Loans Receivable and Allowance for Loan and Lease Losses

6 Months Ended

Sep. 30, 2020

Loans and Leases Receivable Disclosure [Abstract]

Loans Receivable and Allowance for Loan and Lease Losses

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.

    The general valuation allowance applied to those pooled loans not deemed to be impaired is determined using a three step process:

•Trends of historical losses where the net charge-offs on each category are reviewed over a 20 quarter look back period.

•Assessment of several qualitative factors which are adjusted to reflect changes in the current environment.

•Loss Emergence Period reserve "LEP" which takes into account that borrowers have the potential to have suffered some form of loss-causing event or circumstance but that the lender may be unaware of the event.

During the fourth quarter of fiscal 2020, we changed the impact rating of the economic factors (related to unemployment and inflation rate) and collateral factors from moderate to high across all loan categories. Additionally, the factors related to problem loans (including delinquency and credit quality) in the Commercial Real Estate category were increased from moderate to high. These changes were made as a response to the ongoing and expected stressed economic environment resulting from the COVID-19 pandemic. During fiscal 2021, we increased our qualitative factors due to the ongoing pandemic. These increases in reserves were offset by decreases in our quantitative reserve analysis as the rolling 20 quarter historical loss look back period has improved for most of our loan categories.

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, 2020 and March 31, 2020:

	September 30, 2020				March 31, 2020
$ in thousands	Amount		Percent		Amount		Percent
Gross loans receivable:
One-to-four family	$	86,028	18.7	%	$	105,532	24.8	%
Multifamily	96,431		20.9	%	89,241		21.0	%
Commercial real estate	146,953		31.9	%	141,761		33.3	%
Business (1)	128,998		27.9	%	85,425		20.1	%
Consumer (2)	2,847		0.6	%	3,213		0.8	%
Total loans receivable	$	461,257	100.0	%	$	425,172	100.0	%
Unamortized premiums, deferred costs and fees, net	2,942				3,560
Allowance for loan losses	(4,916)				(4,946)
Total loans receivable, net	$	459,283			$	423,786

(1) Includes PPP loans and business overdrafts

(2) Includes personal loans and consumer overdrafts

The Bank is participating as a lender in the Paycheck Protection Program ("PPP"), which opened on April 3, 2020. As part of the CARES Act, the Small Business Administration ("SBA") is authorized to temporarily guarantee loans under this new 7(a) loan program. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Since the PPP loans are fully guaranteed by the SBA, there are no additional ALLL reserves required. As of September 30, 2020, the Bank has approved and funded approximately 203 applications totaling $34.7 million of loans under the PPP.

Consistent with regulatory guidance and the provisions of the CARES Act, loans less than 30 days past due at December 31, 2019 that were granted COVID-19 related payment deferrals will continue to be considered current and not be reported as TDRs. For the six months ended September 30, 2020, the Bank has received 91 applications for payment deferrals on approximately $95.9 million of loans. This total includes 66 commercial loans totaling $88.1 million and 25 residential loans totaling $7.8 million. The Bank has been working with the borrowers to determine if there is a risk of any losses associated with repayment and if any additional reserves would have to be allocated to this portfolio. An analysis of the loans that remain on deferral showed that all were collateralized by real estate and had good loan-to-value ratios and acceptable DSCRs. Additionally, approximately half of the commercial loans resumed payments in July and August. The Bank continues to see this positive trend and determined that additional reserves were not required at this time. As of September 30, 2020, we have 42 loans remaining that are on deferment with outstanding principal balances totaling $32.2 million. This total includes 26 commercial loans totaling $26.5 million and 16 residential loans totaling $5.7 million as of September 30, 2020.

    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, 2020 and 2019, and the fiscal year ended March 31, 2020.

Three months ended September 30, 2020
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	972		911		955		1,511		202		285		4,836
Charge-offs	—		—		—		(9)		—		—		(9)
Recoveries	87		—		—		2		1		—		90
Provision for (recovery of) Loan Losses	(106)		49		14		132		(14)		(76)		(1)
Ending Balance	$	953	$	960	$	969	$	1,636	$	189	$	209	$	4,916

Six months ended September 30, 2020
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,055	$	1,011	$	812	$	1,567	$	212	$	289	$	4,946
Charge-offs	—		—		—		(19)		—		—		(19)
Recoveries	87		—		—		2		3		—		92
Provision for (recovery of) Loan Losses	(189)		(51)		157		86		(26)		(80)		(103)
Ending Balance	$	953	$	960	$	969	$	1,636	$	189	$	209	$	4,916
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	920	$	960	$	969	$	1,626	$	189	$	209	$	4,873
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	33		—		—		10		—		—		43
Loan Receivables Ending Balance:	$	87,569	$	97,162	$	147,951	$	128,641	$	2,876	$	—	$	464,199
Ending Balance: collectively evaluated for impairment	83,719		96,790		146,791		125,669		2,876		—		455,845
Ending Balance: individually evaluated for impairment	3,850		372		1,160		2,972		—		—		8,354

At March 31, 2020
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	$	899	$	1,011	$	812	$	1,557	$	212	$	289	$	4,780
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	156		—		—		10		—		—		166
Loan Receivables Ending Balance:	$	107,528	$	89,887	$	142,410	$	85,659	$	3,248	$	—	$	428,732
Ending Balance: collectively evaluated for impairment	102,902		89,512		142,410		82,210		3,248		—		420,282
Ending Balance: individually evaluated for impairment	4,626		375		—		3,449		—		—		8,450

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

    The following is a summary of nonaccrual loans at September 30, 2020 and March 31, 2020.

