Critical Accounting Policies

Critical accounting policies and estimates are discussed in our 2009 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 2009 Form 10-K.

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company's performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets 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.

Recent Developments

In January 2009, the Bank entered into a MOU with the OTS. Under that agreement, the Bank must, among other things, develop a plan for achieving and maintaining a minimum Tier 1 Capital (Leverage) Ratio of 8% and a minimum Total Risk-Based Capital Ratio of 12%, compared to its current minimum required regulatory Tier 1 Capital (Leverage) Ratio of 4% and Total Risk-Based Capital Ratio of 8%. As of September 30, 2009, the Bank's leverage ratio was 10.20% (2.20% over the new required minimum) and its risk-based capital ratio was 12.42% (0.42% over the new required minimum). The MOU also requires the Bank to: (a) remain in compliance with the minimum capital ratios contained in the business plan; (b) provide notice to and obtain a non-objection from the OTS prior to the Bank declaring a dividend; (c) maintain an adequate allowance for loan and lease losses (ALLL); (d) engage an independent consultant to conduct a comprehensive evaluation of the Bank's asset quality; (e) submit a quarterly update to its written comprehensive plan to reduce classified assets, that is acceptable to the OTS; and (f) obtain written approval of the Loan Committee and the Board prior to the extension of credit to any borrower with a classified loan.

The Company also entered into a separate MOU agreement with the OTS. Under the agreement, the Company must, among other things support the Bank's compliance with its MOU issued in January 2009. The MOU also requires the Bank to: (a) provide notice to and obtain written non-objection from the OTS prior to the Company declaring a dividend or redeeming any capital stock or receiving dividends or other payments from the Bank; (b) provide notice to and obtain written non-objection from the OTS prior to the Company incurring, issuing, renewing or repurchasing any new debt; and (c) submit to the OTS within prescribed time periods an operations plan and a consolidated capital plan that respectively addresses the Company's ability to meet its financial obligations through December 2012 and how the Bank will maintain capital ratios mandated by its MOU.

The Board and Company management do not believe that either of these agreements will constrain the Bank's business plan and furthermore, believes that the Company and the Bank are currently in compliance with all of the requirements of these agreements except for providing the consolidated operations plan and the consolidated capital plan which are not yet due pursuant to the timeframe set forth in the MOU. Management believes that the primary reason the Company and the Bank were requested to enter into a MOU with the OTS was due to the uncertain economic conditions currently affecting the financial industry.

Executive Overview

During 2008, the national and regional residential lending market experienced a notable slowdown. This downturn, which continued into 2009, has negatively affected the economy in our market area. As a result, the Company has experienced a decline in the values of real estate collateral supporting our construction real estate and land acquisition and development loans, and experienced increased loan delinquencies and defaults. In response to these financial challenges, the Company has taken and is continuing to take a number of actions aimed at preserving existing capital, reducing its lending concentrations and associated capital requirements, and increasing liquidity. The tactical actions taken include, but are not limited to: focusing on reducing the amount of nonperforming assets, adjusting its balance sheet by reducing loans receivable, selling real estate owned, reducing controllable operating costs, increasing retail deposits while maintaining available secured borrowing facilities to improve liquidity and eliminating dividends to shareholders.

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 loans), increasing core deposit balances, reducing expenses, hiring experienced employees with a commercial lending focus and exploring opportunistic acquisitions.

As a progressive, community-oriented financial institution, 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, Clackamas and Marion counties of Oregon as its primary market area. The Company is engaged predominantly in the business of attracting deposits from the general public and using such funds in its primary market area to originate commercial, commercial real estate, multi-family real estate, real estate construction, residential real estate and consumer loans. Commercial and construction loans have grown to 87.71% of the loan portfolio at September 30, 2009, increasing the risk profile of the total loan portfolio. The Company continues its strategy of controlling balance sheet growth in order to improve its regulatory capital ratios as well as the targeted reduction of residential construction related loans. Speculative construction loans represent $35.5 million of the residential construction portfolio at September 30, 2009. These loan balances are down 24.6% from the previous linked quarter and 46.7% from a year ago. Our residential construction loans decreased 26.3% from prior quarter and 49.6% from September 30, 2008.

