10-Q 1 riv10q63020.htm FORM 10-Q
 
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 June 30, 2020


OR

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

For the transition period from _____ to _____

Commission File Number: 000-22957

RIVERVIEW BANCORP, INC.
(Exact name of registrant as specified in its charter)

Washington
 
91-1838969
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer I.D. Number)
 
 
 
900 Washington St., Ste. 900, Vancouver, Washington   98660
(Address of principal executive offices)    (Zip Code)
     
Registrant's telephone number, including area code:   (360) 693-6650 
     
Securities registered pursuant to Section 12(b) of the Act:    

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
 Common Stock, Par Value $0.01 per share   RVSB    The NASDAQ Stock Market LLC

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

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

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

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


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, $.01 par value per share, 22,245,472 shares outstanding as of August 14, 2020.



Form 10-Q

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX

Part I.
Financial Information
Page
 
 
 
Item 1: 
Financial Statements (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of
June 30, 2020 and March 31, 2020
2
 
 
 
 
Consolidated Statements of Income for the
Three Months Ended June 30, 2020 and 2019
3
 
 
 
 
Consolidated Statements of Comprehensive Income for the
Three Months Ended June 30, 2020 and 2019
4
 
 
 
 
Consolidated Statements of Shareholders’ Equity for the
Three Months Ended June 30, 2020 and 2019
5
 
 
 
 
Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2020 and 2019
6
 
 
 
 
Notes to Consolidated Financial Statements 
7
 
 
 
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations 
24
 
 
 
Item 3:
Quantitative and Qualitative Disclosures About Market Risk 
40
 
 
 
Item 4: 
Controls and Procedures 
40
 
 
 
Part II.
Other Information
41-42
 
 
 
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
43
     
Certifications   
 
     Exhibit 31.1
     Exhibit 31.2
     Exhibit 32
 




Forward-Looking Statements

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

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-Q, the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions, statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on Riverview’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in the Company’s allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in the Company’s market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, the Company’s net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in the Company’s market areas; secondary market conditions for loans and the Company’s ability to originate loans for sale and sell loans in the secondary market; results of examinations of our bank subsidiary, Riverview Community Bank, by the Office of the Comptroller of the Currency and of the Company by the Board of Governors of the Federal Reserve System, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the Company to increase its allowance for loan losses, write-down assets, reclassify its assets, change Riverview Community Bank’s regulatory capital position or affect the Company’s ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings; legislative or regulatory changes that adversely affect the Company’s business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the Company’s ability to attract and retain deposits; the Company’s ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company’s assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on the Company’s consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the Company’s workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; the Company’s ability to retain key members of its senior management team; costs and effects of litigation, including settlements and judgments; the Company’s ability to implement its business strategies; the Company's ability to successfully integrate any assets, liabilities, customers, systems, and management personnel it may acquire into its operations and the Company's ability to realize related revenue synergies and cost savings within expected time frames; future goodwill impairment due to changes in Riverview’s business, changes in market conditions, including as a result of the COVID-19 pandemic or other factors; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the Company’s ability to pay dividends on its common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting standards; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services including as a result of COVID-19; and the other risks described from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”).

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2021 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company’s consolidated financial condition and consolidated results of operations as well as its stock price performance.



1


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

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2020 AND MARCH 31, 2020

(In thousands, except share and per share data) (Unaudited)
 
June 30,
2020
   
March 31,
2020
 
ASSETS
           
Cash and cash equivalents (including interest-earning accounts of $143,017 and $27,866)
 
$
157,835
   
$
41,968
 
Certificates of deposit held for investment
   
249
     
249
 
Loans held for sale
   
-
     
275
 
Investment securities:
               
Available for sale, at estimated fair value
   
137,749
     
148,291
 
Held to maturity, at amortized cost (estimated fair value of $26 and $28)
   
26
     
28
 
Loans receivable (net of allowance for loan losses of $17,076 and $12,624)
   
985,644
     
898,885
 
Prepaid expenses and other assets
   
9,062
     
7,452
 
Accrued interest receivable
   
5,202
     
3,704
 
Federal Home Loan Bank stock (“FHLB”), at cost
   
2,620
     
1,420
 
Premises and equipment, net
   
16,124
     
15,570
 
Financing lease right-of-use assets (“ROU”)
   
1,489
     
1,508
 
Deferred income taxes, net
   
3,067
     
3,277
 
Mortgage servicing rights, net
   
162
     
191
 
Goodwill
   
27,076
     
27,076
 
Core deposit intangible (“CDI”), net
   
724
     
759
 
Bank owned life insurance (“BOLI”)
   
30,345
     
30,155
 
TOTAL ASSETS
 
$
1,377,374
   
$
1,180,808
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
LIABILITIES:
               
