
Subject to the limitation under Section 9(i) below, the arbitrator will have full authority to determine all issues, including arbitrability, to award any remedy, including permanent injunctive relief, and to determine any request for attorneys’ fees, costs and expenses in accordance with subsection (b) below.
 
 
(5)
There shall be no right of review in court. The arbitrator’s award may be reduced to final judgment or decree in Clark County Superior Court.
 
 
(b)
Expenses/Attorneys’ Fees.  The prevailing party shall be awarded all costs and expenses of the proceeding, including but not limited to, attorneys’ fees, filing and service fees, witness fees and arbitrator’s fees.  If arbitration is commenced, the arbitrator will be required to name the prevailing party and will have full authority and complete discretion to make that determination and the amount of costs and expenses to be awarded.  The prevailing party shall be entitled to recover any reasonable attorneys’ fees and other costs and expenses it incurs in enforcing or collecting an arbitration award.
 
9.
Miscellaneous.

(a)  
Notices.  Any notice to be delivered under this Agreement shall be given in writing and shall be deemed delivered when received or three days after mailing, by certified mail, postage prepaid, addressed to Bancorp’s Chief Executive Officer (or, in the case of a notice under Section 2(b)(2)(A), to the Bank’s Chief Executive Officer), or to Executive at Executive’s last known address on the records of the Company, if mailed.  Either party may designate an address for notices by written notice to the other.
 
 
 
8
 

 

 
(b)
Governing Law.  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Washington.

 
(c)
Amendment/Waiver.
 
 
(1)
This Agreement may not be amended, released, discharged, abandoned, changed, or modified in any manner, except by an instrument in writing signed by each of the parties hereto.
 
 
(2)
The failure of any party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of any party to enforce each and every such provision. No waiver or any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.
 
 
(d)
Severability.  If any provision of this Agreement is held by a court or arbitrator to be invalid or unenforceable, the remaining provisions shall continue to be fully effective.  If any part of this Agreement is held to be unenforceable as written, it shall be enforced to the maximum extent allowed by applicable law.  The unenforceability of any provision in this Agreement in any jurisdiction shall not affect the enforceability of any provision of this Agreement in any other jurisdiction.
 
 
(e)
Entire Agreement.  This Agreement represents the entire agreement between the parties regarding the matters addressed in this Agreement. This Agreement supersedes any other prior oral or written employment agreement between the parties regarding severance benefits or other benefits payable to Executive following a Change in Control. This Agreement does not supersede any incentive compensation agreement (including stock option agreements) or employment agreement entered into separately by the parties to this Agreement.
 
 
(f)
Code § 409A Compliance.  If the Company or Executive believes, at any time, that this Agreement does not comply with Code § 409A, it will promptly advise the other party and both parties will negotiate reasonably and in good faith to amend the terms of the Agreement so that it complies with the most limited possible economic effect on the Company and Executive.
 
(g)           Assignment; Death; Binding Effect.
 
 
(1)
Executive shall not assign or transfer any of Executive’s rights under this Agreement, wholly or partially, to any other person or to delegate the performance of the Executive’s duties under the terms of this Agreement.
 
 
(2)
Upon Executive’s death, no death benefit is payable under this Agreement other than benefits that were already in pay status at the date of death.  Executive’s rights under this Agreement with respect to any benefits earned before the date of death shall inure to Executive’s heirs, executors, administrators or personal representatives.
 
 
(3)
The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of the Company, regardless of the manner in which the successors or assigns succeed to the interests or assets of the Company.  This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company, by any merger, consolidation or acquisition where the Company is not
 
 
 
9
 
 
 
 
the surviving corporation, by any transfer of all or substantially all of the Company’s assets, or by any other change in the Company’s structure or the manner in which the Company’s business or assets are held.  Executive’s employment shall not be deemed terminated upon the occurrence of one of the foregoing events. In the event of any merger, consolidation or sale or transfer of assets, this Agreement shall be binding upon and shall inure to the benefit of the surviving business or the business entity to which the assets are transferred.
 
 
(h)
Survival.  If any benefits provided to Executive under this Agreement are still owed, or claims under the Agreement are still pending at the time of termination of this Agreement, this Agreement shall continue in force with respect to those obligations or claims, until those benefits are paid in full or those claims are resolved in full.  The Restrictive Covenants and dispute resolution provisions of this Agreement shall survive the termination of this Agreement and shall be enforceable regardless of any claim Executive may have against the Company.
 
 
(i)
Board of Director’s Authority.