The Company's strategic plan includes targeting the commercial banking customer base in its primary market area, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company manages growth while including a significant amount of commercial and commercial real estate loans in its portfolio. Significant portions of these new loan products carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate mortgages. A related goal is to increase the proportion of personal and business checking account deposits used to fund these new loans. At September 30, 2009, checking accounts totaled $157.0 million, or 23.7% of our total deposit mix. The strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management 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. The Company is well positioned to attract new customers and to increase its market share with seventeen branches including ten in Clark County, two in the Portland metropolitan area and four lending centers.

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. In-house processing of checks and check imaging has supported the Bank's increased service to customers and at the same time has increased efficiency. The Bank has implemented remote check capture at all of its branches and is in the process of implementing remote capture of checks on site for selected customers of the Bank. The Bank has formed a cash management team with an emphasis on improving the Bank's cash management product line for its commercial customers. 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's online service has also enhanced the delivery of cash management services to commercial customers. The Company began offering Certificate of Deposit Account Registry Service (CDARS™) deposits to its customers during fiscal 2009. Through the CDARS program, customers can access FDIC insurance up to $50 million. The Company also implemented Check 21 during fiscal 2009, which allows the Company to process checks faster and more efficiently. In December 2008, the Company began operating as a merchant bankcard "agent bank" facilitating credit and debit card transactions for business customers through an outside merchant bankcard processor. This allows the Company to underwrite and approve merchant bankcard applications and retain interchange income that, under its previous status as a "referral bank", was earned by a third party. In the first quarter of fiscal 2010, the Company began participating in the MoneyPass Network, which allows our customers access to over 16,000 ATMs across the country free of charge.

The Company also operates a trust and financial services company, Riverview Asset Management Corp. ("RAMCorp"), located in downtown Vancouver, Washington. Riverview Mortgage, a mortgage broker division of the Bank, originates mortgage loans for various mortgage companies predominantly in the Vancouver/Portland metropolitan areas, as well as for the Bank. The 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 and Barrett Business Services, 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.

Prior to 2008, national real estate and home values increased substantially as a result of the generally strong national economy, speculative investing, and aggressive lending practices that provided loans to marginal borrowers (generally termed as "subprime" loans). That strong economy also resulted in significant increases in residential and commercial real estate values and commercial and residential construction. The national and regional residential lending market, however, experienced a notable slowdown in 2008, which has continued into 2009, and loan delinquencies and foreclosure rates have increased. Foreclosures and delinquencies are also being driven by investor speculation in many states, while job losses and depressed economic conditions have resulted in the higher levels of delinquent loans. The continued economic downturn, and more specifically the slowdown in residential real estate sales, has resulted in further uncertainty in the

financial markets. During the quarter-ended September 30, 2009, the local economy has remained under pressure but recently has shown signs that the recession is moderating. Unemployment in Clark County decreased to 11.9% in September 2009 compared to a high of 13.2% in August 2009 and 12.6% in June 2009. Home values in the Company's market area have begun to stabilize after decreasing during the past fiscal year. Home values at September 30, 2009 remained lower than home values in 2008, due in large part to an increase in volume of foreclosures and short sales, but have increased slightly since June 2009. Inventory levels have fallen to 7.6 months at September 2009, compared to 10.4 months at September 2008. Closed home sales in Clark County increased 20% in September 2009 compared to September 2008. Closed home sales in Portland increased 10% during the same time period. Commercial real estate leasing activity in the Portland/Vancouver area has performed better than the residential real estate market, but it is generally affected by a slow economy later than other indicators. Commercial vacancy rates in Clark County increased as of September 30, 2009 compared to prior years. During the past 18 months, the Company has experienced a decline in the values of real estate collateral underlying its loans, including certain of its construction real estate and land acquisition and development loans, has experienced increased loan delinquencies and defaults, and believes there are indications of potential further increased loan delinquencies and defaults. In addition, competition among financial institutions for deposits has also continued to increase, making it more expensive to attract core deposits.

In its continuing effort to reduce controllable costs, the Company has reduced the number of full-time equivalent employees from 264 at September 30, 2008 to 245 at September 30, 2009 and made the decision to close its downtown Portland branch as of October 2, 2009. This branch was acquired as part of the Company's acquisition of American Pacific Bank in 2005. The decision to close this branch was primarily due to the expiration of the lease coupled with the low transaction volume at this location. Due to the Company's proactive efforts in working with its deposit customers, along with existing bank products including remote deposit capture and Internet Banking, the Company anticipates the majority of its deposit accounts will be absorbed within the Company's existing branch network. In addition, the Company made the decision to close its loan production office in Clackamas, Oregon. All employees at both of these locations were transferred to other positions within the Company. As a result of the reduction in personnel and closure of the offices we will save approximately $1.3 million per year.