Deposits
 
$
1,158,749
   
$
990,448
 
Accrued expenses and other liabilities
   
11,472
     
11,783
 
Advanced payments by borrowers for taxes and insurance
   
632
     
703
 
FHLB advances
   
30,000
     
-
 
Junior subordinated debentures
   
26,684
     
26,662
 
Finance lease liability
   
2,359
     
2,369
 
Total liabilities
   
1,229,896
     
1,031,965
 
                 
COMMITMENTS AND CONTINGENCIES (See Note 14)
               
                 
SHAREHOLDERS’ EQUITY:
               
Serial preferred stock, $.01 par value; 250,000 shares authorized; issued and outstanding: none
   
-
     
-
 
Common stock, $.01 par value; 50,000,000 shares authorized
               
June 30, 2020 – 22,245,472 shares issued and outstanding
   
222
     
225
 
March 31, 2020 – 22,748,385 shares issued and 22,544,285 shares outstanding
               
Additional paid-in capital
   
63,254
     
64,649
 
Retained earnings
   
81,240
     
81,870
 
Accumulated other comprehensive income
   
2,762
     
2,099
 
Total shareholders’ equity
   
147,478
     
148,843
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,377,374
   
$
1,180,808
 

See accompanying notes to consolidated financial statements.


2

RIVERVIEW BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019


(In thousands, except share and per share data) (Unaudited)   2020
    2019
 
INTEREST AND DIVIDEND INCOME: 
           
Interest and fees on loans receivable
 
$
11,528
   
$
11,554
 
Interest on investment securities – taxable
   
655
     
878
 
Interest on investment securities – nontaxable
   
18
     
37
 
Other interest and dividends
   
37
     
87
 
Total interest and dividend income
   
12,238
     
12,556
 
                 
INTEREST EXPENSE:
               
Interest on deposits
   
858
     
351
 
Interest on borrowings
   
252
     
735
 
Total interest expense
   
1,110
     
1,086
 
Net interest income
   
11,128
     
11,470
 
Provision for loan losses
   
4,500
     
-
 
Net interest income after provision for loan losses
   
6,628
     
11,470
 
                 
NON-INTEREST INCOME:
               
Fees and service charges
   
1,398
     
1,637
 
Asset management fees
   
974
     
1,143
 
Net gains on sales of loans held for sale
   
28
     
96
 
BOLI
   
190
     
193
 
Other, net
   
33
     
67
 
Total non-interest income, net
   
2,623
     
3,136
 
                 
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
   
5,192
     
5,715
 
Occupancy and depreciation
   
1,450
     
1,320
 
Data processing
   
661
     
680
 
Amortization of CDI
   
35
     
40
 
Advertising and marketing
   
129
     
210
 
FDIC insurance premium
   
48
     
80
 
State and local taxes
   
204
     
195
 
Telecommunications
   
86
     
86
 
Professional fees
   
320
     
325
 
Other
   
560
     
543
 
Total non-interest expense
   
8,685
     
9,194
 
                 
INCOME BEFORE INCOME TAXES
   
566
     
5,412
 
PROVISION FOR INCOME TAXES
   
86
     
1,220
 
NET INCOME
 
$
480
   
$
4,192
 
                 
Earnings per common share:
               
Basic
 
$
0.02
   
$
0.19
 
Diluted
   
0.02
     
0.18
 
Weighted average number of common shares outstanding:
               
Basic
   
22,178,427
     
22,619,580
 
Diluted
   
22,198,065
     
22,685,343
 

See accompanying notes to consolidated financial statements.

3

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands) (Unaudited)
 
2020
   
2019
 
             
Net income
 
$
480
   
$
4,192
 
                 
Other comprehensive income:
               
Net unrealized holding gain from available for sale investment securities
               
arising during the period, net of tax of ($209) and ($675), respectively
   
663
     
2,135
 
                 
Total comprehensive income, net
 
$
1,143
   
$
6,327
 

See accompanying notes to consolidated financial statements.








