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 at December 31, 2017 and March 31, 2017:



	December 31, 2017					March 31, 2017
$ in thousands	Amount			Percent		Amount			Percent
Gross loans receivable:
One-to-four family	$	123,506		25.1	%	$	132,679		24.5	%
Multifamily	75,106			15.2	%	87,824			16.2	%
Commercial real estate	218,998			44.4	%	241,794			44.7	%
Construction	—			—	%	4,983			0.9	%
Business ⁽¹⁾	69,361			14.1	%	65,151			12.0	%
Consumer ⁽²⁾	5,874			1.2	%	8,994			1.7	%
Total loans receivable	$	492,845		100.0	%	$	541,425		100.0	%

Unamortized premiums, deferred costs and fees, net	3,863					4,127

Allowance for loan losses	(5,070		)			(5,060		)
Total loans receivable, net	$	491,638				$	540,492

Loans HFS	$	—				$	944

⁽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, 2017 and 2016, and the fiscal year ended March 31, 2017.



Three months ended December 31, 2017
$ in thousands	One-to-four family			Multifamily			Commercial Real Estate			Construction		Business			Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,179		$	1,369		$	1,692		—		$	832		$	20	34		$	5,126
Charge-offs	—			36			—			—		27			7		—		70
Recoveries	—			—			5			—		3			—		—		8
Provision for (recovery of) Loan Losses	(52		)	(25		)	(25		)	—		(31		)	8		131		6
Ending Balance	$	1,127		$	1,308		$	1,672		$	—	$	777		$	21	$	165	$	5,070



Nine months ended December 31, 2017
$ in thousands	One-to-four family			Multifamily		Commercial Real Estate		Construction			Business		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,663		$	1,213	$	1,496	$	106		$	573	$	9	$	—	$	5,060
Charge-offs	93			42		—		—			47		29		—		211
Recoveries	—			—		15		—			72		4		—		91
Provision for (recovery of) Loan Losses	(443		)	137		161		(106		)	179		37		165		130
Ending Balance	$	1,127		$	1,308	$	1,672	$	—		$	777	$	21	$	165	$	5,070

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	976			1,172		1,672		—			720		21		165		4,726
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	151			136		—		—			57		—		—		344

Loan Receivables Ending Balance:	$	125,678		$	75,805	$	219,939	$	—		$	69,357	$	5,929	$	—	$	496,708
Ending Balance: collectively evaluated for impairment	119,226			74,160		219,431		—			64,980		5,929		—		483,726
Ending Balance: individually evaluated for impairment	6,452			1,645		508		—			4,377		—		—		12,982



Fiscal year ended March 31, 2017
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate			Construction		Business			Consumer		Total
Allowance for loan losses:
Beginning Balance	$	1,697	$	622	$	1,808		$	62	$	1,022		$	21	$	5,232
Charge-offs	106		338		—			—		—			85		529
Recoveries	—		—		20			—		304			4		328
Provision for (recovery of) Loan Losses	72		929		(332		)	44		(753		)	69		29
Ending Balance	$	1,663	$	1,213	$	1,496		$	106	$	573		$	9	$	5,060

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	1,357		1,207		1,490			106		532			7		4,699
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	306		6		6			—		41			2		361

Loan Receivables Ending Balance:	$	134,927	$	88,750	$	242,818		$	4,949	$	65,114		$	8,994	$	545,552
Ending Balance: collectively evaluated for impairment	129,420		87,148		239,323			4,949		61,027			8,992		530,859
Ending Balance: individually evaluated for impairment	5,507		1,602		3,495			—		4,087			2		14,693



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:	$	138,620		$	71,924	$	250,810		$	4,962	$	66,200		$	302	—		$	532,818
Ending Balance: collectively evaluated for impairment	133,097			70,321		246,339			4,962		60,654			299		—		515,672
Ending Balance: individually evaluated for impairment	5,523			1,603		4,471			—		5,546			3		—		17,146

The following is a summary of nonaccrual loans at December 31, 2017 and March 31, 2017.



$ in thousands	December 31, 2017		March 31, 2017
Gross loans receivable:
One-to-four family	$	4,598	$	3,899
Multifamily	897		1,602
Commercial real estate	508		993
Business	302		1,922
Consumer	—		2
Total nonaccrual loans	$	6,305	$	8,418

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. Troubled debt restructured ("TDR") loans consist of modified 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, 2017 were $5.7 million, $1.9 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, 2017, total TDR loans were $6.4 million, of which $2.5 million were non-performing.

At December 31, 2017, other non-performing assets totaled $1.2 million which consisted of other real estate owned. At December 31, 2017, other real estate owned valued at $1.2 million comprised of eight foreclosed properties which includes $268 thousand of residential properties, compared to $990 thousand comprised of eight properties, which included $718 thousand of residential properties at March 31, 2017. At December 31, 2017, the Bank had no non performing held-for-sale loans, compared to $944 thousand at March 31, 2017.

