Loans Receivable and Allowance for Credit Losses

3 Months Ended

Jun. 30, 2023

Loans and Leases Receivable Disclosure [Abstract]

Loans Receivable and Allowance for Credit Losses

LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT 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 ACL reflects management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. Management uses a disciplined process and methodology to calculate the ACL each quarter. To determine the total ACL, management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis.

    The following is a summary of loans receivable at June 30, 2023 and March 31, 2023:

	June 30, 2023				March 31, 2023
$ in thousands	Amount		Percent		Amount		Percent
Loans receivable:
One-to-four family	$	65,526	11.1	%	$	65,808	11.0	%
Multifamily	178,815		30.3	%	179,117		30.0	%
Commercial real estate	173,088		29.3	%	178,424		29.8	%
Business (1)	163,348		27.7	%	166,908		27.9	%
Consumer (2)	9,757		1.6	%	7,639		1.3	%
Total loans receivable	$	590,534	100.0	%	$	597,896	100.0	%
Allowance for credit losses	(5,858)				(5,229)
Total loans receivable, net	$	584,676			$	592,667

(1) Includes PPP loans and business overdrafts

(2) Includes personal loans and consumer overdrafts

The totals above are shown net of deferred loan fees and costs. Net deferred loan fees totaled $2.7 million and $2.8 million at June 30, 2023 and March 31, 2023, respectively. The Bank purchased $2.8 million consumer loans and $0.3 million business loans during the three months ended June 30, 2023.

The Bank participated as a lender in the PPP, which opened on April 3, 2020. As part of the CARES Act, the SBA was authorized to temporarily guarantee loans under this new 7(a) loan program. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. Since the PPP loans are fully guaranteed by the SBA, there are no additional ACL reserves required. As of June 30, 2023, the Bank had approved and funded approximately 420 applications totaling $57.1 million of loans under the PPP. Business loans included PPP loans outstanding totaling $268 thousand as of June 30, 2023.

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 continued to be considered current and not reported as TDRs. For the fiscal year ended March 31, 2021, the Bank received 83 applications for payment deferrals on approximately $90.4 million of loans. At June 30, 2023 and March 31, 2023, no loans were on COVID-related deferrals as the remaining 90-day loan deferments expired and borrowers became current.

The following is an analysis of the allowance for credit losses based upon the method of evaluating loan reserves for the three months ended June 30, 2023 under the expected loss methodology.

Three months ended June 30, 2023
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	716	$	1,109	$	1,814	$	1,139	$	449	$	2	$	5,229
Impact of CECL adoption	1,220		(392)		(497)		505		(166)		(2)		668
Charge-offs	—		—		—		—		(95)		—		(95)
Recoveries	—		—		—		49		1		—		50
Provision for (recovery of) Credit Losses	127		(4)		(53)		(289)		225		—		6
Ending Balance	$	2,063	$	713	$	1,264	$	1,404	$	414	$	—	$	5,858
Allowance for Credit Losses Ending Balance: collectively evaluated for impairment	$	1,962	$	713	$	1,264	$	1,392	$	414	$	—	$	5,745
Allowance for Credit Losses Ending Balance: individually evaluated for impairment	101		—		—		12		—		—		113
Loan Receivables Ending Balance:	$	65,526	$	178,815	$	173,088	$	163,348	$	9,757	$	—	$	590,534
Ending Balance: collectively evaluated for impairment	60,386		176,508		168,566		152,424		9,756		—		567,640
Ending Balance: individually evaluated for impairment	5,140		2,307		4,522		10,924		1		—		22,894

The following is an analysis of the allowance for loan losses as of the fiscal year ended March 31, 2023 and for the three months ended June 30, 2022 based upon the incurred loss impairment model.