4

RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

 
Common Stock
   
Additional
Paid-In
    Retained    
Accumulated
Other
Comprehensive
       
(In thousands, except share and per share data) (Unaudited)
 
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Total
 
                                     
Balance April 1, 2019
   
22,607,712
   
$
226
   
$
65,094
   
$
70,428
   
$
(2,626
)
 
$
133,122
 
                                                 
Net income
   
-
     
-
     
-
     
4,192
     
-
     
4,192
 
Cash dividends on common stock ($0.045 per share)
   
-
     
-
     
-
     
(1,018
)
   
-
     
(1,018
)
Exercise of stock options
   
15,000
     
-
     
52
     
-
     
-
     
52
 
Restricted stock grants
   
82,673
     
-
     
-
     
-
     
-
     
-
 
Stock-based compensation expense
   
-
     
-
     
180
     
-
     
-
     
180
 
Other comprehensive income, net
   
-
     
-
     
-
     
-
     
2,135
     
2,135
 
Balance June 30, 2019
   
22,705,385
   
$
226
   
$
65,326
   
$
73,602
   
$
(491
)
 
$
138,663
 

                                     
Balance April 1, 2020
   
22,544,285
   
$
225
   
$
64,649
   
$
81,870
   
$
2,099
   
$
148,843
 
                                                 
Net income
                           
480
             
480
 
Cash dividends on common stock ($0.05 per share)
   
-
     
-
     
-
     
(1,110
)
   
-
     
(1,110
)
Exercise of stock options
   
5,000
     
-
     
9
     
-
     
-
     
9
 
Stock repurchased
   
(295,900
)
   
(3
)
   
(1,444
)
   
-
     
-
     
(1,447
)
Restricted stock cancelled
   
(7,913
)
   
-
     
-
     
-
     
-
     
-
 
Stock-based compensation expense
   
-
     
-
     
40
     
-
     
-
     
40
 
Other comprehensive income, net
   
-
     
-
     
-
     
-
     
663
     
663
 
Balance June 30, 2020
   
22,245,472
   
$
222
   
$
63,254
   
$
81,240
   
$
2,762
   
$
147,478
 

See accompanying notes to consolidated financial statements.






5


RIVERVIEW BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands) (Unaudited)
 
2020
   
2019
 
             
 CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
480
   
$
4,192
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
732
     
767
 
Purchased loans amortization (accretion), net
   
95
     
(41
)
Provision for loan losses
   
4,500
     
-
 
Stock-based compensation expense
   
40
     
180
 
Increase in deferred loan origination fees, net of amortization
   
2,987
     
110
 
Origination of loans held for sale
   
(913
)
   
(2,627
)
Proceeds from sales of loans held for sale
   
1,214
     
3,598
 
Net gains on loans held for sale and sales of premises and equipment
   
(28
)
   
(91
)
Income from BOLI
   
(190
)
   
(193
)
Changes in certain other assets and liabilities:
               
Prepaid expenses and other assets
   
(842
)
   
1,459
 
Accrued interest receivable
   
(1,498
)
   
(70
)
Accrued expenses and other liabilities
   
(1,039
)
   
(735
)
Net cash provided by operating activities
   
5,538
     
6,549
 
                 
 CASH FLOWS FROM INVESTING ACTIVITIES:
               
Loan originations, net
   
(91,351
)
   
(8,327
)
Purchases of loans receivable
   
(2,989
)
   
(3,594
)
Principal repayments on investment securities available for sale
   
8,065
     
6,863
 
Proceeds from calls of investment securities available for sale
   
3,000
     
3,000
 
Principal repayments on investment securities held to maturity
   
2
     
2
 
Purchases of premises and equipment and capitalized software
   
(847
)
   
(82
)
Purchases of FHLB stock, net
   
(1,200
)
   
(14
)
Net cash used in investing activities
   
(85,320
)
   
(2,152
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase (decrease) in deposits
   
168,301
     
(2,788
)
Dividends paid
   
(1,133
)
   
(904
)
Proceeds from borrowings
   
30,000
     
130,947
 
Repayment of borrowings
   
-
     
(130,592
)
Net increase (decrease) in advance payments by borrowers for taxes and insurance
   
(71
)
   
58
 
Principal payments on finance lease liability
   
(10
)
   
(8
)
Proceeds from exercise of stock options
   
9
     
52
 
Repurchase of common stock
   
(1,447
)
   
-
 
Net cash provided by (used in) financing activities
   
195,649
     
(3,235
)
                 
 NET INCREASE IN CASH AND CASH EQUIVALENTS
   
115,867
     
1,162
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
41,968
     
22,950
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
157,835
   
$
24,112
 
                 
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
 
$
1,001
   
$
1,065
 
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Dividends declared and accrued in other liabilities
 
$
1,112
   
$
1,018
 
Net unrealized holding gain from available for sale investment securities
   
872
     
2,810
 
Income tax effect related to other comprehensive income
   
(209
)
   
(675
)
ROU lease assets obtained in exchange for operating lease liabilities
   
785
     
5,603
 

See accompanying notes to consolidated financial statements.


6



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

1.
BASIS OF PRESENTATION

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

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Riverview Bancorp, Inc. Annual Report on Form 10-K for the year ended March 31, 2020 (“2020 Form 10-K”). The unaudited consolidated results of operations for the three months ended June 30, 2020 are not necessarily indicative of the results which may be expected for the entire fiscal year ending March 31, 2021.

