LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The loans receivable portfolio is segmented into one-to-four family, multifamily, commercial real estate, 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, 2018 and March 31, 2018:



	December 31, 2018					March 31, 2018
$ in thousands	Amount			Percent		Amount			Percent
Gross loans receivable:
One-to-four family	$	110,105		26.0	%	$	121,233		25.6	%
Multifamily	86,962			20.5	%	103,887			21.9	%
Commercial real estate	123,860			29.2	%	141,835			29.9	%
Business ⁽¹⁾	98,887			23.3	%	102,004			21.5	%
Consumer ⁽²⁾	4,412			1.0	%	5,238			1.1	%
Total loans receivable	$	424,226		100.0	%	$	474,197		100.0	%

Unamortized premiums, deferred costs and fees, net	3,181					3,556

Allowance for loan losses	(4,802		)			(5,126		)
Total loans receivable, net	$	422,605				$	472,627

⁽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, 2018 and 2017, and the fiscal year ended March 31, 2018.



Three months ended December 31, 2018
$ in thousands	One-to-four family			Multifamily			Commercial Real Estate		Construction		Business			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,481		$	939		$	702	$	—	$	1,530		$	140		$	—	$	4,792
Charge-offs	(6		)	—			—		—		(490		)	(7		)	—		(503		)
Recoveries	186			—			—		—		658			1			—		845
Provision for (recovery of) Loan Losses	(198		)	(65		)	36		—		(320		)	(12		)	227		(332		)
Ending Balance	$	1,463		$	874		$	738	$	—	$	1,378		$	122		$	227	$	4,802



Nine months ended December 31, 2018
$ in thousands	One-to-four family			Multifamily			Commercial Real Estate			Construction		Business			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,210		$	1,819		$	1,052		$	—	$	1,003		$	18		$	24	$	5,126
Charge-offs	(151		)	(100		)	—			—		(830		)	(12		)	—		(1,093		)
Recoveries	186			158			—			—		667			36			—		1,047
Provision for (recovery of) Loan Losses	218			(1,003		)	(314		)	—		538			80			203		(278		)
Ending Balance	$	1,463		$	874		$	738		$	—	$	1,378		$	122		$	227	$	4,802
December 31, 2018:
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	1,288		$	874		$	738		$	—	$	1,360		$	122		$	227	$	4,609
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	175			—			—			—		18			—			—		193

Loan Receivables Ending Balance:	$	111,776		$	87,705		$	124,352		$	—	$	99,118		$	4,456		$	—	$	427,407
Ending Balance: collectively evaluated for impairment	106,333			84,997			123,870			—		95,544			4,456			—		415,200
Ending Balance: individually evaluated for impairment	5,443			2,708			482			—		3,574			—			—		12,207



At March 31, 2018
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Construction		Business		Consumer		Unallocated		Total
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	1,065	$	1,744	$	1,052	$	—	$	908	$	18	$	24	$	4,811
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	145		75		—		—		95		—		—		315

Loan Receivables Ending Balance:	$	123,092	$	104,865	$	142,304	$	—	$	102,203	$	5,289	$	—	$	477,753
Ending Balance: collectively evaluated for impairment	116,588		103,160		140,765		—		98,914		5,289		—		464,716
Ending Balance: individually evaluated for impairment	6,504		1,705		1,539		—		3,289		—		—		13,037



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

The following is a summary of nonaccrual loans at December 31, 2018 and March 31, 2018.



$ in thousands	December 31, 2018		March 31, 2018
Gross loans receivable:
One-to-four family	$	4,508	$	4,561
Multifamily	2,708		964
Commercial real estate	1,233		502
Business	1,467		635
Total nonaccrual loans	$	9,916	$	6,662

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.

At December 31, 2018, other non-performing assets totaled $453 thousand which consisted of other real estate owned comprised of four foreclosed residential properties, compared to $552 thousand comprised of eight properties, which included $438 thousand of residential properties at March 31, 2018. At December 31, 2018 and March 31, 2018, the Bank had no non-performing held-for-sale loans.

Although we believe that substantially all risk elements at December 31, 2018 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.

At December 31, 2018, 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	$	84,997	$	123,234	$	—	$	89,139
Special Mention	—		636		—		5,751
Substandard	2,708		482		—		4,228
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	87,705	$	124,352	$	—	$	99,118

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	108,015	$	4,411
Non-Performing					3,761		45
Total					$	111,776	$	4,456

At March 31, 2018, 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	$	103,160	$	140,765	$	—	$	93,886
Special Mention	—		—		—		5,028
Substandard	1,705		1,539		—		3,289
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	104,865	$	142,304	$	—	$	102,203

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	116,588	$	5,289
Non-Performing					6,504		—
Total					$	123,092	$	5,289

The following table presents an aging analysis of the recorded investment of past due financing receivables at December 31, 2018 and March 31, 2018.