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

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

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

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

(B)           Supported by clear and convincing evidence; and

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

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

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

 
(k)
Actions by Banking Regulatory Authorities.

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

 
(A)
Pay Executive all or part of the payments under this Agreement that were withheld while its obligations under this Agreement were suspended; and/or
 
 
 
10
 

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

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

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

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

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

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

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

10.
Advice of Counsel.  Executive acknowledges that, in executing this Agreement, Executive has had the opportunity to seek the advice of independent legal counsel and has read and understood all of the terms and provisions of this Agreement.  This Agreement shall not be construed against any party by reason of the drafting or preparation of its provisions.

 
 
EXECUTIVE
  
   
______________________________________
  
   
Date:__________________________________
  
   
   
RIVERVIEW COMMUNITY BANK     RIVERVIEW BANCORP, INC. 
   
   
By:  __________________________________ By: __________________________________
Title: _________________________________  Title: _________________________________
Date: _________________________________  Date: _________________________________
 

                                                                   
                                                                  

 
11
 

Exhibit A

EMPLOYMENT SEPARATION AGREEMENT AND RELEASE OF CLAIMS

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

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

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

3.
COBRA Continuation Coverage.  Your normal employee participation in Riverview’s group health coverage will terminate on the Separation Date or, if provided under the group health plan, the last day of the month in which the Separation Date occurs.  Continuation of group health coverage thereafter will be made available to you and your dependents pursuant to federal law (“COBRA”). Continuation of group health coverage after the Separation Date is entirely at your expense, as provided under COBRA.

4.
Termination of Benefits.  Except as provided in Section 3 above, your participation in all employee benefit plans and programs ends (or ended) on the Separation Date or as otherwise provided in those plans.  Your rights under any benefit or other plans in which you may have participated will be determined in accordance with the written plan documents governing those plans.

5.
Full Payment.  You acknowledge having received full payment of all compensation of any kind (including wages, salary, paid time off, sick leave, commissions and incentive compensation) that you earned as a result of your employment by us and that are owing to you as of the Separation Date.

6.
No Further Compensation.  Any and all agreements to pay you bonuses or other incentive compensation are terminated.  You understand and agree that you have no right to receive any further payments for bonuses or other incentive compensation.  We owe you no further compensation or benefits of any kind, except as described in Section 2 above.

7.           Release of Claims.

 
(a)
You hereby release:

 
(1)
Riverview and its affiliates and benefit plans (each, including Riverview, a “Riverview Affiliate”);

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

A-1
 
 
 

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

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

 
(c)
You specifically waive any rights or claims that you may have under Title 49 of the Revised Code of Washington, the Civil Rights Act of 1964 (including Title VII of that Act), the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967 (ADEA), the Americans with Disabilities Act of 1990 (ADA), the Fair Labor Standards Act of 1938 (FLSA), the Family and Medical Leave Act of 1993 (FMLA), the Worker Adjustment and Retraining Notification Act (WARN), the Employee Retirement Income Security Act of 1974 (ERISA), the National Labor Relations Act (NLRA), and all similar federal, state and local laws.

 
(d)
You agree not to seek any personal recovery (of money damages, injunctive relief or otherwise) for the claims you are releasing in this Separation Agreement, either through any complaint to any governmental agency or otherwise, whether individually or through a class action.  You agree never to start or participate as a plaintiff in any lawsuit or arbitration asserting any of the claims you are releasing in this Separation Agreement.  You represent and warrant that you have not initiated any complaint, charge, lawsuit or arbitration involving any of the claims you are releasing in this Separation Agreement.

 
(e)
Should you apply for future employment with a Riverview Affiliate, the Riverview Affiliate has no obligation to consider you for future employment.

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

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

 
(h)
This Separation Agreement also does not affect your rights under any agreements, bylaw provisions, insurance or otherwise, to be indemnified, defended or held harmless in connection with claims that may be asserted against you by third parties.
 
 
 
A-2
 

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

 
(j)
You are giving up all rights and claims of any kind, known or unknown, except for the rights specifically given to you in this Separation Agreement.

 
(k)
You agree that this release is fairly and knowingly made.

8.
No Admission of Liability.  Neither this Separation Agreement nor the payments made under this Separation Agreement are an admission of liability or wrongdoing by any Riverview Affiliate.

9.
Riverview Materials.  You represent and warrant that you have, or no later than the Separation Date will have, returned all keys, credit cards, documents and other materials that belong to us, and disclosed all computer user identifications and passwords used by you in the course of your employment or necessary for accessing information on our computer system, in accordance with Section 7 of the CIC Agreement, which is incorporated herein by reference.