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

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

2.
PRINCIPLES OF CONSOLIDATION

The accompanying 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 Trust Company (the “Trust Company”) (collectively referred to as the “Company”). All inter-company transactions and balances have been eliminated in consolidation. For the period from April 1, 2017 through December 2019, the Trust Company was a wholly-owned subsidiary of the Bank. In December 2019, the Trust Company issued 1,500 shares of Trust Company stock in conjunction with the exercise of 1,500 Trust Company stock options by the Trust Company’s President and Chief Executive Officer. As a result of this transaction, the Bank’s ownership in the Trust Company decreased from 100% to 98%, resulting in a noncontrolling interest. The noncontrolling interest was $110,000 as of June 30, 2020, and net income attributable to the noncontrolling interest was $3,000 for the three months ended June 30, 2020. These amounts are not presented separately in the accompanying consolidated financial statements due to their insignificance.

3.
STOCK PLANS AND STOCK-BASED COMPENSATION

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

In July 2017, the shareholders of the Company approved the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (“2017 Plan”). The 2017 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units. The Company has reserved 1,800,000 shares of its common stock for issuance under the 2017 Plan. The 2003 Plan and the 2017 Plan are collectively referred to as “the Stock Option Plans”.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes stock option valuation model. The fair value of all awards is amortized on a straight-line basis over the requisite service periods, which are generally the vesting periods. The expected life of options granted represents the period of time that they are expected to be outstanding. The expected life is determined based on historical experience with similar options, giving consideration to the contractual terms and vesting schedules. Expected volatility is estimated at the date of grant based on the historical volatility of the Company’s common stock. Expected dividends are based on dividend trends and the market value of the Company’s common stock at the time of grant. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant. There were no stock options granted under the 2017 Stock Option Plan during the three months ended June 30, 2020 and 2019.



7

As of June 30, 2020, all outstanding stock options were fully vested and there was no remaining unrecognized compensation expense related to stock options granted under the Stock Option Plans. There was no stock-based compensation expense related to stock options for the three months ended June 30, 2020 and 2019 under the Stock Option Plans.

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

   
Three Months Ended
June 30, 2020
   
Three Months Ended
June 30, 2019
 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Number of
Shares
   
Weighted
Average
Exercise
Price
 
Balance, beginning of period
   
43,332
   
$
2.69
     
101,332
   
$
3.26
 
Options exercised
   
(5,000
)
   
1.97
     
(15,000
)
   
3.27
 
Balance, end of period
   
38,332
   
$
2.78
     
86,332
   
$
3.26
 

The following table presents information on stock options outstanding, less estimated forfeitures, as of June 30, 2020 and 2019:

   
2020
   
2019
 
Stock options fully vested and expected to vest:
           
Number
   
38,332
     
86,332
 
Weighted average exercise price
 
$
2.78
   
$
3.26
 
Aggregate intrinsic value (1)
 
$
110,000
   
$
456,000
 
Weighted average contractual term of options (years)
   
2.85
     
1.90
 
Stock options fully vested and currently exercisable:
               
Number
   
38,332
     
86,332
 
Weighted average exercise price
 
$
2.78
   
$
3.26
 
Aggregate intrinsic value (1)
 
$
110,000
   
$
456,000
 
Weighted average contractual term of options (years)
   
2.85
     
1.90
 
                 

(1) 
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price) that would have been received by the option holders had all option holders exercised. This amount changes based on changes in the market value of the Company’s stock.
 

The total intrinsic value of stock options exercised was $17,000 and $64,000 for the three months ended June 30, 2020 and 2019, respectively, under the Stock Option Plans.

During the three months ended June 30, 2019, the Company granted 82,673 shares of restricted stock pursuant to the 2017 Plan of which vesting for 49,298 shares of restricted stock were time based and vesting for 33,375 shares of restricted stock were performance based subject to attaining certain performance metrics. The Company cancelled 7,913 shares of performance-based restricted stock during the quarter ended June 30, 2020 due to not achieving certain performance metrics

The fair value of restricted stock awards is equal to the fair value of the Company’s stock on the date of grant. The related stock-based compensation expense is recorded over the requisite service period. Stock-based compensation related to restricted stock grants was $29,000 and $169,000 for the three months ended June 30, 2020 and 2019, respectively. The unrecognized stock-based compensation related to restricted stock was $252,000 at June 30, 2020. The weighted average vesting period for the restricted stock was 1.43 years at June 30, 2020.