The Company also recently announced the filing of a registration statement in connection with a proposed public offering of its common stock. The net proceeds from the proposed offering may be used by the Company for general corporate purposes which may include without limitation, providing capital to support the Bank's growth, including the origination of, commercial real estate and commercial loans in its market area. The Bank may also use the proceeds to strengthen its regulatory capital ratios, which may include without limitation, providing capital to support the Bank's growth, including the origination of, commercial real estate and commercial loans in its market area.

Financial Highlights. Net income for the three months ended September 30, 2009 was $202,000, or $0.02 per diluted share, compared to net loss of $4.2 million, or $0.39 per diluted share, for the three months ended September 30, 2008. Net interest income after provision for loan losses increased $4.3 million to $5.7 million for the three months ended September 30, 2009 compared to $1.4 million for the same quarter last year. Non-interest income increased for the quarter-ended September 30, 2009 compared to the same quarter last year due to the recognition of $3.4 million in other than temporary impairment ("OTTI") charge during the three months ended September 30, 2008 compared to $201,000 OTTI charged for the three months ended September 30, 2009. Non-interest expense increased $559,000 to $7.3 million for the three months ended September 30, 2009 compared to $6.7 million for the same quarter last year. The $559,000 increase was due to increases in the FDIC insurance premiums of $288,000 and additional professional fees and cost associated with REO properties of $389,000, partially offset by decreases in compensation expense, marketing, and occupancy expense.

Net income for the six months ended September 30, 2009 was $545,000, or $0.05 per basic share ($0.05 per diluted share), compared to a net loss of $3.4 million, or $0.32 per basic share ($0.32 per diluted share) for the six months ended September 30, 2008.

The annualized return on average assets was 0.09% for the three months ended September 30, 2009, compared to (1.86)% for the three months ended September 30, 2008. For the same periods, the annualized return on average common equity was 0.88% compared to (17.66)%, respectively. The efficiency ratio was 67.87% for the second quarter of fiscal 2010 compared to 91.53% for the same period last year. The decrease in the efficiency ratio was primarily a result of a $3.4 million non-cash OTTI charge recognized during the three months ended September 30, 2008 compared to a $201,000 non-cash OTTI charge recognized during the three months ended September 30, 2009 for the same investment security.

Loan Composition

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

                                       Other
                                        Real                         Commercial &
                       Commercial      Estate      Real Estate       Construction
                        Business      Mortgage     Construction         Total
September 30, 2009                          (in thousands)

Commercial business  $    112,578   $        -   $             -   $      112,578
Commercial
construction                    -            -            51,980           51,980
Office buildings                -       89,801                 -           89,801
Warehouse/industrial            -       39,714                 -           39,714
Retail/shopping
centers/strip malls             -       79,932                 -           79,932
   Assisted living
facilities                      -       35,156                 -           35,156
Single purpose
facilities                      -       91,322                 -           91,322
Land                            -       84,681                 -           84,681
Multi-family                    -       28,799                 -           28,799
One-to-four family
construction                    -            -            42,339           42,339
Total                $    112,578   $  449,405   $        94,319   $      656,302




                                       Other
                                        Real                         Commercial &
                       Commercial      Estate      Real Estate       Construction
                        Business      Mortgage     Construction         Total
March 31, 2009                              (in thousands)

Commercial business  $    127,150   $        -   $             -   $      127,150
Commercial
construction                    -            -            65,459           65,459
Office buildings                -       90,621                 -           90,621
Warehouse/industrial            -       40,214                 -           40,214
Retail/shopping
centers/strip malls             -       81,233                 -           81,233
   Assisted living
facilities                      -       26,743                 -           26,743
Single purpose
facilities                      -       88,574                 -           88,574
Land                            -       91,873                 -           91,873
Multi-family                    -       28,394                 -           28,394
One-to-four family
construction                    -            -            74,017           74,017
Total                $    127,150   $  447,652   $       139,476   $      714,278

Comparison of Financial Condition at September 30, 2009 and March 31, 2009

Cash, including interest-earning accounts, totaled $18.5 million at September 30, 2009, compared to $19.2 million at March 31, 2009.