$ in thousands	September 30, 2020		March 31, 2020
Gross loans receivable:
One-to-four family	$	3,541	$	3,582
Multifamily	372		375
Commercial real estate	1,160		—
Business	2,346		2,797
Consumer	—		22
Total nonaccrual loans	$	7,419	$	6,776

    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, 2020, other non-performing assets totaled $60 thousand which consisted of other real estate owned comprised of one foreclosed residential property, compared to $120 thousand comprised of two foreclosed residential properties at March 31, 2020. Other real estate loans is included in other assets in the consolidated statements of financial condition. There were no held-for-sale loans at September 30, 2020 and March 31, 2020.

    Although we believe that substantially all risk elements at September 30, 2020 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, 2020, 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	$	96,790	$	145,416	$	124,059
Special Mention	—		1,375		1,610
Substandard	372		1,160		2,972
Total	$	97,162	$	147,951	$	128,641
			One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing			$	84,612	$	2,876
Non-Performing			2,957		—
Total			$	87,569	$	2,876

    At March 31, 2020, 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	$	89,512	$	141,793	$	80,016
Special Mention	—		617		2,184
Substandard	375		—		3,459
Total	$	89,887	$	142,410	$	85,659
			One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing			$	103,946	$	3,225
Non-Performing			3,582		23
Total			$	107,528	$	3,248

    The following table presents an aging analysis of the recorded investment of past due loans receivables at September 30, 2020 and March 31, 2020.

September 30, 2020
$ 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	$	799	$	—	$	2,957	$	3,756	$	83,813	$	87,569
Multifamily	729		483		—		1,212		95,950		97,162
Commercial real estate	936		—		5,917		6,853		141,098		147,951
Business	808		4,994		1,282		7,084		121,557		128,641
Consumer	176		101		—		277		2,599		2,876
Total	$	3,448	$	5,578	$	10,156	$	19,182	$	445,017	$	464,199

March 31, 2020
$ 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	$	1,410	$	—	$	3,202	$	4,612	$	102,916	$	107,528
Multifamily	490		—		—		490		89,397		89,887
Commercial real estate	6,621		—		—		6,621		135,789		142,410
Business	1,360		3		700		2,063		83,596		85,659
Consumer	103		1		23		127		3,121		3,248
Total	$	9,984	$	4	$	3,925	$	13,913	$	414,819	$	428,732

    The following table presents information on impaired loans with the associated allowance amount, if applicable, at September 30, 2020 and March 31, 2020.

	At September 30, 2020						At March 31, 2020
$ 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	$	3,772	$	4,431	$	—	$	3,819	$	4,566	$	—
Multifamily	372		373		—		375		376		—
Commercial real estate	1,160		1,160		—		—		—		—
Business	2,419		2,555		—		2,797		2,917		—
With an allowance recorded:
One-to-four family	78		73		33		807		803		156
Business	553		553		10		652		652		10
Total	$	8,354	$	9,145	$	43	$	8,450	$	9,314	$	166

    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, 2020 and 2019.

	For the Three Months Ended September 30,								For the Six Months Ended September 30,
	2020				2019				2020				2019
$ 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	$	3,795	$	10	$	4,185	$	14	$	3,840	$	35	$	4,241	$	30
Multifamily	374		4		2,789		14		373		9		2,824		41
Commercial real estate	580		—		—		—		2,649		—		238		—
Business	2,608		26		1,699		16		2,555		55		1,696		41
With an allowance recorded:
One-to-four family	442		—		869		—		317		—		872		—
Business	602		—		1,067		—		602		—		1,088		—
Total	$	8,401	$	40	$	10,609	$	44	$	10,336	$	99	$	10,959	$	112

    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, 2020 were $2.7 million, $1.8 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, 2020, total TDR loans were $3.9 million, of which $2.2 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 six month periods ended September 30, 2020 and 2019.

    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, 2020 and 2019, there were no modified loans that defaulted within 12 months of modification.

    At September 30, 2020, there were 4 loans in the TDR portfolio totaling $937 thousand 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, 2020, there were 6 loans in the TDR portfolio totaling $1.7 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 $60 thousand at September 30, 2020 and $70 thousand at March 31, 2020. During the six months ended September 30, 2020, 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.