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

   
Time Based
   
Performance Based
   
Total
 
   
Number of
Unvested
Shares
   
Weighted
Average
Market
Price
   
Number of
Unvested
Shares
   
Weighted
Average
Market
Price
   
Number of
Unvested
Shares
   
Weighted
Average
Market
Price
 
Balance, beginning of period
   
49,298
   
$
8.35
     
33,375
   
$
8.35
     
82,673
   
$
8.35
 
Granted
   
-
     
-
     
-
     
-
     
-
     
-
 
Forfeited
   
-
     
-
     
-
     
-
     
-
     
-
 
Vested
   
(23,135
)
   
8.35
     
-
     
-
     
(23,135
)
   
8.35
 
Cancelled
   
-
     
-
     
(7,913
)
   
8.35
     
(7,913
)
   
8.35
 
Balance, end of period
   
26,163
   
$
8.35
     
25,462
   
$
8.35
     
51,625
   
$
8.35
 



8

Trust Company Stock Options – At June 30, 2020 and 2019, there were 1,000 and 2,500 Trust Company stock options outstanding, respectively, which had been granted to the President and Chief Executive Officer of the Trust Company. During each of the three months ended June 30, 2020 and 2019, the Trust Company incurred $11,000 of stock-based compensation expense related to these options. No Trust Company stock options were exercised during the three months ended June 30, 2020 and 2019. There were no Trust Company stock options granted during the three months ended June 30, 2020 and 2019. Unrecognized compensation expense related to the Trust Company stock options totaled $33,000.

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 the assumed exercise of outstanding stock options and assumed vesting of restricted stock. For the three months ended June 30, 2020 and 2019, there were no stock options excluded in computing diluted EPS.

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

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

   
Three Months Ended
June 30,
 
   
2020
   
2019
 
Basic EPS computation:
           
Numerator-net income
 
$
480,000
   
$
4,192,000
 
Denominator-weighted average common shares outstanding
   
22,178,427
     
22,619,580
 
Basic EPS
 
$
0.02
   
$
0.19
 
Diluted EPS computation:
               
Numerator-net income
 
$
480,000
   
$
4,192,000
 
Denominator-weighted average common shares outstanding
   
22,178,427
     
22,619,580
 
Effect of dilutive stock options and restricted stock
   
19,638
     
65,763
 
Weighted average common shares and common
               
stock equivalents
   
22,198,065
     
22,685,343
 
Diluted EPS
 
$
0.02
   
$
0.18
 

5.
INVESTMENT SECURITIES

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

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
June 30, 2020
                       
Available for sale:
                       
Municipal securities
 
$
4,737
   
$
279
   
$
-
   
$
5,016
 
Agency securities
   
3,008
     
9
     
(9
)
   
3,008
 
Real estate mortgage investment conduits (1)
   
40,308
     
952
     
-
     
41,260
 
Residential mortgage-backed securities (1)
   
54,184
     
1,481
     
-
     
55,665
 
Other mortgage-backed securities (2)
   
31,878
     
1,023
     
(101
)
   
32,800
 
Total available for sale
 
$
134,115
   
$
3,744
   
$
(110
)
 
$
137,749
 
                                 
Held to maturity:
                               
Residential mortgage-backed securities (3)
 
$
26
   
$
-
   
$
-
   
$
26
 


9


   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
March 31, 2020
                       
Available for sale:
                       
Municipal securities
 
$
4,740
   
$
137
   
$
-
   
$
4,877
 
Agency securities
   
6,009
     
17
     
(10
)
   
6,016
 
Real estate mortgage investment conduits (1)
   
42,663
     
1,128
     
-
     
43,791
 
Residential mortgage-backed securities (1)
   
58,700
     
1,415
     
(30
)
   
60,085
 
Other mortgage-backed securities (2)
   
33,417
     
256
     
(151
)
   
33,522
 
Total available for sale
 
$
145,529
   
$
2,953
   
$
(191
)
 
$
148,291
 
                                 
Held to maturity:
                               
Residential mortgage-backed securities (3)
 
$
28
   
$
-
   
$
-
   
$
28
 
   
(1) Comprised of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Ginnie Mae (“GNMA”) issued securities.
 
(2) Comprised of U.S. Small Business Administration (“SBA”) issued securities and commercial real estate (“CRE”) secured securities issued by FNMA.
 
(3) Comprised of FHLMC and FNMA issued securities.
 

