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 or to release reserves 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 September 30, 2019 and March 31, 2019:



	September 30, 2019					March 31, 2019
$ in thousands	Amount			Percent		Amount			Percent
Gross loans receivable:
One-to-four family	$	116,291		27.1	%	$	108,363		25.5	%
Multifamily	82,246			19.1	%	86,177			20.2	%
Commercial real estate	138,512			32.2	%	130,812			30.7	%
Business ⁽¹⁾	88,982			20.7	%	96,430			22.7	%
Consumer ⁽²⁾	3,655			0.9	%	4,023			0.9	%
Total loans receivable	$	429,686		100.0	%	$	425,805		100.0	%

Unamortized premiums, deferred costs and fees, net	3,598					3,023

Allowance for loan losses	(4,625		)			(4,646		)
Total loans receivable, net	$	428,659				$	424,182

⁽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 six month periods ended September 30, 2019 and 2018, and the fiscal year ended March 31, 2019.



Three months ended September 30, 2019
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	1,232		875		668		1,400			240			255			$	4,670
Charge-offs	—		—		—		(56		)	(6		)	—			(62		)
Recoveries	8		—		—		2			—			—			10
Provision for (recovery of) Loan Losses	49		9		27		145			14			(237		)	7
Ending Balance	$	1,289	$	884	$	695	$	1,491		$	248		$	18		$	4,625



Six months ended September 30, 2019
$ in thousands	One-to-four family		Multifamily			Commercial Real Estate			Business			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1,274	$	885		$	766		$	1,330		$	154		$	237		$	4,646
Charge-offs	—		—			—			(56		)	(73		)	—			(129		)
Recoveries	8		—			—			90			2			—			100
Provision for (recovery of) Loan Losses	7		(1		)	(71		)	127			165			(219		)	8
Ending Balance	$	1,289	$	884		$	695		$	1,491		$	248		$	18		$	4,625

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	1,120	$	884		$	695		$	1,478		$	248		$	18		$	4,443
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	169		—			—			13			—			—			182

Loan Receivables Ending Balance:	$	118,502	$	82,823		$	137,451		$	90,816		$	3,692		$	—		$	433,284
Ending Balance: collectively evaluated for impairment	113,693		80,390			137,451			88,509			3,692			—			423,735
Ending Balance: individually evaluated for impairment	4,809		2,433			—			2,307			—			—			9,549



At March 31, 2019
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	1,103	$	885	$	766	$	1,312	$	154	$	237	$	4,457
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	171		—		—		18		—		—		189

Loan Receivables Ending Balance:	$	109,926	$	86,886	$	131,292	$	96,661	$	4,063	$	—	$	428,828
Ending Balance: collectively evaluated for impairment	104,509		83,672		130,816		93,399		4,063		—		416,459
Ending Balance: individually evaluated for impairment	5,417		3,214		476		3,262		—		—		12,369



Three months ended September 30, 2018
$ in thousands	One-to-four family			Multifamily			Commercial Real Estate		Business			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1,853		$	1,387		$	540	$	1,169		$	172		$	66		$	5,187
Charge-offs	(49		)	(100		)	—		(329		)	(2		)	—			(480		)
Recoveries	—			—			—		4			32			—			36
Provision for (recovery of) Loan Losses	(323		)	(348		)	162		686			(62		)	(66		)	49
Ending Balance	$	1,481		$	939		$	702	$	1,530		$	140		$	—		$	4,792



Six months ended September 30, 2018
$ in thousands	One-to-four family			Multifamily			Commercial Real Estate			Business			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	1,210		$	1,819		$	1,052		$	1,003		$	18		$	24		$	5,126
Charge-offs	(145		)	(100		)	—			(340		)	(5		)	—			(590		)
Recoveries	—			158			—			9			35			—			202
Provision for (recovery of) Loan Losses	416			(938		)	(350		)	858			92			(24		)	54
Ending Balance	$	1,481		$	939		$	702		$	1,530		$	140		$	—		$	4,792

The following is a summary of nonaccrual loans at September 30, 2019 and March 31, 2019.



$ in thousands	September 30, 2019		March 31, 2019
Gross loans receivable:
One-to-four family	$	3,753	$	4,488
Multifamily	2,433		3,214
Commercial real estate	—		476
Business	1,542		2,051
Consumer	—		65
Total nonaccrual loans	$	7,728	$	10,294

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 September 30, 2019, other non-performing assets totaled $120 thousand which consisted of other real estate owned comprised of two foreclosed residential properties, compared to $404 thousand comprised of four residential properties at March 31, 2019.

