LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The loans receivable portfolio is segmented into one-to-four family, multifamily, commercial real estate, construction, business (including Small Business Administration loans), and consumer loans.

The allowance for loan and lease losses ("ALLL") reflects management’s judgment in the evaluation of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to calculate the ALLL each quarter. To determine the total ALLL, management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis.

From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts or release balances from the ALLL. The ALLL is sensitive to risk ratings assigned to individually evaluated loans and economic assumptions and delinquency trends. Individual loan risk ratings are evaluated based on the specific facts related to that loan. Additions to the ALLL are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the ALLL, while recoveries of previously charged off amounts are credited to the ALLL.

The following is a summary of loans receivable, gross of allowance for loan losses, and net of loans held-for-sale at December 31, 2016 and March 31, 2016:



	December 31, 2016					March 31, 2016
$ in thousands	Amount			Percent		Amount			Percent
Gross loans receivable:
One-to-four family	$	136,298		26	%	$	141,243		24	%
Multifamily	70,836			13	%	94,202			16	%
Commercial real estate	249,908			47	%	272,497			47	%
Construction	4,996			1	%	5,033			1	%
Business ⁽¹⁾	66,476			13	%	71,277			12	%
Consumer ⁽²⁾	302			—	%	42			—	%
Total loans receivable	$	528,816		100	%	$	584,294		100	%

Unamortized premiums, deferred costs and fees, net	4,475					4,725

Allowance for loan losses	(4,620		)			(5,232		)
Total loans receivable, net	$	528,671				$	583,787

Loans HFS	$	16,103				$	2,495

⁽¹⁾ Includes business overdrafts

⁽²⁾Includes personal loans and consumer overdrafts

The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for the three and nine month periods ended December 31, 2016 and 2015, and the fiscal year ended March 31, 2016.



Three months ended December 31, 2016
$ in thousands	One-to-four family			Multifamily		Commercial Real Estate			Construction		Business			Consumer		Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1,654		$	672	$	1,743		$	50	$	577		$	2	49			$	4,747
Charge-offs	4			37		—			—		—			13		—			54
Recoveries	—			—		4			—		51			—		—			55
Provision for (Recovery of) Loan Losses	(33		)	54		(180		)	70		(29		)	39		(49		)	(128		)
Ending Balance	$	1,617		$	689	$	1,567		$	120	$	599		$	28	$	—		$	4,620



Nine months ended December 31, 2016
$ in thousands	One-to-four family			Multifamily		Commercial Real Estate			Construction		Business			Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,697		$	622	$	1,808		$	62	$	1,022		$	21	$	—	$	5,232
Charge-offs	66			288		—			—		—			54		—		408
Recoveries	—			—		14			—		270			4		—		288
Provision for (Recovery of) Loan Losses	(14		)	355		(255		)	58		(693		)	57		—		(492		)
Ending Balance	$	1,617		$	689	$	1,567		$	120	$	599		$	28	$	—	$	4,620

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	1,369		$	689	$	1,537		$	120	$	541		$	25	$	—	$	4,281
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	248			—		30			—		58			3		—		339

Loan Receivables Ending Balance:	$	138,634		$	72,074	$	250,880		$	4,962	$	66,439		$	302	$	—	$	533,291
Ending Balance: collectively evaluated for impairment	133,111			70,471		246,409			4,962		60,893			299		—		516,145
Ending Balance: individually evaluated for impairment	5,523			1,603		4,471			—		5,546			3		—		17,146



Fiscal year ended March 31, 2016
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Construction			Business			Consumer		Total
Allowance for loan losses:
Beginning Balance	$	1,970	$	502	$	1,029	$	99		$	813		$	15	$	4,428
Charge-offs	389		340		—		—			176			517		1,422
Recoveries	113		—		9		—			578			31		731
Provision for (Recovery of) Loan Losses	3		460		770		(37		)	(193		)	492		1,495
Ending Balance	$	1,697	$	622	$	1,808	$	62		$	1,022		$	21	$	5,232

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	1,602		622		1,787		62			548			21		4,642
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	95		—		21		—			474			—		590

Loan Receivables Ending Balance:	$	143,667	$	95,648	$	273,470	$	5,000		$	71,192		$	42	$	589,019
Ending Balance: collectively evaluated for impairment	139,031		93,879		267,176		5,000			64,326			42		569,454
Ending Balance: individually evaluated for impairment	4,636		1,769		6,294		—			6,866			—		19,565



Three months ended December 31, 2015
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Construction			Business		Consumer		Total
Allowance for loan losses:
Beginning Balance (restated)	$	1,576	$	457	$	1,436	$	99		$	843	$	28	$	4,439
Charge-offs	77		—		—		—			43		28		148
Recoveries	—		68		1		—			59		27		155
Provision for (Recovery of) Loan Losses (restated)	131		87		470		(1		)	26		15		728
Ending Balance (restated)	$	1,630	$	612	$	1,907	$	98		$	885	$	42	$	5,174