The contractual maturities of investment securities as of June 30, 2020 are as follows (in thousands):

   
Available for Sale
   
Held to Maturity
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Due in one year or less
 
$
1,001
   
$
1,010
   
$
-
   
$
-
 
Due after one year through five years
   
5,103
     
5,149
     
23
     
23
 
Due after five years through ten years
   
29,637
     
30,531
     
3
     
3
 
Due after ten years
   
98,374
     
101,059
     
-
     
-
 
Total
 
$
134,115
   
$
137,749
   
$
26
   
$
26
 

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

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


   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
 
June 30, 2020
                                   
                                     
Available for sale:
                                   
Agency securities
 
$
1,998
   
$
(9
)
 
$
-
   
$
-
   
$
1,998
   
$
(9
)
Other mortgage-backed securities (2)
   
-
     
-
     
4,787
     
(101
)
   
4,787
     
(101
)
Total available for sale
 
$
1,998
   
$
(9
)
 
$
4,787
   
$
(101
)
 
$
6,785
   
$
(110
)

March 31, 2020
                                   
                                     
Available for sale:
                                   
Agency securities
 
$
1,998
   
$
(10
)
 
$
-
   
$
-
   
$
1,998
   
$
(10
)
Residential mortgage-backed securities (1)
   
2,509
     
(22
)
   
409
     
(8
)
   
2,918
     
(30
)
Other mortgage-backed securities (2)
   
11,726
     
(58
)
   
4,911
     
(93
)
   
16,637
     
(151
)
Total available for sale
 
$
16,233
   
$
(90
)
 
$
5,320
   
$
(101
)
 
$
21,553
   
$
(191
)
                                                 
(1) Comprised of FHLMC and FNMA issued securities.
 
(2) Comprised of SBA and CRE secured securities issued by FNMA.
 

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

The Company had no sales and realized no gains or losses on sales of investment securities for the three months ended June 30, 2020 and 2019. Investment securities available for sale with an amortized cost of $6.4 million and $6.6 million and an estimated fair value of $6.5 million and $6.8 million at June 30, 2020 and March 31, 2020, respectively, were pledged as collateral for government public funds held by the Bank. There were no held to maturity securities pledged as collateral for government public funds held by the Bank at June 30, 2020 and March 31, 2020.

10

6.
LOANS RECEIVABLE

Loans receivable are reported net of deferred loan fees. At June 2020, deferred loan fees totaled $7.1 million of which $3.2 million were related to SBA Paycheck Protection Program (“PPP”) loans. At March 31, 2020, deferred loan fees totaled $4.1 million of which there were no deferred loan fees related to SBA PPP loans. Loans receivable are also reported net of discounts and premiums totaling $994,000 and $1.4 million, respectively, as of June 30, 2020, compared to $1.1 million and $1.5 million, respectively, as of March 31, 2020. Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated (in thousands):


   
June 30, 2020
   
March 31, 2020
 
Commercial and construction
           
Commercial business (1)
 
$
281,832
   
$
179,029
 
Commercial real estate
   
527,576
     
507,871
 
Land
   
14,404
     
14,026
 
Multi-family
   
58,113
     
58,374
 
Real estate construction
   
37,824
     
64,843
 
Total commercial and construction
   
919,749
     
824,143
 
                 
Consumer
               
Real estate one-to-four family
   
79,582
     
83,150
 
Other installment
   
3,389
     
4,216
 
Total consumer
   
82,971
     
87,366
 
                 
Total loans
   
1,002,720
     
911,509
 
                 
Less:  Allowance for loan losses
   
17,076
     
12,624
 
Loans receivable, net
 
$
985,644
   
$
898,885
 
(1) SBA PPP loans totaled $110.3 million and none at June 30, 2020 and March 31, 2020, respectively.
 

The Company considers its loan portfolio to have very little exposure to sub-prime mortgage loans since the Company has not historically engaged in this type of lending. At June 30, 2020, loans carried at $513.3 million were pledged as collateral to the Federal Home Loan Bank of Des Moines (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) pursuant to borrowing agreements.

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

7.
ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s ongoing quarterly assessment of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions and a detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific, general and unallocated components.

The specific component relates to loans that are considered impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value (less estimated selling costs, if applicable) of the impaired loan is lower than the carrying value of that loan.

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

An unallocated component is maintained to cover uncertainties that the Company believes have resulted in incurred losses that have not yet been allocated to specific elements of the general and specific components of the allowance for loan losses. Such factors include uncertainties in economic conditions, uncertainties in identifying triggering events that directly correlate to subsequent loss rates, changes in appraised value of underlying collateral, risk factors that have not yet manifested themselves in loss allocation factors and historical loss experience data that may not precisely correspond to the current loan portfolio or economic conditions. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio. The appropriate allowance level is estimated based upon factors and trends identified by the Company as of the date of the filing of the consolidated financial statements.

11


When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.