Although we believe that substantially all risk elements at December 31, 2017 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, 2017, and based on the most recent analysis performed in the current quarter, 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	$	74,160	$	219,431	$	—	$	60,982
Special Mention	—		—		—		3,764
Substandard	1,645		508		—		4,611
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	75,805	$	219,939	$	—	$	69,357

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	121,238	$	5,928
Non-Performing					4,440		1
Total					$	125,678	$	5,929

As of March 31, 2017, 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	$	87,148	$	238,552	$	4,949	$	58,555
Special Mention	—		771		—		133
Substandard	1,082		3,495		—		6,426
Doubtful	520		—		—		—
Loss	—		—		—		—
Total	$	88,750	$	242,818	$	4,949	$	65,114

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	131,028	$	8,992
Non-Performing					3,899		2
Total					$	134,927	$	8,994

The following table presents an aging analysis of the recorded investment of past due financing receivable as of December 31, 2017 and March 31, 2017.



December 31, 2017
$ 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	$	1,486	$	—	$	4,440	$	5,926	$	119,752	$	125,678
Multifamily	—		—		276		276		75,529		75,805
Commercial real estate	2,478		—		—		2,478		217,461		219,939
Business	1,932		12		289		2,233		67,124		69,357
Consumer	17		—		—		17		5,912		5,929
Total	$	5,913	$	12	$	5,005	$	10,930	$	485,778	$	496,708



March 31, 2017
$ 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	$	2,094	$	247	$	3,022	$	5,363	$	129,564	$	134,927
Multifamily	—		—		803		803		87,947		88,750
Commercial real estate	—		—		—		—		242,818		242,818
Construction	—		—		—		—		4,949		4,949
Business	—		429		1,500		1,929		63,185		65,114
Consumer	1		—		2		3		8,991		8,994
Total	$	2,095	$	676	$	5,327	$	8,098	$	537,454	$	545,552

The following table presents information on impaired loans with the associated allowance amount, if applicable, at December 31, 2017 and March 31, 2017.



	At December 31, 2017						At March 31, 2017
$ 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	$	5,073	$	6,366	$	—	$	3,416	$	4,210	$	—
Multifamily	839		1,188		—		1,596		2,081		—
Commercial real estate	508		508		—		993		993		—
Business	1,788		1,861		—		1,923		1,968		—
With an allowance recorded:
One-to-four family	1,379		1,510		151		2,091		2,215		306
Multifamily	806		806		136		6		6		6
Commercial real estate	—		—		—		2,502		2,502		6
Business	2,589		2,602		57		2,164		2,164		41
Consumer and other	—		—		—		2		2		2
Total	$	12,982	$	14,841	$	344	$	14,693	$	16,141	$	361

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 periods ended December 31, 2017 and 2016.



	For the Three Months Ended December 31,								For the Nine Months Ended December 31,
	2017				2016				2017				2016
$ 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	$	5,284	$	3	$	3,220	$	—	$	5,099	$	15	$	2,927	$	7
Multifamily	1,068		9		1,608		—		1,379		25		1,689		6
Commercial real estate	799		9		1,952		9		1,912		28		1,969		9
Business	1,632		—		3,459		—		2,020		—		3,842		128
With an allowance recorded:
One-to-four family	1,381		—		2,163		4		1,388		—		2,174		5
Commercial real estate	—		—		1,429		—		—		—		1,431		—
Business	2,623		1		2,581		—		2,603		1		2,639		37
Consumer and other	—		—		3		—		—		—		1		—
Total	$	13,094	$	22	$	16,415	$	13	$	14,542	$	69	$	16,672	$	192

In certain circumstances, the Bank will modify a loan as part of a TDR under GAAP. 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 was one loan modification made during the nine month period ended December 31, 2017. The modification converted a line of credit into a five year term loan with an interest concession. There were no TDR modifications made during the three and nine month periods ended December 31, 2016.

There were no TDR modifications for the three months ended December 31, 2017. The following table presents an analysis of those loan modifications that were classified as TDRs during the nine month period ended December 31, 2017.



Modifications to loans during the nine month period ended
December 31, 2017
Number of loans	Pre-modification outstanding recorded investment		Post-Modification Recorded investment		Pre-Modification rate		Post-Modification rate
1	$	285	$	285	7.25	%	7.00	%

In an effort to proactively resolve delinquent loans, the Bank has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the periods ended December 31, 2017 and 2016, there were no modified loans that defaulted within the last 12 months of modification.

At December 31, 2017, there were 10 loans in the TDR portfolio totaling $3.8 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, 2017, there were 11 loans in the performing TDR portfolio totaling $3.9 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.

There were no loans outstanding to related parties at December 31, 2017. The aggregate amount of loans outstanding to related parties was $4.7 million at March 31, 2017. During the nine months ended December 31, 2017, advances totaled $111 thousand and principal repayments totaled $4.8 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.