Nine months ended December 31, 2015
$ in thousands	One-to-four family			Multifamily		Commercial Real Estate		Construction			Business			Consumer		Total
Allowance for loan losses:
Beginning Balance	$	1,970		$	502	$	1,029	$	99		$	813		$	15	$	4,428
Charge-offs	320			241		—		—			163			288		1,012
Recoveries	1			68		4		—			247			33		353
Provision for (Recovery of) Loan Losses	(21		)	283		874		(1		)	(12		)	282		1,405
Ending Balance	$	1,630		$	612	$	1,907	$	98		$	885		$	42	$	5,174

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	1,533			612		1,907		98			785			42		4,977
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	97			—		—		—			100			—		197

Loan Receivables Ending Balance:	$	146,179		$	106,275	$	267,547	$	5,012		$	76,979		$	85	$	602,077
Ending Balance: collectively evaluated for impairment	141,483			105,046		262,261		5,012			71,471			85		585,358
Ending Balance: individually evaluated for impairment	4,696			1,229		5,286		—			5,508			—		16,719

The following is a summary of nonaccrual loans at December 31, 2016 and March 31, 2016.



$ in thousands	December 31, 2016		March 31, 2016
Gross loans receivable:
One-to-four family	$	3,466	$	2,947
Multifamily	1,603		1,769
Commercial real estate	1,004		5,338
Business	2,421		3,896
Consumer	3		—
Total nonaccrual loans	$	8,497	$	13,950

Nonaccrual loans generally consist of loans for which the accrual of interest has been discontinued as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on nonaccrual loans is recorded when received based upon the collectability of the loan. TDR loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms. Total TDR loans at December 31, 2016 were $7.6 million, $1.6 million of which were non-performing as they were either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months. At March 31, 2016, total TDR loans were $7.8 million, of which $2.2 million were non-performing.

At December 31, 2016, other non-performing assets totaled $2.3 million which consisted of other real estate owned and held-for-sale loans. At December 31, 2016, other real estate owned valued at $1.2 million comprised of eight foreclosed properties which includes $877 thousand of residential properties, compared to $1.0 million comprised of seven properties, which included $718 thousand of residential properties at March 31, 2016. At December 31, 2016, non performing held-for-sale loans totaled $1.2 million, compared to $2.5 million at March 31, 2016. At December 31, 2016, Carver had 22 loans secured by one-to-four family residential real estate in the process of foreclosure for a total outstanding balance of $3.8 million.

Although we believe that substantially all risk elements at December 31, 2016 have been disclosed, it is possible that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans.

The Bank utilizes an internal loan classification system as a means of reporting problem loans within its loan categories. Loans may be classified as "Pass," “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Loans rated Pass have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. They represent a moderate credit risk and some degree of financial stability. Loans are considered collectible in full, but perhaps require greater than average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure. Loans rated Special Mention 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 Bank's credit position at some future date. Loans rated Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged off immediately to the allowance for loan losses.

One-to-four family residential loans and consumer and other loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance or past maturity. All other one-to-four family residential loans and consumer and other loans are performing loans.

As of December 31, 2016, the risk category by class of loans is as follows:



$ in thousands	Multifamily		Commercial Real Estate		Construction		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	70,471	$	245,243	$	4,962	$	57,669
Special Mention	—		1,166		—		841
Substandard	1,603		4,471		—		7,929
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	72,074	$	250,880	$	4,962	$	66,439

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	135,168	$	299
Non-Performing					3,466		3
Total					$	138,634	$	302

As of March 31, 2016, and based on the most recent analysis performed, the risk category by class of loans is as follows:



$ in thousands	Multifamily		Commercial Real Estate		Construction		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	93,879	$	262,937	$	5,000	$	61,331
Special Mention	—		4,239		—		2,039
Substandard	1,769		6,294		—		7,822
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	95,648	$	273,470	$	5,000	$	71,192

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	140,720	$	42
Non-Performing					2,947		—
Total					$	143,667	$	42

The following table presents an aging analysis of the recorded investment of past due financing receivable as of December 31, 2016 and March 31, 2016.