Management’s evaluation of the allowance for loan losses is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company’s historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, a detailed analysis of impaired loans and other factors as deemed appropriate. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

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

Three months ended
June 30, 2020
 
Commercial Business
   
Commercial
Real Estate
   
Land
   
Multi-
Family
   
Real Estate Construction
   
Consumer
   
Unallocated
   
Total
 
                                                 
Beginning balance
 
$
2,008
   
$
6,421
   
$
230
   
$
854
   
$
1,149
   
$
1,363
   
$
599
   
$
12,624
 
Provision for (recapture of) loan losses
   
(7
)
   
4,902
     
13
     
25
     
(457
)
   
(24
)
   
48
     
4,500
 
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
(65
)
   
-
     
(65
)
Recoveries
   
10
     
-
     
-
     
-
     
-
     
7
     
-
     
17
 
Ending balance
 
$
2,011
   
$
11,323
   
$
243
   
$
879
   
$
692
   
$
1,281
   
$
647
   
$
17,076
 

Three months ended
June 30, 2019
                                               
                                                 
Beginning balance
 
$
1,808
   
$
5,053
   
$
254
   
$
728
   
$
1,457
   
$
1,447
   
$
710
   
$
11,457
 
Provision for (recapture of) loan losses
   
308
     
(164
)
   
(10
)
   
(29
)
   
49
     
(89
)
   
(65
)
   
-
 
Charge-offs
   
(3
)
   
-
     
-
     
-
     
-
     
(41
)
   
-
     
(44
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
29
     
-
     
29
 
Ending balance
 
$
2,113
   
$
4,889
   
$
244
   
$
699
   
$
1,506
   
$
1,346
   
$
645
   
$
11,442
 

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

   
Allowance for Loan Losses
   
Recorded Investment in Loans
 
June 30, 2020
 
Individually
Evaluated for
Impairment
   
Collectively
Evaluated for
Impairment
   
Total
   
Individually
Evaluated for Impairment
   
Collectively
Evaluated for
Impairment
   
Total
 
                                     
Commercial business
 
$
-
   
$
2,011
   
$
2,011
   
$
135
   
$
281,697
   
$
281,832
 
Commercial real estate
   
-
     
11,323
     
11,323
     
2,363
     
525,213
     
527,576
 
Land
   
-
     
243
     
243
     
714
     
13,690
     
14,404
 
Multi-family
   
-
     
879
     
879
     
1,551
     
56,562
     
58,113
 
Real estate construction
   
-
     
692
     
692
     
-
     
37,824
     
37,824
 
Consumer
   
11
     
1,270
     
1,281
     
424
     
82,547
     
82,971
 
Unallocated
   
-
     
647
     
647
     
-
     
-
     
-
 
Total
 
$
11
   
$
17,065
   
$
17,076
   
$
5,187
   
$
997,533
   
$
1,002,720
 

March 31, 2020
                                   
                                     
Commercial business
 
$
-
   
$
2,008
   
$
2,008
   
$
139
   
$
178,890
   
$
179,029
 
Commercial real estate
   
-
     
6,421
     
6,421
     
2,378
     
505,493
     
507,871
 
Land
   
-
     
230
     
230
     
714
     
13,312
     
14,026
 
Multi-family
   
-
     
854
     
854
     
1,549
     
56,825
     
58,374
 
Real estate construction
   
-
     
1,149
     
1,149
     
-
     
64,843
     
64,843
 
Consumer
   
12
     
1,351
     
1,363
     
432
     
86,934
     
87,366
 
Unallocated
   
-
     
599
     
599
     
-
     
-
     
-
 
Total
 
$
12
   
$
12,612
   
$
12,624
   
$
5,212
   
$
906,297
   
$
911,509
 


12

Non-accrual loans:  Loans are reviewed regularly and it is the Company’s general policy that a loan is past due when it is 30 to 89 days delinquent. In general, when a loan is 90 days delinquent or when collection of principal or interest appears doubtful, it is placed on non-accrual status, at which time the accrual of interest ceases and a reserve for unrecoverable accrued interest is established and charged against operations. As a general practice, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cost recovery method. Also, as a general practice, a loan is not removed from non-accrual status until all delinquent principal, interest and late fees have been brought current and the borrower has demonstrated a history of performance based upon the contractual terms of the note. A history of repayment performance generally would be a minimum of six months. Interest income foregone on non-accrual loans was $17,000 and $18,000 for the three months ended June 30, 2020 and 2019, respectively.