Although we believe that substantially all risk elements at September 30, 2019 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 September 30, 2019, 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		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	80,390	$	136,826	$	84,496
Special Mention	—		625		3,981
Substandard	2,433		—		2,339
Doubtful	—		—		—
Loss	—		—		—
Total	$	82,823	$	137,451	$	90,816

			One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing			$	114,749	$	3,657
Non-Performing			3,753		35
Total			$	118,502	$	3,692

At March 31, 2019, and based on the most recent analysis performed, the risk category by class of loans is as follows:



$ in thousands	Multifamily		Commercial Real Estate		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	83,672	$	128,319	$	90,336
Special Mention	—		2,497		2,425
Substandard	3,214		476		3,900
Doubtful	—		—		—
Loss	—		—		—
Total	$	86,886	$	131,292	$	96,661

			One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing			$	106,531	$	4,063
Non-Performing			3,395		—
Total			$	109,926	$	4,063

The following table presents an aging analysis of the recorded investment of past due loans receivables at September 30, 2019 and March 31, 2019.



September 30, 2019
$ in thousands	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans Receivables
One-to-four family	$	—	$	623	$	3,021	$	3,644	$	114,858	$	118,502
Multifamily	—		—		2,053		2,053		80,770		82,823
Commercial real estate	—		—		—		—		137,451		137,451
Business	14		440		667		1,121		89,695		90,816
Consumer	122		—		—		122		3,570		3,692
Total	$	136	$	1,063	$	5,741	$	6,940	$	426,344	$	433,284



March 31, 2019
$ in thousands	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans Receivables
One-to-four family	$	1,827	$	—	$	3,395	$	5,222	$	104,704	$	109,926
Multifamily	2,580		—		2,118		4,698		82,188		86,886
Commercial real estate	121		—		—		121		131,171		131,292
Business	780		—		599		1,379		95,282		96,661
Consumer	87		53		65		205		3,858		4,063
Total	$	5,395	$	53	$	6,177	$	11,625	$	417,203	$	428,828

The following table presents information on impaired loans with the associated allowance amount, if applicable, at September 30, 2019 and March 31, 2019.



	At September 30, 2019						At March 31, 2019
$ 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	$	3,994	$	4,999	$	—	$	4,488	$	5,643	$	—
Multifamily	2,433		2,433		—		3,214		3,214		—
Commercial real estate	—		—		—		476		476		—
Business	1,418		1,476		—		1,974		2,017		—
With an allowance recorded:
One-to-four family	815		815		169		929		929		171
Business	889		889		13		1,288		1,288		18
Total	$	9,549	$	10,612	$	182	$	12,369	$	13,567	$	189

The following tables presents information on average balances of impaired loans and the interest income recognized on a cash basis for the three and six month periods ended September 30, 2019 and 2018.



	For the Three Months Ended September 30,								For the Six Months Ended September 30,
	2019				2018				2019				2018
$ 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	$	4,185	$	14	$	4,813	$	26	$	4,241	$	30	$	5,074	$	31
Multifamily	2,789		14		2,382		9		2,824		41		1,646		17
Commercial real estate	—		—		492		8		238		—		1,014		8
Business	1,699		16		652		6		1,696		41		623		6
With an allowance recorded:
One-to-four family	869		—		887		1		872		—		1,003		2
Multifamily	—		—		—		—		—		—		371		—
Business	1,067		—		3,050		4		1,088		—		2,867		4
Total	$	10,609	$	44	$	12,276	$	54	$	10,959	$	112	$	12,598	$	68

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 September 30, 2019 were $4.5 million, $2.5 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, 2019, total TDR loans were $5.4 million, of which $3.2 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 no loan modifications made during the three and six month periods ended September 30, 2019. There was one loan modification made during the three and six month periods ended September 30, 2018. The modification set a schedule of principal repayments with an interest rate concession and maturity date extension. The following table presents an analysis of the loan modification that was classified as a TDR during the three and six month periods ended September 30, 2018.



	Modifications to loans during the three month period ended									Modifications to loans during the six month period ended
	September 30, 2018									September 30, 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	1	$	1,762	$	1,712	6.75	%	6.00	%	1	$	1,762	$	1,712	6.75	%	6.00	%

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 September 30, 2019 and 2018, there were no modified loans that defaulted within 12 months of modification.

At September 30, 2019, there were 7 loans in the TDR portfolio totaling $2.0 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, 2019, there were 8 loans in the TDR portfolio totaling $2.2 million that were on accrual status.

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 $70 thousand at September 30, 2019 and $80 thousand at March 31, 2019. During the six months ended September 30, 2019, principal repayments totaled $10 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.