10.
Nondisclosure Agreement.  You will comply with the covenant regarding confidential information in Section 5(a) of the CIC Agreement, which covenant is incorporated herein by reference.

11.
No Disparagement.  You may not disparage any Riverview Affiliate or its business or products and may not encourage any third parties to sue a Riverview Affiliate.

12.
Cooperation Regarding Other Claims.  If any claim is asserted by or against a Riverview Affiliate as to which you have relevant knowledge, you will reasonably cooperate with us in the prosecution or defense of that claim, including by providing truthful information and testimony as reasonably requested by us.

13.
Nonsolicitation; No Interference.   You will comply with Sections 5(b) and 5(c) of the CIC Agreement, incorporated herein by reference, and Riverview will have the right to enforce those provisions under the terms of Section 5(d) of the CIC Agreement, incorporated herein by reference.  Following the expiration of the covenants referenced in the preceding sentence, you will not, apart from good faith competition, interfere with any Riverview Affiliate’s relationships with customers, employees, vendors, or others.

14.
Independent Legal Counsel.  You are advised and encouraged to consult with an attorney before signing this Separation Agreement.  You acknowledge that you have had an adequate opportunity to do so.

15.
Consideration Period.  You have 21 days from the date this Separation Agreement is given to you to consider this Separation Agreement before signing it.  You may use as much or as little of this 21-day period as you wish before signing.  If you do not sign and return this Separation Agreement within this 21-day period, you will not be eligible to receive the benefits described in this Separation Agreement.

16.
Revocation Period and Effective Date.  You have 7 calendar days after signing this Separation Agreement to revoke it.  To revoke this Separation Agreement after signing it, you must deliver a written notice of revocation to the Bank’s Chief Executive Officer before the 7-day period expires.  
 
 
 
A-3
 
 
 
This Separation Agreement shall not become effective until the 8th calendar day after you sign it.  If you revoke this Separation Agreement it will not become effective or enforceable and you will not be entitled to the benefits described in this Separation Agreement.
 
17.
Governing Law.  This Separation Agreement is governed by the laws of the State of Washington that apply to contracts executed and to be performed entirely within the State of Washington.

18.
Dispute Resolution.  Any dispute arising under this Agreement shall be subject to arbitration in accordance with Section 8 of the CIC Agreement, as modified by Section 9(i) of the CIC Agreement, which sections are specifically incorporated by reference, in their entirety, in this Agreement.

19.
Saving Provision.  If any part of this Separation Agreement is held to be unenforceable, it shall not affect any other part.  If any part of this Separation Agreement is held to be unenforceable as written, it shall be enforced to the maximum extent allowed by applicable law.

20.
Final and Complete Agreement.  Except for the CIC Agreement and/or the Employment Agreement, which are expressly incorporated herein by reference, this Separation Agreement is the final and complete expression of all agreements between us on all subjects relating to your employment or its termination and supersedes and replaces all prior discussions, representations, agreements, policies and practices.  You acknowledge you are not signing this Separation Agreement relying on anything not set out herein.

 
Riverview Community Bank

By: _______________________                                                               

Title: ______________________                                                                

Date: ______________________                                                                


Riverview Bancorp, Inc.

By: _______________________                                                               

Title: ______________________                                                                

Date: ______________________                                                                


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

___________________________
Print Name

___________________________
Date

A-4
 
 
 



Exhibit 31.1
Section 302 Certification

I, Patrick Sheaffer, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014 of Riverview Bancorp, Inc.;

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

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

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

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

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

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

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

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

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

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




Date:  February 12, 2015
/S/ Patrick Sheaffer
Patrick Sheaffer
Chairman and Chief Executive Officer
 
 
44


Exhibit 31.2
Section 302 Certification

I, Kevin J. Lycklama, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014 of Riverview Bancorp, Inc.;

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

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

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

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

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

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

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

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

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

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




Date:  February 12, 2015                                                                      /S/ Kevin J. Lycklama
Kevin J. Lycklama
Chief Financial Officer
 
 
 
45


Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF RIVERVIEW BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify in the capacity indicated below, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), in their capacity as officers of Riverview Bancorp, Inc. (the “Company”) and in connection with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014 that:

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

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


 
 /s/ Patrick Sheaffer /s/ Kevin J. Lycklama
Patrick Sheaffer  Kevin J. Lycklama 
Chief Executive Officer Chief Financial Officer
   
   
Dated: February 12, 2015  Dated: February 12, 2015 
 

 
 
 
 
 
 
 
 
 
 
 
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