December 31, 2016
$ in thousands	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Financing Receivables
One-to-four family	$	1,607	$	1,044	$	3,022	$	5,673	$	132,961	$	138,634
Multifamily	—		—		797		797		71,277		72,074
Commercial real estate	4,440		—		880		5,320		245,560		250,880
Construction	—		—		—		—		4,962		4,962
Business	15		5		2,409		2,429		64,010		66,439
Consumer	3		4		3		10		292		302
Total	$	6,065	$	1,053	$	7,111	$	14,229	$	519,062	$	533,291



March 31, 2016
$ in thousands	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables
One-to-four family	$	986	$	—	$	2,628	$	3,614	$	140,053	$	143,667
Multifamily	—		—		1,769		1,769		93,879		95,648
Commercial real estate	889		3,410		—		4,299		269,171		273,470
Construction	—		—		—		—		5,000		5,000
Business	2,495		307		1,972		4,774		66,418		71,192
Consumer	2		—		—		2		40		42
Total	$	4,372	$	3,717	$	6,369	$	14,458	$	574,561	$	589,019

The following table presents information on impaired loans with the associated allowance amount, if applicable, at December 31, 2016 and March 31, 2016.



	At December 31, 2016						At March 31, 2016
$ in thousands	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Recorded Investment		Unpaid Principal Balance		Associated Allowance
With no specific allowance recorded:
One-to-four family	$	3,364	$	4,109	$	—	$	2,909	$	4,101	$	—
Multifamily	1,603		2,088		—		1,769		2,122		—
Commercial real estate	1,946		2,110		—		5,405		5,572		—
Business	2,972		3,168		—		4,223		4,403		—
With an allowance recorded:
One-to-four family	2,159		2,331		248		1,727		1,727		95
Commercial real estate	2,525		2,525		30		889		889		21
Business	2,574		2,574		58		2,643		2,643		474
Consumer and other	3		3		3		—		—		—
Total	$	17,146	$	18,908	$	339	$	19,565	$	21,457	$	590

The following tables presents information on average balances on impaired loans and the interest income recognized on a cash basis for the three and nine month period ended December 31, 2016 and 2015.



	For the Three Months Ended December 31,								For the Nine Months Ended December 31,
	2016				2015				2016				2015
$ in thousands	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
With no specific allowance recorded:
One-to-four family	$	3,220	$	—	$	3,062	$	9	$	2,927	$	7	$	2,863	$	14
Multifamily	1,608		—		1,236		6		1,689		6		1,296		13
Commercial real estate	1,952		9		1,860		14		1,969		9		1,865		31
Business	3,459		—		2,723		21		3,842		128		2,772		64
With an allowance recorded:
One-to-four family	2,163		4		1,652		19		2,174		5		1,660		23
Commercial real estate	1,429		—		3,427		—		1,431		—		1,142		—
Business	2,581		—		2,838		32		2,639		37		—		—
Consumer and other	3		—		—		—		1		—		2,909		67
Total	$	16,415	$	13	$	16,798	$	101	$	16,672	$	192	$	14,507	$	212

In certain circumstances, the Bank will modify a loan as part of a troubled debt restructure ("TDR") under ASC Subtopic 310-40 and the related allowance under ASC Subtopic 310-10-35. Situations around these modifications may include extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, reduction in the face amount of the debt or reduction of past accrued interest. Loans modified in TDRs are placed on nonaccrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. There were no TDR modifications made during the three and nine month periods ended December 31, 2016.

The following table presents an analysis of those loan modifications that were classified as TDRs during the nine month period ended December 31, 2015.



	Modifications to loans during the nine month period ended December 31, 2015
$ in thousands	Number of loans	Pre-modification outstanding recorded investment		Post- modification recorded investment		Pre-Modification rate		Post-Modification rate
One-to-four family	1	$	96	$	96	2.63	%	2.63	%

In an effort to proactively resolve delinquent loans, Carver has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the periods ended December 31, 2016 and 2015, there were no modified loans that subsequently defaulted within the last 12 months.

At December 31, 2016, there were 13 loans in the TDR portfolio totaling $6.0 million that were on accrual status as the Company has determined that future collection of the principal and interest is reasonably assured. These have generally performed according to restructured terms for a period of at least six months. At March 31, 2016, there were 11 loans in the performing TDR portfolio totaling $5.6 million.

Transactions With Certain Related Persons

Federal law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. Loans to our current directors, principal officers, nominees for election as directors, security holders known by us to own more than 5% of the outstanding shares of common stock, or associates of such persons (together, “related persons”), are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Carver Federal, and do not involve more than the normal risk of collectibility or present other unfavorable features.

The aggregate amount of loans outstanding to related parties was $4.5 million at December 31, 2016 and $4.4 million at March 31, 2016. During the nine months ended December 31, 2016, advances totaled $1.5 million and principal repayments totaled $1.4 million. These loans were made in the ordinary course of business, on substantially the same terms, including collateral, as those prevailing at the time for comparable loans with persons not related to Carver Federal, and do not involve more than the normal risk of collectibility or present other unfavorable features.

Furthermore, loans above the greater of $25,000, or 5% of Carver Federal’s capital and surplus (up to $500,000), to Carver Federal’s directors and executive officers must be approved in advance by a majority of the disinterested members of Carver Federal’s Board of Directors.