At March 31, 2023
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for Loan Losses Ending Balance:	$	716	$	1,109	$	1,814	$	1,139	$	449	$	2	$	5,229
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	607		1,109		1,814		937		449		2		4,918
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	109		—		—		202		—		—		311
Loan Receivables Ending Balance:	$	65,808	$	179,117	$	178,424	$	166,908	$	7,639	$	—	$	597,896
Ending Balance: collectively evaluated for impairment	60,805		179,046		171,234		160,985		7,638		—		579,708
Ending Balance: individually evaluated for impairment	5,003		71		7,190		5,923		1		—		18,188

Three months ended June 30, 2022
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate		Business		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	731	$	1,114	$	1,157	$	2,497	$	123	$	2	$	5,624
Charge-offs	—		—		—		—		(13)		—		(13)
Recoveries	—		—		—		19		1		—		20
Provision for (recovery of) Loan Losses	(82)		(61)		(49)		(195)		2		358		(27)
Ending Balance	$	649	$	1,053	$	1,108	$	2,321	$	113	$	360	$	5,604

The following is a summary of nonaccrual loans, at amortized cost, at June 30, 2023 and March 31, 2023.

	June 30, 2023						March 31, 2023
$ in thousands	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
Gross loans receivable:
One-to-four family	$	4,154	$	—	$	4,154	$	4,001
Multifamily	824		—		$	824	71
Commercial real estate	4,522		—		$	4,522	7,190
Business	6,088		10		$	6,098	998
Consumer	1		—		$	1	1
Total nonaccrual loans	$	15,589	$	10	$	15,599	$	12,261

    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.  Accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well-secured and in the process of collection. When a loan is placed on nonaccrual status, any accrued but uncollected interest is reversed from current income. Interest income on nonaccrual loans is recorded when received based upon the collectability of the loan. There was no interest income recognized on nonaccrual loans for the three months ended June 30, 2023.

    At June 30, 2023 and March 31, 2023, other non-performing assets totaled $60 thousand, which consisted of other real estate owned comprised of one foreclosed residential property. Other real estate owned is included in other assets in the consolidated statements of financial condition. There were no held-for-sale loans at June 30, 2023 and March 31, 2023.

    Although we believe that substantially all risk elements at June 30, 2023 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:

Pass - Loans have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. These loans represent a moderate credit risk and some degree of financial stability, and are considered collectible in full.

Special Mention - Loans have potential weaknesses that deserve management's close attention. If 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.

Substandard - Loans are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. These loans 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.

Doubtful - Loans have all the weaknesses inherent in those classified as Substandard, with the added characteristic that collection or liquidation in full, based on current facts, conditions and values, is highly questionable and improbable.

Loss - Loans are considered uncollectible with insignificant value and are charged off immediately to the allowance for credit losses.

One-to-four family residential loans and consumer loans are rated non-performing if they are delinquent in payments ninety or more days, or past maturity. All other one-to-four family residential loans and consumer loans are performing loans.

    The following table presents the amortized cost of loans by year of origination and risk category by class of loans based on the most recent analysis performed in the current quarter as of June 30, 2023:

$ in thousands	2023		2022		2021		2020		2019		2018 and earlier		Revolving Loans		Total
Credit Risk Profile by Internally Assigned Grade:
Multifamily
Pass	$	3,287	$	54,039	$	51,796	$	28,328	$	18,088	$	20,172	$	—	$	175,710
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		1,483		1,560		—		62		—		3,105
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total	3,287		54,039		53,279		29,888		18,088		20,234		—		178,815
Commercial Real Estate
Pass	8,383		31,662		28,022		17,289		21,172		61,344		—		167,872
Special Mention	—		—		—		—		—		694		—		694
Substandard	—		—		—		—		—		4,522		—		4,522
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total	8,383		31,662		28,022		17,289		21,172		66,560		—		173,088
Business
Pass	8,454		42,152		49,728		11,037		401		42,070		—		153,842
Special Mention	—		—		7,326		—		—		16		—		7,342
Substandard	—		—		—		—		193		1,971		—		2,164
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total	8,454		42,152		57,054		11,037		594		44,057		—		163,348
Credit Risk Profile Based on Payment Activity:
One-to-four Family
Performing	1,610		3,876		13,562		1,448		9,127		31,778		—		61,401
Non-Performing	—		—		—		—		—		4,125		—		4,125
Total	1,610		3,876		13,562		1,448		9,127		35,903		—		65,526
Consumer
Performing	7,769		803		17		30		—		1,137		—		9,756
Non-Performing	—		1		—		—		—		—		—		1
Total	7,769		804		17		30		—		1,137		—		9,757
Gross charge-offs	—		—		—		—		—		95		—		95
Total	$	29,503	$	132,533	$	151,934	$	59,692	$	48,981	$	167,891	$	—	$	590,534