December 31, 2018
$ 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	$	1,847	$	—	$	3,761	$	5,608	$	106,168	$	111,776
Multifamily	2,449		—		1,601		4,050		83,655		87,705
Commercial real estate	5,411		—		—		5,411		118,941		124,352
Business	5,448		98		688		6,234		92,884		99,118
Consumer	36		1		—		37		4,419		4,456
Total	$	15,191	$	99	$	6,050	$	21,340	$	406,067	$	427,407



March 31, 2018
$ 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	$	1,819	$	—	$	4,056	$	5,875	$	117,217	$	123,092
Multifamily	—		—		219		219		104,646		104,865
Commercial real estate	1,395		—		—		1,395		140,909		142,304
Business	973		312		322		1,607		100,596		102,203
Consumer	7		5		—		12		5,277		5,289
Total	$	4,194	$	317	$	4,597	$	9,108	$	468,645	$	477,753

The following table presents information on impaired loans with the associated allowance amount, if applicable, at December 31, 2018 and March 31, 2018.



	At December 31, 2018						At March 31, 2018
$ 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	$	4,508	$	5,663	$	—	$	5,439	$	6,862	$	—
Multifamily	2,708		2,708		—		964		1,122		—
Commercial real estate	482		482		—		1,539		1,539		—
Business	1,774		1,795		—		611		611		—
With an allowance recorded:
One-to-four family	935		930		175		1,065		1,065		145
Multifamily	—		—		—		741		741		75
Business	1,800		1,804		18		2,678		2,681		95
Total	$	12,207	$	13,382	$	193	$	13,037	$	14,621	$	315

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, 2018 and 2017.



	For the Three Months Ended December 31,								For the Nine Months Ended December 31,
	2018				2017				2018				2017
$ 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	$	4,608	$	25	$	5,284	$	3	$	4,973	$	60	$	5,099	$	15
Multifamily	2,518		11		1,068		9		1,836		29		1,379		25
Commercial real estate	486		8		799		9		1,011		16		1,912		28
Business	1,204		—		1,632		—		1,192		6		2,020		—
With an allowance recorded:
One-to-four family	938		—		1,381		—		1,000		—		1,388		1
Multifamily	—				—		—		371		—		—		—
Business	2,428		—		2,623		1		2,239		4		2,603		—
Total	$	12,182	$	44	$	12,787	$	22	$	12,622	$	115	$	14,401	$	69

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, 2018 were $5.5 million, $3.2 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, 2018, total TDR loans were $5.7 million, of which $1.9 million were non-performing.

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 were two loan modifications made during the three month period and three modifications made during the nine month periods ended December 31, 2018. There was one loan modification made during the three and nine month periods ended December 31, 2017. The modification converted a line of credit into a five-year term loan with an interest concession. The following tables presents an analysis of those loan modifications that were classified as TDRs during the three and nine month periods ended December 31, 2018 and 2017.



	Modifications to loans during the three month period ended							Modifications to loans during the nine month period ended
	December 31, 2018							December 31, 2018
$ in thousands	Number of loans	Pre-modification outstanding recorded investment	Post-Modification Recorded investment	Pre-Modification rate		Post-Modification rate		Number of loans	Pre-modification outstanding recorded investment	Post-Modification Recorded investment	Pre-Modification rate		Post-Modification rate
Business	2	1,014	648	6.11	%	6.24	%	3	2,776	2,360	6.51	%	6.06	%



	Modifications to loans during the three month period ended									Modifications to loans during the nine month period ended
	December 31, 2017									December 31, 2017
$ in thousands	Number of loans	Pre-modification outstanding recorded investment		Post-Modification Recorded investment		Pre-Modification rate		Post-Modification rate		Number of loans	Pre-modification outstanding recorded investment		Post-Modification Recorded investment		Pre-Modification rate		Post-Modification rate
Business	—	$	—	$	—	—	%	—	%	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, 2018 and 2017, there were no modified loans that defaulted within 12 months of modification.

At December 31, 2018, there were 8 loans in the TDR portfolio totaling $2.3 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, 2018, 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.

The aggregate amount of loans outstanding to related parties was $80 thousand at December 31, 2018 and $120 thousand at March 31, 2018. During the nine months ended December 31, 2018, there were no advances and principal repayments totaled $40 thousand.

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.