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

June 30, 2020
 
30-89 Days
Past Due
   
90 Days and
Greater Past
Due
   
Non-accrual
   
Total Past
Due and
Non-accrual
   
Current
   
Total Loans
Receivable
 
                                     
Commercial business
 
$
413
   
$
-
   
$
197
   
$
610
   
$
281,222
   
$
281,832
 
Commercial real estate
   
-
     
-
     
1,009
     
1,009
     
526,567
     
527,576
 
Land
   
-
     
-
     
-
     
-
     
14,404
     
14,404
 
Multi-family
   
-
     
6
     
-
     
6
     
58,107
     
58,113
 
Real estate construction
   
-
     
-
     
-
     
-
     
37,824
     
37,824
 
Consumer
   
241
     
5
     
71
     
317
     
82,654
     
82,971
 
Total
 
$
654
   
$
11
   
$
1,277
   
$
1,942
   
$
1,000,778
   
$
1,002,720
 
                                     
March 31, 2020
                                   
                                     
Commercial business
 
$
-
   
$
-
   
$
201
   
$
201
   
$
178,828
   
$
179,029
 
Commercial real estate
   
-
     
-
     
1,014
     
1,014
     
506,857
     
507,871
 
Land
   
-
     
-
     
-
     
-
     
14,026
     
14,026
 
Multi-family
   
-
     
-
     
-
     
-
     
58,374
     
58,374
 
Real estate construction
   
-
     
-
     
-
     
-
     
64,843
     
64,843
 
Consumer
   
271
     
-
     
180
     
451
     
86,915
     
87,366
 
Total
 
$
271
   
$
-
   
$
1,395
   
$
1,666
   
$
909,843
   
$
911,509
 

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

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

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

13

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

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

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

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

The following tables present an analysis of loans by credit quality indicators at the dates indicated (in thousands):

June 30, 2020
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total Loans
Receivable
 
                                     
Commercial business
 
$
280,809
   
$
704
   
$
319
   
$
-
   
$
-
   
$
281,832
 
Commercial real estate
   
509,338
     
13,665
     
4,573
     
-
     
-
     
527,576
 
Land
   
14,404
     
-
     
-
     
-
     
-
     
14,404
 
Multi-family
   
58,034
     
45
     
34
     
-
     
-
     
58,113
 
Real estate construction
   
37,824
     
-
     
-
     
-
     
-
     
37,824
 
Consumer
   
82,900
     
-
     
71
     
-
     
-
     
82,971
 
Total
 
$
983,309
   
$
14,414
   
$
4,997
   
$
-
   
$
-
   
$
1,002,720
 
                                     
March 31, 2020
                                   
                                     
Commercial business
 
$
177,399
   
$
1,282
   
$
348
   
$
-
   
$
-
   
$
179,029
 
Commercial real estate
   
506,794
     
63
     
1,014
     
-
     
-
     
507,871
 
Land
   
14,026
     
-
     
-
     
-
     
-
     
14,026
 
Multi-family
   
58,295
     
45
     
34
     
-
     
-
     
58,374
 
Real estate construction
   
64,843
     
-
     
-
     
-
     
-
     
64,843
 
Consumer
   
87,186
     
-
     
180
     
-
     
-
     
87,366
 
Total
 
$
908,543
   
$
1,390
   
$
1,576
   
$
-
   
$
-
   
$
911,509
 


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

14


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

June 30, 2020
 
Recorded
Investment with
No Specific
Valuation
Allowance
   
Recorded
Investment
with Specific Valuation
Allowance
   
Total
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Specific
Valuation
Allowance
 
                               
Commercial business
 
$
135
   
$
-
   
$
135
   
$
173
   
$
-
 
Commercial real estate
   
2,363
     
-
     
2,363
     
3,456
     
-
 
Land
   
714
     
-
     
714
     
753
     
-
 
Multi-family
   
1,551
     
-
     
1,551
     
1,671
     
-
 
Consumer
   
290
     
134
     
424
     
538
     
11
 
Total
 
$
5,053
   
$
134
   
$
5,187
   
$
6,591
   
$
11
 
March 31, 2020
                                       
                                         
Commercial business
 
$
139
   
$
-
   
$
139
   
$
170
   
$
-
 
Commercial real estate
   
2,378
     
-
     
2,378
     
3,405
     
-
 
Land
   
714
     
-
     
714
     
748
     
-
 
Multi-family
   
1,549
     
-
     
1,549
     
1,662
     
-
 
Consumer
   
295
     
137
     
432
     
543
     
12
 
Total
 
$
5,075
   
$
137
   
$
5,212
   
$
6,528
   
$
12
 

   
Three Months ended June 30, 2020
   
Three Months ended June 30, 2019
 
   
Average
Recorded
Investment
   
Interest
Recognized on
Impaired Loans
   
Average
Recorded
Investment
   
Interest
Recognized on
Impaired Loans
 
                         
Commercial business
 
$
137
   
$
-
   
$
157
   
$
-
 
Commercial real estate
   
2,370
     
15
     
2,462
     
16
 
Land
   
714
     
10
     
726
     
10
 
Multi-family
   
1,550
     
22
     
1,591
     
23
 
Consumer
   
428
     
6
     
575
     
7
 
Total
 
$
5,199