    At March 31, 2023, the risk category by class of loans was as follows:

$ in thousands	Multifamily		Commercial Real Estate		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	175,981	$	170,534	$	154,056
Special Mention	771		701		5,719
Substandard	2,365		7,189		7,133
Total	$	179,117	$	178,424	$	166,908
			One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing			$	60,629	$	7,639
Non-Performing			5,179		—
Total			$	65,808	$	7,639

    Loans are considered past due if required principal and interest payments have not been received as of the date such payments were contractually due. The following table presents an aging analysis of the amortized cost of past due loans receivables at June 30, 2023 and March 31, 2023.

.

June 30, 2023
$ 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	$	—	$	263	$	2,649	$	2,912	$	62,614	$	65,526
Multifamily	—		551		1,078		1,629		177,186		178,815
Commercial real estate	—		—		4,522		4,522		168,566		173,088
Business	—		11,652		2,528		14,180		149,168		163,348
Consumer	—		73		32		105		9,652		9,757
Total	$	—	$	12,539	$	10,809	$	23,348	$	567,186	$	590,534

March 31, 2023
$ 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	$	1,207	$	185	$	2,475	$	3,867	$	61,941	$	65,808
Multifamily	1,458		—		71		1,529		177,588		179,117
Commercial real estate	1,370		—		—		1,370		177,054		178,424
Business	11,006		—		5,014		16,020		150,888		166,908
Consumer	99		26		34		159		7,480		7,639
Total	$	15,140	$	211	$	7,594	$	22,945	$	574,951	$	597,896

At June 30, 2023 and March 31, 2023, there were no loans 90 or more days past due and accruing interest.

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the underlying collateral and the borrower is experiencing financial difficulty. All substandard and doubtful loans and any other loans that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual analysis. The following table presents the amortized cost of collateral dependent loans with the associated allowance amount, if applicable, as of June 30, 2023:

	Collateral Type
$ in thousands	Real Estate		Other		Allowance Allocated
One-to-four family	$	5,140	$	—	$	101
Multifamily	2,307		—		—
Commercial real estate	4,522		—		—
Business	10,731		193		12
Consumer	1		—		—
	$	22,701	$	193	$	113

Real estate collateral includes one-to-four family, multifamily and commercial properties. Collateral types securing business loans include accounts receivable. There have been no significant changes to the types of collateral securing the Bank's collateral dependent loans.

The following table presents information on impaired loans with the associated allowance amount and interest income recognized on a cash basis, if applicable, at March 31, 2023.

	At March 31, 2023
$ in thousands	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Balance		Interest Income Recognized
With no specific allowance recorded:
One-to-four family	$	3,972	$	4,567	$	—	$	3,861	$	111
Multifamily	71		71		—		220		—
Commercial real estate	7,190		7,378		—		4,054		36
Business	1,114		1,146		—		1,723		—
Consumer	1		1		—		—		—
With an allowance recorded:
One-to-four family	1,031		1,031		109		554		41
Business	4,809		4,820		202		5,116		316
Total	$	18,188	$	19,014	$	311	$	15,528	$	504

In certain circumstances, the Bank will modify the terms of a loan by granting a concession. 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 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 to borrowers experiencing financial difficulty made during the three months ended June 30, 2023. There were two one-to-four family loans totaling $1.0 million modified during the three months ended June 30, 2022. At June 30, 2023, loans modified to borrowers experiencing financial difficulty totaled $7.5 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. There were four modified loans totaling $5.9 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.

    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 June 30, 2023 and 2022, there were no modified loans that defaulted within 12 months of modification.

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 $30 thousand at June 30, 2023 and at March 31, 2023. There were no advances or principal repayments during the three months ended June 30, 2023.

    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.