Investment securities available for sale totaled $8.5 million at September 30, 2009 and March 31, 2009. During the quarter, the Company recognized a non-cash OTTI charge on an investment security of $201,000. The investment security is a trust preferred pooled security with a fair market value of $1.2 million secured by the debentures issued by bank holding companies. For the six months ended September 30, 2009, the Company recognized a total of $459,000 in OTTI charges on this investment security. The Company reviews investment securities for the presence of OTTI, taking into consideration current market conditions, extent and nature of change in fair value, issuer rating changes and trends, current analysts' evaluations, the Company's intentions or requirements to sell the investments, as well as other factors. Management believes it is possible that a substantial portion of the principal and interest will be received and 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 this security before the anticipated recovery of the remaining amortized cost basis. The Company compared the amortized cost basis of the security to the present value of the revised expected cash flows, discounted using the current pre-impairment yield. The revised expected cash flow estimates were based primarily on an analysis of default rates, prepayment speeds and third-party analytical reports. In determining the expected default rates and prepayment speeds, management evaluated, among other things, the individual issuer's financial condition including capital levels, nonperforming assets amounts, loan loss reserve levels, and portfolio composition and concentrations. Management does not believe that the recognition of this OTTI charge has any other implications for the Company's business fundamentals or its outlook. For additional information on our Level 3 fair value measurements see "Fair Value of Level 3 Assets" included in Item 2.

Loans receivable, net, totaled $730.2 million at September 30, 2009, compared to $784.1 million at March 31, 2009, a decrease of $53.9 million due primarily to the Company's planned balance sheet restructuring strategy, which includes reducing the loan portfolio to preserve capital and liquidity. Loan originations totaling $46.6 million during the current quarter ended September 30, 2009 were entirely offset by scheduled maturities and pay downs on loans as well as the transfer of certain loans to REO. The Company continued to focus on growing commercial real estate loans. The total

commercial real estate loan portfolio was $335.9 million as of September 30, 2009, compared to $327.4 million as of March 31, 2009. Of this total, 29% are owner occupied, and 71% are non-owner occupied as of September 30, 2009. 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 ARM, teaser, or sub-prime residential real estate loans in its portfolio.

Deposit accounts totaled $662.5 million at September 30, 2009, compared to $670.1 million at March 31, 2009. The decline in total deposits was attributable to the repayment of $19.9 million of brokered deposits and $25.8 million in deposits from RAMCorp. The Company had no wholesale-brokered deposits in its deposit mix as of September 30, 2009. Customer branch deposits increased $26.6 million from March 31, 2009 to September 30, 2009 despite the general downturn in the real estate market as well as the overall economy. Core deposits (comprised of checking, savings and money market accounts) account for 56.6% of total deposits at September 30, 2009, compared to 58.6% at March 31, 2009. The Company continues to focus on the growth of its core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.

FHLB and FRB advances totaled $5.0 million and $75.0 million, respectively, at September 30, 2009 and $37.9 million and $85.0 million, respectively, at March 31, 2009. The $42.9 million decrease in total borrowings was attributable to the Company's increase in deposit balances, coupled with the planned decrease in loan balances. The decision to shift the Company's borrowings to the FRB was a result of the lower cost of FRB borrowings as compared to those from the FHLB.

Shareholders' Equity and Capital Resources

Shareholders' equity increased $904,000 to $89.6 million at September 30, 2009 from $88.7 million at March 31, 2009. The increase in equity was mainly attributable to net income of $545,000 for the six months ended September 30, 2009. Earned ESOP shares, stock based compensation expense and the net tax effect of adjustments to securities comprised the remaining increase.

The Bank is subject to various regulatory capital requirements administered by the OTS. 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. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated in accordance with regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk, weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets, Tier I capital to risk-weighted assets, Tier I capital to adjusted tangible assets and tangible capital to tangible assets (set forth in the table below). Management believes the Bank met all capital adequacy requirements to which it was subject as of September 30, 2009.

As of September 30, 2009, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total capital and Tier 1 capital to risk-weighted assets, Tier 1 capital to adjusted tangible assets and tangible capital to tangible assets (set forth in the table below). In the fourth quarter of fiscal 2009, the Bank entered into a MOU with the OTS which requires, among other things, the Bank to develop a plan for achieving and maintaining a minimum Tier 1 Capital (Leverage) Ratio of 8% and a minimum Total Risk-Based Capital Ratio of 12%. These higher capital requirements will remain in effect until the MOU is terminated.

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